TEMPLETON INSTITUTIONAL FUNDS INC, 485APOS, 1999-03-02

TEMPLETON INSTITUTIONAL FUNDS INC
485APOS, 1999-03-02

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Registration No. 33-35779 and 811-6135

As filed with the Securities and Exchange Commission on March 2, 1999

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

Pre-Effective Amendment No.

Post-Effective Amendment No. 14 X
-------
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 16 X
------

TEMPLETON INSTITUTIONAL FUNDS, INC.
-------------------------------------
(Exact Name of Registrant as Specified in Charter)

500 E. BROWARD BOULEVARD, FT. LAUDERDALE, FLORIDA 33394
---------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(954) 527-7500
-----------------
(Registrant's Telephone Number, Including Area Code)

DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
-------------------------------------------------------------------
(Name and Address of Agent for Service of Process)

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

immediately upon filing pursuant to paragraph (b) of Rule 485

on (date) pursuant to paragraph (b) of Rule 485

60 days after filing pursuant to paragraph (a)(1) of Rule 485

X on MAY 1, 1999 pursuant to paragraph (a)(1) of Rule 485
-----------

75 days after filing pursuant to paragraph (a)(2) of Rule 485

on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

this post-effective amendment designates a new effective
date for a previously filed post-effective amendment

PAGE

PART A
TEMPLETON INSTITUTIONAL FUNDS, INC.
PROSPECTUS

PAGE

Prospectus

TEMPLETON INSTITUTIONAL FUNDS, INC.

Emerging Fixed Income Markets Series
Emerging Markets Series
Foreign Equity Series - Primary Shares
Growth Series

MAY 1, 1999

[Insert Franklin Templeton Ben Head]

LIKE ALL MUTUAL FUND SHARES, 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 EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[END CALLOUT]

[insert page #] Emerging Fixed Income Markets Series

[insert page #] Emerging Markets Series

[insert page #] Foreign Equity Series

[insert page #] Growth Series

[insert page #] Distribution and tax information for each fund; Year 2000
problem

YOUR ACCOUNT

[BEGIN CALLOUT]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[END CALLOUT]

[insert page #] Qualified Investors

[insert page #] Buying Shares

[insert page #] Investor Services

[insert page #] Selling Shares

[insert page #] Account Policies

[insert page #] Questions

FOR MORE INFORMATION

[BEGIN CALLOUT]
WHERE TO LEARN MORE ABOUT EACH FUND
[END CALLOUT]

Back Cover

PAGE

EMERGING FIXED INCOME MARKETS SERIES

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is high total return, consisting of current
income and capital appreciation.

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of total assets in debt securities of companies, governments and
government agencies located in emerging market countries. The fund may invest up
to 35% of total assets in securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities.

[BEGIN CALLOUT]
The fund invests primarily in debt securities of companies and governments of
emerging market countries.
[END CALLOUT]

For purposes of the fund's investments, developing or emerging market countries
include those considered such by the World Bank, the International Finance
Corporation, or the United Nations. In addition, developing market securities
means those issued by:

/bullet/ companies with their principal securities trading market within a
developing market country, as defined above; or

/bullet/ companies that derive 50% or more of their total revenue from either
goods or services produced or sales made in developing market
countries; or

/bullet/ companies organized under the laws of, and with a principal office in,
a developing market country.

Debt securities represent an obligation of the issuer to repay a loan of money
to it, and generally provide for the payment of interest. These include bonds,
notes and debentures. Debt securities issued by emerging market companies and
governments are generally rated below "investment grade" debt securities, which
are issues rated in the top four rating categories by independent rating

PAGE

agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors
Services, Inc. (Moody's). The fund may buy securities rated in any category and
anticipates that a substantial percentage of its assets will be invested in debt
securities rated below investment grade or unrated securities determined by the
fund's manager to be comparable. As of December 31, 1998, approximately 75.7% of
the fund's net assets were invested in lower rated and comparable quality
unrated debt securities.

The fund generally invests a substantial portion of its assets in debt
securities called "Brady Bonds." Brady Bonds are public-issue bonds that are
created through an exchange of existing commercial bank loans to sovereign
entities for new obligations in connection with a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady. Brady
Bonds may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated). Brady Bonds have been issued relatively
recently, and, accordingly, do not have a long payment history. Because of the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are
considered speculative.

The fund may buy securities on a "when issued" or "delayed delivery" basis. This
means that the securities will be paid for and delivered to the fund at a future
date, generally in 30 to 45 days.

The fund's manager allocates its assets based upon its assessment of changing
market, political and economic conditions. It will consider various factors,
including evaluation of interest and currency exchange rate changes and credit
risks, in seeking to identify those markets and issuers which are anticipated to
provide the opportunity for high current income and capital appreciation.

PAGE

the fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in emerging market debt securities.

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

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 or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.

Securities rated below investment grade, sometimes called "junk bonds" or "high
yield debt securities," generally have more risk than higher-rated securities.
The principal risks of investing in these securities include:

/bullet/ SUBSTANTIAL CREDIT RISK. Companies and governments issuing high yield
debt securities are not as strong financially as those with higher
credit ratings. They 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.

/bullet/ DEFAULTED DEBT RISK. If an issuer is not paying or stops paying
interest and/or principal on its securities, payments on the
securities may never resume. These securities may be worthless and the
fund could lose its entire investment.

/bullet/ VOLATILITY RISK. The prices of high yield debt securities fluctuate
more than higher-quality securities. 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. The price
of a company's debt securities is especially sensitive to developments
affecting the company's business and to changes in the ratings
assigned by ratings organizations. Prices are often closely linked
with a company's stock prices and typically rise and fall in response
to factors that affect stock prices. 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

PAGE

price, which may limit the fund's ability to sell securities in
response to specific economic events or to meet redemption requests.

INTEREST RATE When interest rates rise, fixed-income security prices fall. When
interest rates fall, fixed-income security prices rise. Generally, interest
rates rise during times of inflation or a growing economy, and will fall during
an economic slowdown or recession. Securities with longer maturities usually are
more sensitive to interest rate changes than securities with shorter maturities.

[BEGIN CALLOUT]

If a security's credit rating is downgraded or an issuer's financial condition
deteriorates, the price of the security will fall and so too will the fund's
share price. If interest rates rise, the value of the fund's debt securities
will also fall. Because the value of the fund's holdings 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]

FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. may involve risks that can increase the potential for losses in the fund.
Investments in Depositary Receipts also involve some or all of the following
risks.

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. These movements will affect the fund's share price and
fund performance.

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 the imposition of
exchange controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks.

EMERGING MARKETS. The fund's investments in developing or emerging markets are
subject to all of the risks of foreign investing generally, and have additional

PAGE

heightened risks due to a lack of established legal, business and social
frameworks to support securities markets. Some of the significant, additional
risks include:

/bullet/ Political and social uncertainty (for example, regional conflicts and
risk of war)

/bullet Currency exchange rate volatility

/bullet/ Pervasiveness of corruption and crime

/bullet/ Delays in settling portfolio transactions

/bullet/ Risk of loss arising out of the system of share registration
and custody

/bullet/ Involves markets that are comparatively smaller and less liquid than
developed markets. While short-term volatility in these markets can be
disconcerting, declines in excess of 50% are not unusual.

/bullet/ Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the
United States

ALL OF THESE FACTORS MAKE DEVELOPING MARKET DEBT SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN SECURITIES ISSUED IN DEVELOPED MARKETS.

COMPANY. Foreign 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.
Foreign stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in foreign
courts than with respect to U.S. companies in U.S. courts.

PAGE

a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency markets
generally are not as regulated as securities markets.

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

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

ILLIQUID SECURITIES The fund may invest up to 15% of its total assets in
restricted and other securities that are not readily marketable.

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

YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.

The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of

PAGE

course, cannot audit any company and its major suppliers to verify their Year
2000 readiness.

If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.

PORTFOLIO TURNOVER The manager's attempt to seek high total return may cause the
fund's portfolio turnover rate to be high. High turnover will increase the
fund's transaction costs and may increase your tax liability.

More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).

[BEGIN CALLOUT]
Mutual 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[END CALLOUT]

PAGE

[Insert graphic of a bull and a bear] PERFORMANCE

This information gives some indication of the risks of investing in the fund by
comparing the fund's performance with a broad-based securities market index. Of
course, past performance cannot predict or guarantee future results

ANNUAL TOTAL RETURNS1

[Insert bar graph]

-3.87%
98
YEAR

[BEGIN CALLOUT]

BEST QUARTER:
Q4 '98 12.69%

WORST QUARTER:

Q3 '98 -14.45%

[END CALLOUT]

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

SINCE INCEPTION
1 YEAR (6/4/97)
- ------------------------------------------- -------------- ------------------
Emerging Fixed Income Markets Series -3.87% 5.05%
JP Morgan Emerging Markets Plus Index/2/ -14.35% -6.79%

1. As of March 31, 1999, the fund's year-to-date return was []%.

2. Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Emerging
Markets Plus Index includes reinvested dividends. One cannot invest directly in
an index, nor is an index representative of the fund's portfolio.

[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.

PAGE

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00

ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
- --------------------------------------- ----------------------
Management fees/2/ 0.70%
Other expenses 3.04%
----------------------
Total annual fund operating expenses/2/ 3.74%
=============

1. This fee is only for market timers (see page [#]).

2. For the fiscal year ended December 31, 1998, the manager and administrator
had agreed in advance to limit their respective fees and to assume as their own
expense certain expenses otherwise payable by the fund. With this reduction, the
fund paid no management fees and total annual fund operating expenses were
1.25%. After May 1, 2000, the manager and administrator may end this 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 mutual funds.

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

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------- ---------------- --------------- ---------------
$376 $1,143 $1,930 $3,984

[Insert graphic of briefcase] MANAGEMENT

Templeton Investment Counsel, Inc. (Investment Counsel), 500 East Broward Blvd.,
Ft. Lauderdale, FL 33394-3091, through its Templeton Global Bond Managers
division (Global Bond Managers), is the fund's investment manager. Together,
Investment Counsel and its affiliates manage over $220 billion in assets. A team
from Global Bond Managers is responsible for the day-to-day management of the
fund.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, management

PAGE

fees, before any advance waiver, were 0.70% of the fund's average daily net
assets. Under an agreement by the manager to waive its fees, the fund did not
pay any management fees. After May 1, 2000, the manager may end this arrangement
at any time upon notice to the fund's Board of Directors.

[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past two years.
This information has been audited by McGladrey & Pullen, LLP.

YEAR ENDED
DECEMBER 31, 1998
1998 1997/1/
- -------------------------------------- ------------- -------------
<S> <C> <C>

PER SHARE DATA ($)
Net asset value,
beginning of year 10.47 10.00
------------- -------------
Net investment income .84 .44
Net realized and unrealized
gains (losses) (1.27) .79
------------- -------------
Total from investment operations (.43) 1.23
------------- -------------
Distributions from net
investment income (.86) (.44)
Distributions from net
realized gains (.56) (.32)
------------- -------------
Tax return of capital (.03) -
------------- -------------
Total distributions (1.45) (.76)
------------- -------------
Net asset value, end of year 8.59 10.47
------------- -------------
Total return (%)/2/ (3.98) 12.42
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,881 2,249
Ratios to average net assets: (%)
Expenses 1.25 1.25/3/
Expenses excluding waiver and
payments by affiliate 3.74 6.40/3/
Net investment income 8.55 7.26/3/
Portfolio turnover rate (%) 525.94 172.62
</TABLE>

1. For the period June 4, 1997 (commencement of operations) to December 31,
1997.
2. Total return is not annualized.
3. Annualized

EMERGING MARKETS SERIES

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

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

PAGE

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of developing market issuers.

For purposes of the fund's investments, developing or emerging market countries
include those considered such by the World Bank, the International Finance
Corporation, or the United Nations. The fund normally will invest in at least
three developing market countries.

In addition, developing market equity securities means those issued by:

/bullet/ companies with their principal securities trading market within a
developing market country, as defined above; or

/bullet/ companies that derive 50% or more of their total
revenue from either goods or services produced or sales made in
developing market countries; or

/bullet/ companies organized under the laws of, and with a principal office
in, a developing market country.

Depending upon current market conditions, the fund generally invests a portion
of its total assets in rated and unrated debt securities. Debt securities
represent an obligation of the issuer to repay a loan of money to it, and
generally provide for the payment of interest. These include bonds, notes and
debentures.

[BEGIN CALLOUT]
The fund invests primarily in developing market companies' common stocks.
[END CALLOUT]

PAGE

The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value and cash flow potential. A company's historical
value measures, including price/earnings ratios, profit margins and liquidation
value, will also be considered.

TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
markets or the economies of countries where the fund invests are experiencing
excessive volatility or a prolonged general decline, or other adverse conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goal because it may not invest or may invest substantially less in
developing market companies' stocks.

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

[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 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. Value stock prices are
considered "cheap" relative to the company's perceived value. They may not
increase in value, as anticipated by the manager, if other investors fail to
recognize the company's value and bid up the price or if they trade in markets
favoring faster-growing companies.

PAGE

EMERGING MARKETS. The fund's investments in developing or emerging markets 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. Some of the additional significant
risks, include:

/bullet/ Political and social uncertainty (for example, regional conflicts and
risk of war)

/bullet/ Currency exchange rate volatility

/bullet/ Pervasiveness of corruption and crime

/bullet/ Delays in settling portfolio transactions

/bullet/ Risk of loss arising out of the system of share registration and
custody Involves markets that are comparatively smaller and less
liquid than developed markets. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not
unusual.

/bullet/ Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the
United States

ALL OF THESE FACTORS MAKE DEVELOPING MARKET EQUITY SECURITIES' PRICES GENERALLY
MORE VOLATILE THAN SECURITIES ISSUED IN DEVELOPED MARKETS.

PAGE

EURO. 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. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.

ILLIQUID SECURITIES The fund may invest up to 10% of its total assets in
restricted securities and securities with a limited trading market. Such a
market can result from political or economic conditions affecting previously
established securities markets, particularly in emerging market countries.

INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true; debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and fall
during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities.

YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.

PAGE

If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see page
[#] for more information.

More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).

PAGE

[Insert graphic of a bull and a bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 5 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.

ANNUAL TOTAL RETURNS/1/

[Insert bar graph]

-11.39% -1.23% 18.86% -11.32% -18.03%
94 95 96 97 98
YEAR

[BEGIN CALLOUT]
BEST QUARTER:
Q4 '98 23.62%

WORST QUARTER:
Q4 '97 -25.71%
[END CALLOUT]

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

<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR 5 YEARS (5/3/93)
- ------------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Emerging Markets Series -18.03% -5.44% 0.09%
IFC - Investable Composite Index/2/ -22.02% -10.14% -0.67%
</TABLE>

1. As of March 31, 1999, the fund's year-to-date return was []%.

2. Source: Standard & Poor's(R) Micropal. The unmanaged IFC - Investable
Composite Index includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.

PAGE

[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.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

- --------------------------------------------------- -------------------------
Management fees/2/ 1.25%
Other expenses 0.26%
------------------------
Total annual fund operating expenses/2/ 1.51%
------------------------

1. This fee is only for market timers (see page [#]).

2. For the fiscal year ended December 31, 1998, the manager and administrator
had agreed in advance to reduce their respective fees in order to limit the
total expenses of the fund to an annual rate of 1.6% of average net assets. If
these fee reductions are insufficient to so limit the fund's expenses, FT
Services has agreed to make certain payments to reduce the fund's expenses.
After May 1, 2000, the manager and administrator may end this arrangement at any
time. These voluntary agreements did not result in any fee reductions for the
fund for the fiscal year ended December 31, 1998.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------- ---------------- --------------- ---------------
$154 $477 $824 $1,802

PAGE

[Insert graphic of briefcase] MANAGEMENT

Templeton Asset Management Ltd - Hong Kong Branch, (Asset Management Hong Kong),
Two Exchange Square, Hong Kong, is the fund's investment manager. Together,
Asset Management Hong Kong and its affiliates manage over $220 billion in
assets.

The fund's lead portfolio manager is:

DR. J. MARK MOBIUS, MANAGING DIRECTOR OF TEMPLETON ASSET MANAGEMENT LTD

Dr. Mobius has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1987.

The following individuals have secondary portfolio management responsibilities:

H. ALLAN LAM, VICE PRESIDENT OF TEMPLETON INVESTMENT MANAGEMENT (HONG KONG)
LIMITED

Mr. Lam has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.

TOM WU, DIRECTOR OF TEMPLETON ASSET MANAGEMENT LTD

Mr. Wu has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund paid
1.25% of its average daily net assets to the manager. The manager voluntarily
agreed to reduce its fees in order to limit total expenses of the fund. This
voluntary agreement did not result in any management fee reductions for the
fund. After May 1, 2000, the manager may end this arrangement at any time upon
notice to the fund's Board of Directors.

PAGE

[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by McGladrey & Pullen, LLP.

YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------- --------------- --------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, 10.37 12.45 10.75 11.21 13.22
beginning of year
--------------- --------------- ---------------- ------------ ------------
Net investment income .18 .18 .15 .19 .17
Net realized and unrealized (2.05) (1.60) 1.86 (.34) (1.65)
gains (losses)
--------------- --------------- ---------------- ------------ ------------
Total from investment operations (1.87) (1.42) 2.01 (.15) (1.48)
--------------- --------------- ---------------- ------------ ------------
Distributions from net (.19) (.18) (.15) (.17) (.17)
investment income
Distributions from net - (.48) (.16) (.14) (.36)
realized gains
--------------- --------------- ---------------- ------------ ------------
Total distributions (.19) (.66) (.31) (.31) (.53)
--------------- --------------- ---------------- ------------ ------------
Net asset value, end of year 8.31 10.37 12.45 10.75 11.21
--------------- --------------- ---------------- ------------ ------------
Total return (%)/1/ (18.03) (11.32) 18.86 (1.23) (11.39)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year 1,733,607 1,923,881 1,565,537 798,515 582,878
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.51 1.57 1.56 1.52 1.60
Expenses excluding waiver and payments 1.51 1.57 1.56 1.52 1.66
by affiliate
Net investment income 2.03 1.42 1.56 2.00 1.59
Portfolio turnover rate (%) 38.11 24.72 7.92 13.47 12.51
</TABLE>

1. Total return is not annualized.

FOREIGN EQUITY SERIES

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

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

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of companies located outside the U.S.,
including emerging markets.

[BEGIN CALLOUT]
The fund invests primarily in an internationally diversified portfolio of common
stocks.
[END CALLOUT]

Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks and preferred stocks. The
fund also invests in American, European and Global Depositary Receipts, which
are certificates typically issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic company.
Depending upon current market conditions, the fund generally invests up to 35%
of its total assets in debt securities of companies and governments located
anywhere in the world. Debt securities represent an obligation of the issuer to
repay a loan of money to it, and generally provide for the payment of interest.
These include bonds, notes and debentures.

The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A company's
historical value measures, including price/earnings ratio, profit margins and
liquidation value, will also be considered.

TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these circumstances,
the fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in international stocks.

[Insert graphic of chart with line going up and down] 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 markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value. They may not
increase in value, as anticipated by the manager, if other investors fail to
recognize the company's value and bid up the price or in markets favoring
faster-growing companies.

PAGE

The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of established legal, political, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines in
excess of 50% are not unusual.

PAGE

greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in foreign
courts than with respect to U.S. companies in U.S. courts.

CURRENCY Many of the fund's investments 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. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of a currency by
a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency markets
generally are not as regulated as securities markets.

SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.

PAGE

In addition, small companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.

Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.

ILLIQUID SECURITIES The fund may invest up to 10% of its total assets in
securities with a limited trading market. Such a market can result from
political or economic conditions affecting previously established securities
markets, particularly in emerging market countries.

INTEREST RATE When interest rates rise, debt security prices fall. When interest
rates fall, debt security prices go up. Generally, interest rates rise during
times of inflation or a growing economy, and fall during an economic slowdown or
recession. Securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities.

YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.

If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities will also be adversely

PAGE

affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see page
[#] for more information.

More detailed information about the fund, its policies (including temporary
investments) and risks can be found in the fund's Statement of Additional
Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 8 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.

ANNUAL TOTAL RETURNS1

[Insert bar graph]

21.39% -1.33% 34.03% 0.24% 12.97% 21.58% 11.43% 10.16%
91 92 93 94 95 96 97 98
YEAR

[BEGIN CALLOUT]
BEST QUARTER:
Q1 '98 15.58%

WORST QUARTER:

Q98 '3 -15.88%
[END CALLOUT]

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

SINCE INCEPTION
1 YEAR 5 YEARS (10/18/90)
- --------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Foreign Equity Series 10.16% 11.07% 12.55%
MSCI - EAFE Index/2/ 20.33% 9.50% 9.57%
</TABLE>

1. As of March 31, 1999, the fund's year-to-date return was []%.

2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Europe Australia
Far East (EAFE) Index tracks the performance of approximately 1000 securities in
20 countries. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.

PAGE

[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.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- ------------------------------------ -------------------------------------
Management fees/2/ 0.70%
Other expenses 0.13%
-------------------------------------
Total annual fund operating expenses/2/ 0.83%
-------------------------------------

1. This fee is only for market timers (see page [#]).

2. For the fiscal year ended December 31, 1998, the manager and administrator
had agreed in advance to reduce their respective fees in order to limit the
total expenses of the fund to an annual rate of 1% of average net assets. If
these fee reductions are insufficient to so limit the fund's expenses, FT
Services has agreed to make certain payments to reduce the fund's expenses.
After May 1, 2000, the manager and administrator may end this arrangement at any
time. These voluntary agreements did not result in any fee reductions for the
fund for the fiscal year ended December 31, 1998.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------- ---------------- --------------- ---------------
$85 $265 $460 $1,025

[Insert graphic of briefcase] MANAGEMENT

Templeton Investment Counsel, Inc. (Investment Counsel), 500 East Broward Blvd.,
Ft. Lauderdale, FL 33394-3091, is the fund's investment manager. Together,
Investment Counsel and its affiliates manage over $220 billion in assets.

PAGE

The fund's lead portfolio manager is:

GARY P. MOTYL CFA, DIRECTOR AND EXECUTIVE VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Motyl has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1981.

The following individuals have secondary portfolio management responsibilities:

MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Beveridge has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1985.

GARY CLEMONS, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Clemons has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1990.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund paid
0.70% of its average daily net assets to the manager. The manager voluntarily
agreed to reduce its fees in order to limit total expenses of the fund. This
voluntary agreement did not result in any management fee reductions for the
fund. After May 1, 2000, the manager may end this arrangement at any time upon
notice to the fund's Board of Directors.

PAGE

[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by McGladrey & Pullen, LLP.

YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, 17.36 16.34 14.04 12.86 13.32
beginning of year
------------- ------------- ------------- ------------- -------------
Net investment income .42 .42 .45 .31 .20
Net realized and unrealized 1.29 1.43 2.54 1.35 (.16)
gains (losses) ------------- ------------- ------------- ------------- -------------
Total from investment operations 1.71 1.85 2.99 1.66 .04
------------- ------------- ------------- ------------- -------------
Dividends from net (.40) (.43) (.45) (.31) (.19)
investment income
In excess of net investment - - (.02) - -
income
Distributions from net (.91) (.40) (.14) (.17) (.31)
realized gains
------------- ------------- ------------- ------------- -------------
In excess of net realized gains - - (.08) - -
------------- ------------- ------------- ------------- -------------
Total distributions (1.31) (.83) (.69) (.48) (.50)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year 17.76 17.36 16.34 14.04 12.86
------------- ------------- ------------- ------------- -------------
Total return (%)/1 10.16 11.43 21.58 13.00 0.24

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year 4,552 3,706 2,858 1,818 1,093
($ x 1 million)
Ratios to average net
assets: (%)
Expenses .83 .84 .87 .88 .95
Net investment income 2.33 2.49 3.20 2.70 2.03
Portfolio turnover rate (%) 15.40 15.25 7.39 20.87 7.90

</TABLE>

1. Total return is not annualized.

PAGE

GROWTH SERIES

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

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

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of companies located anywhere in the world,
including emerging markets.

[BEGIN CALLOUT]
The fund invests primarily in a globally diversified portfolio of common stocks.
[END CALLOUT]

The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A company's
historical value measures, including price/earnings ratio, profit margins and
liquidation value, will also be considered.

[Insert graphic of chart with line going up and down] 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 markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value. They may not
increase in value, as anticipated by the manager, if other investors fail to
recognize the company's value and bid up the price or in markets favoring
faster-growing companies.

PAGE

Foreign stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in foreign
courts than with respect to U.S. companies in U.S. courts.

PAGE

Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.

YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.

If a company in which the fund is invested is adversely affected by Year 2000

PAGE

problems, it is likely that the price of its securities will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see page
[#] for more information.

More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).

[Insert graphic of a bull and a bear] PERFORMANCE

ANNUAL TOTAL RETURNS/1/

[Insert bar graph]

-1.32% 17.59% 22.57% 12.27% 2.98%
94 95 96 97 98

YEAR

[BEGIN CALLOUT]

BEST QUARTER:
Q4 '98 18.07%

WORST QUARTER:
Q3 '98 -18.24%

[END CALLOUT]

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

SINCE INCEPTION
1 YEAR 5 YEARS (5/3/93)
- ---------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>

Growth Series 2.98% 10.46% 12.76%
MSCI World Index/2/ 24.80% 16.19% 15.74%
</TABLE>

1. As of March 31, 1999, the fund's year-to-date return was []%.

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

[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.

PAGE

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

- ---------------------------------------------------------------------------
Management fees/2/ 0.70%
Other expenses 0.19%
----------
Total annual fund operating expenses/2/ 0.89%
----------

1. This fee is only for market timers (see page [#]).

2. For the fiscal year ended December 31, 1998, the manager and administrator
had agreed in advance to reduce their respective fees in order to limit the
total expenses of the fund to an annual rate of 0.90% of average net assets. If
these fee reductions are insufficient to so limit the fund's expenses, FT
Services has agreed to make certain payments to reduce the fund's expenses.
After May 1, 2000, the manager and administrator may end this arrangement at any
time. These voluntary agreements did not result in any fee reductions for the
fund for the fiscal year ended December 31, 1998.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

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

[Insert graphic of briefcase] MANAGEMENT

The fund's lead portfolio manager is:

PAGE

GARY P. MOTYL CFA, DIRECTOR AND EXECUTIVE VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Motyl has been a manager of the fund since 19[]. He joined the Franklin
Templeton Group in 1981.

The following individuals have secondary portfolio management responsibilities:

MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Beveridge has been a manager of the fund since 19[]. He joined the Franklin
Templeton Group in 1985.

GARY CLEMONS, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Clemons has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1990.

PAGE

[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by McGladrey & Pullen, LLP.

YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value,
beginning of year 13.62 13.41 11.86 10.94 11.80
------------- ------------- ------------- ------------- -------------
Net investment income .19 .73 .30 .27 .20
Net realized and unrealized .46 .89 2.32 1.62 (.36)
gains (losses)
------------- ------------- ------------- ------------- -------------
Total from investment operations .65 1.62 2.62 1.89 (.16)
------------- ------------- ------------- ------------- -------------
Distributions from net (.19) (.87) (.29) (.27) (.20)
Investment income
Distributions from net (7.47) (.54) (.74) (.70) (.50)
realized gains
------------- ------------- ------------- ------------- -------------
In excess of net realized gains - - (.04) - -
------------- ------------- ------------- ------------- -------------
Total distributions (7.66) (1.41) (1.07) (.97) (.70)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year 6.61 13.62 13.41 11.86 10.94
------------- ------------- ------------- ------------- -------------
Total return (%)/1/ 2.98 12.27 22.57 17.59 (1.32)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 55,779 120,370 268,158 226,963 194,059
($ x 1,000)
Ratios to average net
assets: (%)
Expenses .89 .86 .87 .88 .95
Net investment income 2.27 2.15 2.34 2.28 1.69
Portfolio turnover rate (%) 13.00 16.73 15.61 30.20 17.23

</TABLE>

1. Total return is not annualized.

PAGE

[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES;
YEAR 2000 PROBLEM

INCOME AND CAPITAL GAINS DISTRIBUTIONS

The funds intend to pay a dividend at least annually representing substantially
all of their net investment income and any net realized capital gains. The
amount of these distributions will vary and there is no guarantee the funds will
pay dividends.

To receive a distribution, you must be a shareholder on the record date. The
record date for the funds' distributions will vary. Please keep in mind that if
you invest in the funds shortly before the record date of a distribution, any
distribution will lower the value of the funds' shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the funds' distributions, please call Institutional Services at 1-800/321-8563.

TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of a fund or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.

[BEGIN CALLOUT]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[END CALLOUT]

Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.

When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.

Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes paid by a

PAGE

fund that invests more than 50% of its assets in foreign securities may be
passed through to you as a foreign tax credit. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in a
fund.

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

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

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

PAGE

YOUR ACCOUNT

[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS

There is a minimum initial investment of $5 million ($50 for subsequent
investments) for all investors except the following:

[BEGIN CALLOUT]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[END CALLOUT]

/bullet/ Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification
under section 401 of the Internal Revenue Code, including salary
reduction plans qualified under section 401(k) of the Internal Revenue
Code, and that are sponsored by an employer (i) with at least 1,000
employees (10,000 for the Foreign Equity Series), or (ii) with
retirement plan assets of $10 million or more ($100 million or more
for the Foreign Equity Series). Minimum investments: No initial and
$50 additional minimums. Minimum investments for plans with less than
1,000 employees or $10 million in plan assets (excluding Foreign
Equity Series): $1 million initial investment or an investment of $1
million over the subsequent 13-month period in the funds or any of the
Franklin Templeton Funds and $50 additional.

/bullet/ Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. Minimum investments: $1
million initial investment or an investment of $1 million over the
subsequent 13-month period in the funds or any of the Franklin
Templeton Funds and $50 additional.

/bullet/ Defined benefit plans, governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under section
501 of the Internal Revenue Code. Minimum investments: $1 million
initial investment and $50 additional.

PAGE

/bullet/ Service agents and broker-dealers who have entered into an agreement
with Distributors may purchase shares of the funds for clients of
associated registered investment advisors participating in fee-based
programs until May 31, 1997. After this date, additional purchases of
a fund may be made only for clients who already own or hold shares of
that fund.

/bullet/ Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group.
Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added
together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is invested or to be invested
in the funds. There are certain other requirements and the group must
have a purpose other than buying fund shares.

/bullet/ An investor who executes a Letter of Intent (Letter) which expresses
the investor's intention to invest at least $5 million within a
13-month period in the Franklin Templeton Funds, including at least $1
million in the funds. See the Institutional Application. Minimum
investments: $1 million and $50 additional. If the investor does not
invest at least $5 million in shares of the funds or other Franklin
Templeton Funds within the 13-month period, the shares actually
purchased will be involuntarily redeemed and the proceeds sent to the
investor at the address of record. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the
amount of purchases for purposes of determining whether the terms of
the Letter have been completed.

Shares of the funds may be purchased at net asset value without a sales charge
through any broker that has a dealer agreement with Distributors, the Principal
Underwriter of the shares of the funds, or directly from Distributors, upon
receipt by Distributors of an Institutional Account Application Form and
payment. Distributors may establish minimum requirements with respect to amount
of purchase.

PAGE

Certain Franklin Templeton Funds offer multiple share classes not offered by the
Emerging Fixed Income Markets Series, Emerging Markets Series and Growth Series.
Please note that for selling or exchanging your shares, or for other purposes,
the fund's shares are considered Class A shares. Before January 1, 1999, the
fund's shares were considered Class I shares.

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

ACCOUNT APPLICATION If you are opening a new account, please complete and sign
an Institutional Account Application Form.

PAGE

BUYING SHARES

- ------------------------------ ------------------------------------------- -------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ------------------------------ ------------------------------------------- -------------------------------------------
<S> <C> <C>
[Insert graphic of hands
shaking]

Contact your investment representative Contact your investment representative

THROUGH YOUR INVESTMENT
REPRESENTATIVE

- ------------------------------ ------------------------------------------- -------------------------------------------
Make your check, Federal Reserve draft or Make your check, Federal Reserve
your check, Federal Reserve draft or draft or negotiable bank draft
[Insert graphic of envelope] negotiable bank draft payable to the payable to the fund. Include your
fund. account number.

BY MAIL
Mail the check, Federal Reserve draft or Fill out the deposit slip from your
negotiable bank draft and your signed account statement. If you do not have a
Institutional Account Application Form to slip, include a note with your name,
the Institutional Services. fund name, and your account number.

Mail the check, Federal Reserve draft
or negotiable bank draft and deposit
slip or note to Institutional
Services.

- ------------------------------ ------------------------------------------- -------------------------------------------
[Insert graphic of phone] Call to receive a wire control number and Call to receive a wire control number and
wire instructions. wire instructions.

BY PHONE
On the next business day, wire the funds To make a same day wire investment,
1-800/321-8563 or and mail your signed Institutional please call us by 1:00 p.m. pacific time
1-415/312-3600 Account Application Form to Institutional and make sure your wire arrives by 3:00
Services. Please include the wire control p.m.
number or your new account number on the
application.

To make a same day wire investment,
please call us by 1:00 p.m. pacific time
and make sure your wire arrives by 3:00
p.m.
- ------------------------------ ------------------------------------------- -------------------------------------------
PAGE

[Insert graphic of two Call Institutional Services at the number Call Institutional Services at the number
arrows pointing in opposite below, or send signed written below, or send signed written
directions] instructions. (Please see page [#] for instructions. (Please see page [#] for
information on exchanges.) information on exchanges.)

BY EXCHANGE

- ------------------------------ ------------------------------------------- -------------------------------------------
</TABLE>

Orders mailed to Franklin Templeton Distributors, Inc. (Distributors) by dealers
or individual investors do not require advance notice. Checks or negotiable bank
drafts must be in U.S. currency drawn on a commercial bank in the U.S. and, if
over $100,000, may not be deemed to have been received until the proceeds have
been collected, unless the check is certified or issued by such bank. Any
subscription may be rejected by Distributors or by Templeton Institutional
Funds, Inc.

Shares of the funds may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase fund shares must be
appropriate investments for that fund, consistent with its investment objective,
policies and limitations, as determined by the Company, and must have readily
available market quotations. The securities will be valued in accordance with
the Company's policy for calculating Net Asset Value (as set forth above),
determined as of the close of the day on which the securities are received by
the Company in salable form. A prospective shareholder will receive shares of
the applicable fund next computed after such receipt. To obtain the approval of
the Company, call Institutional Services. Investors who are affiliated persons
of the Company (as defined in the Investment Company Act of 1940) may not
purchase shares in this manner in the absence of SEC approval.

FRANKLIN TEMPLETON INVESTOR SERVICES
100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)

PAGE

[Insert graphic of person with a headset] INVESTOR SERVICES

TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.

TELEPHONE PRIVILEGES You may initiate many transactions and make certain other
changes to your account by phone. Please refer to the sections of this
prospectus that discuss the transaction you would like to make or call
Institutional Services.

For accounts with more than one registered owner, telephone privileges also
allow a fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.

As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests.

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class.

[BEGIN CALLOUT]

An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[END CALLOUT]

Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.

Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).

PAGE

[Insert graphic of a certificate] SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. If you have completed and returned
the Institutional Telephone Privileges Agreement, amounts over $100,000 may also
be redeemed. Sometimes, however, to protect you and the funds we will need
written instructions signed by all registered owners, with a signature guarantee
for each owner, if:

[BEGIN CALLOUT]

A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.

A notary public CANNOT provide a signature guarantee.
[END CALLOUT]

/bullet/ you are selling more than $100,000 worth of shares
/bullet/ you want your proceeds paid to someone who is not a registered owner
/bullet/ you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account

We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the funds
against potential claims based on the instructions received.

SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.

REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.

PAGE

RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.

SELLING SHARES

- ----------------------------------- -------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------- -------------------------------------------
<S> <C>
[Insert graphic of hands shaking]

THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE

- ----------------------------------- -------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
or trust accounts may need to send additional
documents.

BY MAIL Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.

A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.

- ----------------------------------- ------------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000
or less, you do not hold share certificates
and you have not changed your address by phone
within the last 15 days, you can sell your
shares by phone.

BY PHONE
1-800/321-8563 (Only available if A check will be mailed to the name(s)
you have completed and sent the and address on the account. Written
Institutional Telephone instructions, with a signature guarantee,
Privileges Agreement) are required to send the check to another
address or to make it payable to another
person.

- ----------------------------------- ---------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds of $1,000 or more wired to a bank
or escrow account. See the policies above for
selling shares by mail or phone.

Before requesting a bank wire, please make
sure we have your bank account information
on file. If we do not have this information,
you will need to send written instructions
with your bank's name and address, your bank
BY WIRE account number, the ABA routing number, and a
signature guarantee.

Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- ----------------------------------- ----------------------------------------------
PAGE

[Insert graphic of two arrows Obtain a current prospectus for the fund
pointing in opposite directions] you are considering.

Call Institutional Services at the number
below, or send signed written instructions.
BY EXCHANGE See the policies above for selling shares
by mail or phone.

If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.

- ----------------------------------- -------------------------------------------
</TABLE>

FRANKLIN TEMPLETON INVESTOR SERVICES
100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)

[Insert graphic of paper and pen] ACCOUNT POLICIES

CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each fund's NAV is calculated by dividing
their 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 values, assets may be valued at their fair value. If
a fund hold securities listed primarily on a foreign exchange that trades on
days when the funds are not open for business, the value of your shares may
change on days that you cannot buy or sell shares.

Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.

ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,000
because you sell some of your shares, we may mail you a notice asking you to
bring the account back up to $1,000. If you choose not to do so within 30 days,
we may close your account and mail the proceeds to the address of record.

STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the funds' financial

PAGE

reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.

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

STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.

JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.

MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of a fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
a fund more than twice in a calendar quarter, or (iii) exchanged shares equal to
at least $5 million, or more than 1% of a fund's net assets, or (iv) otherwise
seem to follow a timing pattern. Shares under common ownership or control are
combined for these limits.

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

bullet/ The fund may refuse any order to buy shares, including any purchase
under the exchange privilege.

/bullet/ At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.

PAGE

/bullet/ The fund may modify or discontinue the exchange privilege on 60 days'
notice.

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

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

/bullet/ For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case
of an emergency or if the payment by check or wire would be harmful to
existing shareholders.

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

DEALER COMPENSATION Qualifying dealers who sell shares may receive up to 0.25%
of the amount invested. This amount is paid by Franklin Templeton Distributors,
Inc. from its own resources.

[Insert graphic of question mark]QUESTIONS

If you have any questions about the funds or your account, you can write to us
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. You can
also call us at one of the following numbers. For your protection and to help
ensure we provide you with quality service, all calls may be monitored or
recorded.

HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------- ----------------------------- -------------------------------------------
<S> <C> <C>
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>

PAGE

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).

For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.

FRANKLIN(R)TEMPLETON(R)
INSTITUTIONAL SERVICES 1-800/321/8563
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com

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

Investment Company Act file #811-6135 ZTIFI P 5/99

PAGE

PART A
FOREIGN EQUITY SERIES
TEMPLETON INSTITUTIONAL FUNDS, INC.
PROSPECTUS

PAGE

Prospectus

Templeton Foreign Equity Series

PLAN SHARES

MAY 1, 1999

[Insert Franklin Templeton Ben Head]

LIKE ALL MUTUAL FUND SHARES, 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 #] Performance

[insert page #] Fees and Expenses

[insert page #] Management

[insert page #] Distributions and Taxes

YOUR ACCOUNT

[BEGIN CALLOUT]
INFORMATION ABOUT SALES CHARGES, QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND
SERVICES
[END CALLOUT]

[insert page #] Sales Charges

[insert page #] Qualified Investors

[insert page #] Buying Shares

[insert page #] Investor Services

[insert page #] Selling Shares

[insert page #] 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] GOALS AND STRATEGIES

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

PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of companies located outside the U.S.,
including emerging markets.

[BEGIN CALLOUT]
The fund invests primarily in an internationally diversified portfolio of
common stocks.
[END CALLOUT]

The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A company's
historical value measures, including price/earnings ratio, profit margins and
liquidation value, will also be considered.

PAGE

TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these circumstances,
the fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in international stocks.

[Insert graphic of chart with line going up and down] 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 markets as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value. They may not
increase in value, as anticipated by the manager, if other investors fail to
recognize the company's value and bid up the price or in markets favoring
faster-growing companies.

PAGE

Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not

PAGE

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.

Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.

PAGE

YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.

If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see page
[#] for more information.

More detailed information about the fund, its policies (including temporary
investments) and risks can be found in the fund's Statement of Additional
Information (SAI).

PAGE

[Insert graphic of a bull and a bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 8 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.

PLAN SHARES NNUAL TOTAL RETURNS/1,2/

[Insert bar graph]

[]% []% []% []% []% []% []% []%
91 92 93 94 95 96 97 98

YEAR

[BEGIN CALLOUT]

BEST QUARTER:

Q[] '[] []%

WORST QUARTER:

Q[] '[] []%

[END CALLOUT]

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

SINCE INCEPTION
1 YEAR 5 YEARS (10/18/90)
- ------------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Foreign Equity Series - Plan Shares []% []% []%
MSCI - EAFE Index3 []% []% []%

</TABLE>

1.As of March 31, 1999, the fund's year-to-date return was []%.

2. Before May 1, 1999, only a single class of fund shares was offered without
Rule 12b-1 expenses. Returns shown are a restatement of the original class to
include the Rule 12b-1 fees applicable to Plan Shares as though in effect from
the fund's inception.

3. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Europe Australia
Far East (EAFE) Index tracks the performance of approximately 1000 securities in
20 countries. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.

PAGE

[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.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

PLAN SHARES
Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)/2/

PLAN SHARES
- -----------------------------------------------------------------
Management fees 0.70%
Distribution and service
(12b-1) fees 0.35%
Other expenses 0.13%
-------------
Total annual fund operating expenses 1.18%
-------------

1. This fee is only for market timers (see page [#]).

2. The fund began offering Plan Shares on May 1, 1999. Annual operating expenses
are based on the expenses for the fund's Primary Shares for the fiscal year
ended December 31, 1998.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------- ---------------- --------------- ---------------
$120 $375 $649 $1,432

[Insert graphic of briefcase] MANAGEMENT

PAGE

The fund's lead portfolio manager is:

GARY P. MOTYL CFA, DIRECTOR AND EXECUTIVE VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Motyl has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1981.

The following individuals have secondary portfolio management responsibilities:

MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Beveridge has been a manager of the fund since 1996. He joined the Franklin
Templeton Group in 1985.

GARY CLEMONS, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL

Mr. Clemons has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1990.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to a annual rate of 0.70% of its average
daily net assets.

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

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

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

PAGE

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

INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.

To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call Institutional Services at 1-800/321-8563.

TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.

[BEGIN CALLOUT]
BACKUP WITHHOLDING

By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[END CALLOUT]

When you sell your shares of the fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.

Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes paid by
the fund that invests more than 50% of its assets in foreign securities may be
passed through to you as a foreign tax credit. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in the
fund.

PAGE

YOUR ACCOUNT

[Insert graphic of percentage sign] SALES CHARGES

DISTRIBUTION AND SERVICE (12B-1) FEES Plan Shares has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay distribution
fees of up to 0.35% per year to those who sell and distribute Plan shares and
provide other services to shareholders. Because these fees are paid out of Plan
Shares' 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 pencil marking an "X"]QUALIFIED INVESTORS

There is a minimum initial investment of $5 million ($50 for subsequent
investments) for all investors except the following:

/bullet/ Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification
under section 401 of the Internal Revenue Code, including salary
reduction plans qualified under section 401(k) of the Internal Revenue
Code, and that are sponsored by an employer (i) with at least 1,000
employees, or (ii) with retirement plan assets of $10 million or more.
Minimum investments: No initial and $50 additional minimums. Minimum
investments for plans with less than 1,000 employees or $10 million in
plan assets: $1 million initial investment or an investment of $1
million over the subsequent 13-month period in the fund or any of the
Franklin Templeton Funds and $50 additional.
PAGE

/bullet/ Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. Minimum investments: $1
million initial investment or an investment of $1 million over the
subsequent 13-month period in the fund or any of the Franklin
Templeton Funds and $50 additional.

PAGE

investor at the address of record. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the
amount of purchases for purposes of determining whether the terms of
the Letter have been completed.

Certain Franklin Templeton Funds offer multiple share classes not offered by the
fund. Please note that for selling or exchanging your shares, or for other
purposes, the fund's shares are considered Class A shares. Before January 1,
1999, the fund's shares were considered Class I shares.

PAGE

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

ACCOUNT APPLICATION If you are opening a new account, please complete and sign
an Institutional Account Application Form.

BUYING SHARES

Contact your investment representative Contact your investment representative

THROUGH YOUR INVESTMENT
REPRESENTATIVE

Mail the check, Federal Reserve draft
or negotiable bank draft and deposit
slip or note to Institutional
Services.

To make a same day wire investment,
please call us by 1:00 p.m. pacific time
and make sure your wire arrives by 3:00
p.m.

PAGE

- ------------------------------ ------------------------------------------- -------------------------------------------
[Insert graphic of two Call Institutional Services at the number Call Institutional Services at the number
arrows pointing in opposite below, or send signed written below, or send signed written
directions] instructions. (Please see page [#] for instructions. (Please see page [#] for
information on exchanges.) information on exchanges.)

BY EXCHANGE

- ------------------------------ ------------------------------------------- -------------------------------------------
</TABLE>

Shares of the fund may be purchased with "in-kind" securities, if approved in
advance by the Company. Securities used to purchase fund shares must be
appropriate investments for that fund, consistent with its investment objective,
policies and limitations, as determined by the Company, and must have readily
available market quotations. The securities will be valued in accordance with
the Company's policy for calculating Net Asset Value (as set forth above),
determined as of the close of the day on which the securities are received by
the Company in salable form. A prospective shareholder will receive shares of
the applicable fund next computed after such receipt. To obtain the approval of
the Company, call Institutional Services. Investors who are affiliated persons
of the Company (as defined in the Investment Company Act of 1940) may not
purchase shares in this manner in the absence of SEC approval.

FRANKLIN TEMPLETON INVESTOR SERVICES
100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)

PAGE

[Insert graphic of person with a headset] INVESTOR SERVICES

For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.

As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests.

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class.

[BEGIN CALLOUT]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[END CALLOUT]

Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.

Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the

PAGE

number and amount of exchanges you may make (please see "Market Timers" on page
[#]).

[Insert graphic of a certificate] SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. If you have completed and returned
the Institutional Telephone Privileges Agreement, amounts over $100,000 may also
be redeemed. Sometimes, however, to protect you and the fund we will need
written instructions signed by all registered owners, with a signature guarantee
for each owner, if:

[BEGIN CALLOUT]

A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.

A notary public CANNOT provide a signature guarantee.
[END CALLOUT]

We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.

PAGE

SELLING SHARES
<TABLE>
<CAPTION>

THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE

A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.

Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- ----------------------------------- ---------------------------------------------
PAGE

[Insert graphic of two arrows Obtain a current prospectus for the fund
pointing in opposite directions] you are considering.

Call Institutional Services at the number
below, or send signed written instructions.
BY EXCHANGE See the policies above for selling shares
by mail or phone.

If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.

- ----------------------------------- -------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES
100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/321-8563
(MONDAY THROUGH FRIDAY 6:00 A.M. TO 5:00 P.M., PACIFIC TIME)

[Insert graphic of paper and pen] ACCOUNT POLICIES

CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). The fund's 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 values, 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 your shares may change
on days that you cannot buy or sell shares.

Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.

PAGE

STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.

MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. 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. Shares under common ownership or
control are combined for these limits.

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

/bullet/ The fund may refuse any order to buy shares, including any purchase
under the exchange privilege.

/bullet/ At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.

PAGE

/bullet/ The fund may modify or discontinue the exchange privilege on 60 days'
notice.

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

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

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

[Insert graphic of question mark]QUESTIONS

If you have any questions about the fund or your account, you can write to us at
100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. You can
also call us at one of the following numbers. For your protection and to help
ensure we provide you with quality service, all calls may be monitored or
recorded.

</TABLE>

PAGE

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).

For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.

FRANKLIN(R)TEMPLETON(R)
INSTITUTIONAL SERVICES 1-800/321/8563
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com

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,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.

Investment Company Act file #811-6135 ZTIFI() P 5/99

PAGE
PART B
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION

PAGE

TEMPLETON INSTITUTIONAL FUNDS, INC.

Emerging Fixed Income Markets Series
Emerging Markets Series
Foreign Equity Series - Primary Shares
Growth Series

STATEMENT OF
ADDITIONAL INFORMATION

MAY 1, 1999

100 FOUNTAIN PARKWAY, P.O. BOX 33030

ST. PETERSBURG, FL 33733-8030 1-800/321/8563 (INSTITUTIONAL SERVICES)

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated May 1, 1999, 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 funds' prospectus.

The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).

For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/321-8563.

CONTENTS

Goals and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings

- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT;

/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK;

/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------

GOALS AND STRATEGIES

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

EMERGING FIXED INCOME MARKETS SERIES The fund's investment goal is high total
return, consisting of current income and capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.

Under normal market conditions, the fund will invest at least 65% of total
assets in debt securities of companies, governments and government agencies
located in emerging market countries. The fund may invest up to 35% of total
assets in securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities.

Emerging Fixed Income Markets Series seeks high total return by investing at
least 65% of its total assets in a portfolio of "fixed income" or debt
obligations of sovereign or sovereign-related entities of emerging market
countries, as well as debt obligations of emerging market companies. For
purposes of this restriction, the fund uses the term "fixed income" generically
to mean debt obligations of all types, including debt obligations which pay a
variable or floating rate of interest as well as a fixed rate of interest. In
selecting investments for Emerging Fixed Income Markets Series, the manager will
draw on its experience in global investing in seeking to identify those markets
and issuers around the world which are anticipated to provide the opportunity
for high current income and capital appreciation. Debt securities issued in
emerging markets are generally rated below investment grade. Consequently, the
fund anticipates that a substantial percentage of its assets may be invested in
higher risk, lower quality debt securities, commonly known as "junk bonds."
These investments are speculative in nature.

Emerging Fixed Income Markets Series' investments in sovereign or
sovereign-related debt obligations may consist of (i) bonds, notes, bills,
debentures or other fixed income or floating rate securities issued or
guaranteed by governments, governmental agencies or instrumentalities, or
government owned, controlled or sponsored entities, including central banks,
located in emerging market countries (including loans and participations in and
assignments of portions of loans between governments and financial
institutions), (ii) debt securities issued by entities organized and operated
for the purpose of restructuring the investment characteristics of securities
issued by any of the entities described above, including indexed or
currency-linked securities, and (iii) debt securities issued by supra-national
organizations such as the Asian Development Bank, the Inter-American Development
Bank, and the Corporacion Andina de Fomento, among others. These securities may
be issued in either registered or bearer form. These securities may include
Brady Bonds which are discussed below.

Emerging Fixed Income Markets Series' investments in debt obligations of private
sector companies in emerging market countries may take the form of bonds, notes,
bills, debentures, convertible securities, warrants, indexed or currency-linked
securities, bank debt obligations, short-term paper, loan participations, loan
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of instruments issued by
emerging market country issuers. Emerging market country debt securities held by
Emerging Fixed Income Markets Series may or may not be listed or traded on a
securities exchange. Emerging Fixed Income Markets Series will not be subject to
any restrictions on the maturities of the emerging market country debt
securities it holds; those maturities may range from overnight to more than 30
years.

Emerging Fixed Income Markets Series may invest up to 5% of its assets in
warrants (not counting warrants acquired in units or attached to other
securities), and up to 15% of its net assets in illiquid securities. Emerging
Fixed Income Markets Series will not invest more than 5% of its total assets in
securities of Russian issuers. Emerging Fixed Income Markets Series may invest
in debt securities rated below BBB by S&P or Baa by Moody's (or unrated debt
securities determined by the fund's manager to be of comparable quality).
Emerging Fixed Income Markets Series may borrow up to one-third of the value of
its total assets and may lend portfolio securities with an aggregate market
value of up to one-third of its total assets. Emerging Fixed Income Markets
Series may purchase and sell put and call options on securities or indices,
provided that (i) the value of the underlying securities on which options may be
written at any one time will not exceed 25% of the fund's total assets, and (ii)
the fund will not purchase put or call options if the aggregate premium paid for
such options would exceed 5% of its total assets. Emerging Fixed Income Markets
Series may enter into forward foreign currency contracts and may purchase and
write put and call options on foreign currencies. For hedging purposes only
(including anticipatory hedges where the manager seeks to anticipate an intended
shift in maturity, duration or asset allocation), Emerging Fixed Income Markets
Series may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of these
futures contracts, provided that (i) the fund will not commit more than 5% of
its total assets to initial margin deposits on futures contracts and related
options, and (ii) the value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the total
assets of the fund. Emerging Fixed Income Markets Series may enter into swap
agreements, provided that the fund will not enter into an agreement with any
single party if the amount owed or to be received under any existing contracts
with that party would exceed 5% of the fund's assets.

EMERGING MARKETS SERIES The fund's investment goal is long-term capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.

The fund tries to achieve its goal by investing primarily in the equity
securities of developing market issuers. The fund may invest up to 100% of its
total assets in emerging markets, including up to 5% of its total assets in
Russian securities. With respect to 75% of its total assets, the fund may invest
up to 5% of its total assets in securities issued by any one company or foreign
government. The fund may invest any amount of its assets in U.S. government
securities. The fund may invest in any industry although it will not concentrate
(invest more than 25% of its total assets) in any one industry. The fund may
invest up to 15% of its total assets in foreign securities that are not listed
on a recognized U.S. or foreign securities exchange, including up to 10% of its
total assets in restricted securities, securities that are not readily
marketable, repurchase agreements with more than seven days to maturity, and
over-the-counter options bought by the fund.

FOREIGN EQUITY SERIES The fund's investment goal is long-term capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.

Under normal market conditions, the fund will invest primarily in the equity
securities of companies located outside the U.S., including emerging markets.
Foreign Equity Series seeks long-term capital growth through a flexible policy
of investing primarily in equity securities and debt obligations of companies
and governments outside the U.S. including emerging markets securities. Foreign
Equity Series normally will invest at least 65% of its total assets in foreign
equity securities. Foreign Equity Series may also invest up to 35% of its total
assets in debt securities when, in the judgment of the manager, they offer
greater potential for capital appreciation than is available through investment
in stocks. In selecting securities for Foreign Equity Series, the manager
attempts to identify those companies that offer above-average opportunities for
capital appreciation in various countries and industries where economic and
political factors, including currency movements, are favorable to capital
growth.

Foreign Equity Series may invest up to 5% of its assets in warrants (not
counting warrants acquired in units or attached to other securities), and up to
10% of its net assets in illiquid securities. Foreign Equity Series will not
invest more than 5% of its total assets in any of the following: (i) debt
securities rated at the time of purchase lower than BBB by S&P or Baa by
Moody's, (ii) structured investments, and (iii) securities of Russian issuers.
Foreign Equity Series may borrow up to one-third of the value of its total
assets and may lend portfolio securities with an aggregate market value of up to
one-third of its total assets. Foreign Equity Series may purchase and sell put
and call options on securities or indices, provided that (i) the value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the fund's total assets, and (ii) the fund will not purchase put
or call options if the aggregate premium paid for such options would exceed 5%
of its total assets. Foreign Equity Series may enter into forward foreign
currency contracts and may purchase and write put and call options on foreign
currencies. For hedging purposes only, Foreign Equity Series may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the fund.

GROWTH SERIES The fund's investment goal is long-term capital appreciation. This
goal is fundamental, which means it may not be changed without shareholder
approval.

Under normal market conditions, the fund will invest primarily in the equity
securities of companies located anywhere in the world, including emerging
markets. Growth Series seeks long-term capital growth through a flexible policy
of investing in stocks and debt obligations of companies and governments of any
nation, including developing nations. Under normal market conditions at least
65% of Growth Series' total assets will be invested in such securities. Although
Growth Series generally invests in common stock, it may also invest in preferred
stocks and debt securities that the manager believes offer the potential for
capital growth. In selecting securities for Growth Series, the manager attempts
to identify companies that offer above-average opportunities for capital
appreciation in various countries and industries where economic and political
factors, including currency movements, are favorable to capital growth.

Growth Series may invest up to 5% of its assets in warrants (not counting
warrants acquired in units or attached to other securities), and up to 10% of
its net assets in illiquid securities. Growth Series will not invest more than
5% of its total assets in any of the following: (i) debt securities rated at the
time of purchase lower than BBB by S&P or Baa by Moody's, (ii) structured
investments, and (iii) securities of Russian issuers. Growth Series may borrow
up to one-third of the value of its total assets and may lend portfolio
securities with an aggregate market value of up to one-third of its total
assets. Growth Series may purchase and sell put and call options on securities
or indices, provided that (i) the value of the underlying securities on which
options may be written at any one time will not exceed 25% of the fund's total
assets, and (ii) the fund will not purchase put or call options if the aggregate
premium paid for such options would exceed 5% of its total assets. Growth Series
may enter into forward foreign currency contracts and may purchase and write put
and call options on foreign currencies. For hedging purposes only, Growth Series
may buy and sell financial futures contracts, stock index futures contracts,
foreign currency futures contracts and options on any of these futures
contracts, provided that (i) the fund will not commit more than 5% of its total
assets to initial margin deposits on futures contracts and related options, and
(ii) the value of the underlying securities on which futures contracts will be
written at any one time will not exceed 25% of the total assets of the fund.

The following is a description of the various types of securities the funds may
buy.

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.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price. A warrant is typically a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified number of shares of the underlying common stock at a specified
exercise price at any time on or before the expiration date. Stock index
warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If a fund does not exercise or dispose of a warrant before its expiration, it
will expire worthless.

DEPOSITARY RECEIPTS Depositary receipts are certificates 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"). 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 pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored depositary
receipts and there may not be a correlation between such information and the
market value of the depositary receipts. Depositary receipts also involve the
risks of investments in foreign securities, as discussed below. For purposes of
the funds' investment policies, the funds' investments in depositary receipts
will be deemed to be investments in the underlying securities.

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,
debentures 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 funds are not limited as to the type of debt securities in which they may
invest. For example, bonds may include Eurobonds, Global Bonds, Yankee Bonds,
bonds sold under SEC Rule 144A, restructured external debt such as Brady Bonds,
as well as restructured external debt that has not undergone a Brady-style debt
exchange, or other types of instruments structured or denominated as bonds.
Issuers of debt securities may include the U.S. government, its agencies or
instrumentalities; a foreign government, its agencies or instrumentalities;
supranational organizations; local governments, their agencies or
instrumentalities; U.S. or foreign corporations; and U.S. or foreign banks,
savings and loan associations, and bank holding companies.

Debt securities purchased by the funds may be rated below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by each fund's
manager. Each fund except Emerging Fixed Income Markets Series will limit its
investment in such debt securities to 5% of its total assets. The Board may
consider a change in this operating policy if, in its judgment, economic
conditions change such that a different level of investment in high risk, lower
quality debt securities would be consistent with the interests of the funds and
their shareholders. Debt securities rated C by Moody's are the lowest rated
class of bonds and may be regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt securities rated C by S&P are
typically subordinated to senior debt which is vulnerable to default and is
dependent on favorable conditions to meet timely payment of interest and
repayment of principal. Debt securities rated C are therefore risky and
speculative investments.

Each fund may invest a portion of its assets, and may invest without limit for
defensive purposes, in commercial paper which, at the date of investment, must
be rated Prime-1 by Moody's or A-1 by S&P or, if not rated, be issued by a
company which at the date of investment has an outstanding debt issue rated Aaa
or Aa by Moody's or AAA or AA by S&P. Certain debt securities can provide the
potential for capital appreciation based on various factors such as changes in
interest rates, economic and market conditions, improvement in an issuer's
ability to repay principal and pay interest, and ratings upgrades. Each of the
funds may invest in debt or preferred securities which have equity features,
such as conversion or exchange rights, or which carry warrants to purchase
common stock or other equity interests. Such equity features may enable the
holder of the bond or preferred security to benefit from increases in the market
price of the underlying equity.

BRADY BONDS AND OTHER SOVEREIGN-RELATED DEBT Emerging Fixed Income Markets
Series may invest a portion of its assets in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, the Ivory Coast, Jordan, Mexico,
Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela and
Vietnam. In addition, some countries have negotiated and others are expected to
negotiate similar restructurings to the Brady Plan and, in some cases, their
external debts have been restructured into new loans or promissory notes: namely
Bolivia, Russia, Macedonia and Bosnia.

Brady Bonds have been issued relatively recently, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
have been actively traded in the over-the-counter secondary market.

Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative.

LOAN PARTICIPATIONS AND ASSIGNMENTS Emerging Fixed Income Markets Series may
invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a sovereign, sovereign-related or corporate entity and one
or more financial institutions ("Lenders"). Emerging Fixed Income Markets Series
may invest in such Loans in the form of participations ("Participations") in
Loans and assignments ("Assignments") of all or a portion of Loans from third
parties. Participations typically will result in Emerging Fixed Income Markets
Series having a contractual relationship only with the Lender, not with the
borrower. Emerging Fixed Income Markets Series will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations,
Emerging Fixed Income Markets Series generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and Emerging Fixed Income
Markets Series may not benefit directly from any collateral supporting the Loan
in which it has purchased the Participation. As a result, Emerging Fixed Income
Markets Series will assume the credit risk of both the borrower and the Lender
that is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, Emerging Fixed Income Markets Series may be treated as
a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. Emerging Fixed Income Markets Series will acquire
Participations only if the Lender interpositioned between Emerging Fixed Income
Markets Series and the borrower is believed by the manager to be creditworthy.
When Emerging Fixed Income Markets Series purchases Assignments from Lenders,
Emerging Fixed Income Markets Series will acquire direct rights against the
borrower on the Loan, except that under certain circumstances such rights may be
more limited than those held by the assigning Lender.

Emerging Fixed Income Markets Series may have difficulty disposing of
Assignments and Participations. Because the market for such instruments is not
highly liquid, Emerging Fixed Income Markets Series anticipates that such
instruments could be sold only to a limited number of institutional investors.
The lack of a highly liquid secondary market will have an adverse impact on the
value of such instruments and on the ability of Emerging Fixed Income Markets
Series to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower.

STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the funds may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("structured investments") backed by, or representing interests in,
the underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the funds anticipate investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.

The funds are permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the purchase
of subordinated structured investments would have a similar economic effect to
that of borrowing against the underlying securities, the purchase will not be
deemed to be leveraged for purposes of the limitations placed on the extent of
assets that may be used for borrowing activities.

Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, a fund's investment in these structured investments may be limited by
the restrictions contained in the 1940 Act. Structured investments are typically
sold in private placement transactions, and there currently is no active trading
market for structured investments. To the extent such investments are illiquid,
they will be subject to the fund's restrictions on investments in illiquid
securities. Each of the funds, except Emerging Fixed Income Markets Series, will
limit its investment in structured investments to 5% of its total assets.

MORTGAGE-BACKED SECURITIES Mortgage-backed securities represent an ownership
interest in a pool of residential and commercial mortgage loans. Generally,
these securities are designed to provide monthly payments of interest and
principal to the investor. The mortgagee's monthly payments to his/her lending
institution are passed through to investors such as a fund. Most issuers provide
guarantees of payments, regardless of whether the mortgagor actually makes the
payment. The guarantees made by issuers or poolers are supported by various
forms of credit, collateral, guarantees or insurance, including individual loan,
title, pool and hazard insurance purchased by the issuer. The pools are
assembled by various governmental, government-related and private organizations.
A fund may invest in securities issued or guaranteed by the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
Fannie Mae, and other government agencies. If there is no guarantee provided by
the issuer, mortgage-backed securities purchased by a fund will be those which
at the time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the manager to be of investment grade quality.

REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. 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 seller, including possible delays or restrictions upon the
fund's ability to dispose of the underlying securities. The funds will enter
into repurchase agreements only with parties who meet creditworthiness standards
approved by the board, i.e., banks or broker-dealers which have been determined
by the manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.

LOANS OF PORTFOLIO SECURITIES The funds may lend to qualified securities dealers
or other institutional investors. portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
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
loans at any time and obtain the return of the securities loaned within five
business days. The fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.

BORROWING Each fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the
Investment Company Act of 1940, the fund 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 such
liquidations of the fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of portfolio securities on a fund's net asset
value, and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income or gains received from the
securities purchased with borrowed funds.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES Each fund may purchase securities on
a when-issued or delayed delivery basis. Securities purchased on a when-issued
or delayed delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed delivery basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. The funds will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date to attempt to "lock" in gains or avoid losses, or if
otherwise deemed advisable by the manager.

Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. Each
fund will establish a segregated account in which it will maintain liquid assets
in an amount at least equal in value to the fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.

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, for example, it may invest
the fund's portfolio in a temporary defensive manner.

Under such circumstances, each fund may invest up to 100% of its total assets in
the following money market securities, denominated in U.S. dollars or in the
currency of any foreign country, issued by entities organized in the United
States or any foreign country: short-term (less than twelve months to maturity)
and medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. government or the governments of foreign countries, their
agencies or instrumentalities; finance company and corporate commercial paper,
and other short-term corporate obligations, in each case rated Prime-1 by
Moody's or A or better by S&P or, if unrated, of comparable quality as
determined by each fund's Investment Manager; obligations (including
certificates of deposit, time deposits and bankers' acceptances) of banks having
total assets in excess of $1 billion; and repurchase agreements with banks and
broker-dealers with respect to such securities. In addition, for temporary
defensive purposes, each fund may invest up to 25% of its total assets in
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of U.S. foreign banks; provided that a fund will limit its
investment in time deposits for which there is a penalty for early withdrawal to
10% of its total assets.

ILLIQUID INVESTMENTS Growth Series' and Foreign Equity Series' policy is not to
invest more than 10% of net assets, at the time of purchase, in illiquid
securities. Emerging Markets Series' and Emerging Fixed Income Markets Series'
policy is not to invest more than 15% of net assets, at the time of purchase, in
illiquid securities. Illiquid securities are generally securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which a fund has valued them.

The managers, based on a continuing review of the trading markets, may consider
certain restricted securities which may otherwise be deemed to be illiquid, that
are offered and sold to "qualified institutional buyers," to be liquid. The
board has adopted guidelines and delegated to the managers the daily function of
determining and monitoring the liquidity of restricted securities. The board,
however, will oversee and be ultimately responsible for the determinations. If
the fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in a fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.

FUTURES CONTRACTS Although the funds have the authority to buy and sell
financial futures contracts, they presently have no intention of entering into
such transactions. For hedging purposes only (including anticipatory hedges
where the manager seeks to anticipate an intended shift in maturity, duration or
asset allocation), the funds may buy and sell covered financial futures
contracts, stock index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date. When a fund enters into a futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the security, index or
currency fluctuates, either party to the contract is required to make additional
margin payments, known as "variation margin," to cover any additional obligation
it may have under the contract. In addition, when a fund enters into a futures
contract, it will segregate assets or "cover" its position in accordance with
the Investment Company Act of 1940. Although some financial futures contracts
call for making or taking delivery of the underlying securities, in most cases
these obligations are closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their terms
call for cash settlements.

A fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of a fund.

At the time a fund purchases a futures contract, an amount of cash, U.S.
government securities or other highly liquid debt securities equal to the market
value of the futures contract will be deposited in a segregated account with the
fund's custodian. When writing a futures contract, a fund will maintain with its
custodian liquid assets that, when added to the amounts deposited with a futures
commission merchant or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, a fund may "cover" its
position by owning the instruments underlying the contract (or, in the case of
an index futures contract, a portfolio with a volatility substantially similar
to that of the index on which the futures contract is based), or holding a call
option permitting the fund to purchase the same futures contract at a price no
higher than the price of the contract written by the fund (or at a higher price
if the difference is maintained in liquid assets with the fund's custodian).

OPTIONS ON SECURITIES OR INDICES Although the funds have the authority to write
(i.e., sell) covered put and call options and purchase put and call options on
securities or securities indices that are traded on U.S. and foreign exchanges
or in the over-the-counter markets in order to hedge against market shifts
and/or to generate income to offset operating expenses, the presently have no
intention of entering into such transactions.

An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.

A fund may write a call or put option only if the option is "covered." A call
option on a security written by a fund is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
on a security is also covered if a 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 high-grade U.S. government securities in a
segregated account with its custodian. A put option on a security written by a
fund is "covered" if the fund maintains cash or liquid assets with a value equal
to the exercise price in a segregated account with its custodian, 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.

A fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's 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. Nevertheless, where a fund covers a call option
on a stock index through ownership of securities, such securities may not match
the composition of the index. In that event, a fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, 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.

A fund will receive a premium from writing a put or call option, which increases
the fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which a fund has
written a call option falls or remains the same, the fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, a fund
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the fund's investments. By writing a put
option, a fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase a fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.

A fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, a fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of a fund's investments does not decline as
anticipated, or if the value of the option does not increase, the fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of a fund's security holdings being hedged.

A fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, a fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options, a
fund will bear the risk of losing all or a portion of the premium paid if the
value of the underlying security or index does not rise.

There can be no assurance that a liquid market will exist when a fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.

The value of the underlying securities on which options may be written at any
one time will not exceed 25% of the total assets of a fund. A fund will not
purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.

FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency
exchange rate risks, the funds may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The funds may also
conduct their foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market.

A fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The funds will
generally not enter into forward contracts with terms of greater than one year.
A forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A fund may 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 the security. In addition, for example, when a 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, or when a 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. This second investment practice is generally referred to as
"cross-hedging." A fund's forward transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. The
funds have no specific limitation on the percentage of assets they may commit to
forward contracts, subject to their stated investment objectives and policies,
except that a fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
fund's ability to meet redemption requests. Because in connection with a fund's
forward foreign currency transactions an amount of the fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to pay
for the commitment, a fund will always have cash, cash equivalents or
high-quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk. In addition, when the fund sells
a forward contract, it will cover its obligation under the contract by
segregating cash, cash equivalents or high quality debt securities, or by owning
securities denominated in the corresponding currency and with a market value
equal to or greater than the fund's obligation. The segregated account will be
marked-to-market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission, it may in the future
assert authority to regulate forward contracts. In such event, a fund's ability
to utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a fund
than if it had not engaged in such contracts.

The funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with 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, and a fund could be required to
purchase 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 fluctuation in exchange rates, although, in the event
of rate movements adverse to a fund's position, the fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies written or purchased by a fund will be traded on U.S. and foreign
exchanges or over-the-counter.

The funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
fund's portfolio securities or adversely affect the prices of securities that a
fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a fund's manager to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, a fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.

SWAP AGREEMENTS Emerging Fixed Income Markets Series may enter into interest
rate, index and currency exchange rate swap agreements for purposes of
attempting to obtain a particular desired return at a lower cost to the fund
than if the fund had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations which the parties to a swap agreement have agreed to exchange.
Emerging Fixed Income Markets Series' obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). Emerging Fixed Income Markets Series'
obligations under a swap agreement will be accrued daily (offset against any
amounts owing to the fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, or high grade debt obligations,
to avoid any potential leveraging of the fund's portfolio. Emerging Fixed Income
Markets Series will not enter into a swap agreement with any single party if the
net amount that would be owed or received under contracts with that party would
exceed 5% of the fund's assets.

Whether Emerging Fixed Income Markets Series' use of swap agreements will be
successful in furthering its investment objective will depend on the ability of
the manager correctly to predict whether certain types of investments are likely
to produce greater returns than other investments. Because they are two-party
contracts and may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, Emerging Fixed Income Markets Series bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
manager will cause Emerging Fixed Income Markets Series to enter into swap
agreements only with counterparties that would be eligible for consideration as
repurchase agreement counterparties under the funds' repurchase agreement
guidelines. Certain restrictions imposed on Emerging Fixed Income Markets Series
by the Code may limit its ability to use swap agreements. The swap market is a
relatively new market and is largely unregulated. It is possible that
developments in the swap market and the laws relating to swaps, including
potential government regulation, could adversely affect Emerging Fixed Income
Markets Series' ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, or to enter into swap agreements,
or could have adverse tax consequences.

CLOSED-END AND OPEN-END INVESTMENT COMPANIES Some countries have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. The Investment Company Act of 1940 limits
the amount each fund may invest in securities of closed-end investment
companies, including those that invest principally in securities that a fund may
purchase. These restrictions may limit opportunities for a fund to invest
indirectly in certain emerging markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing premiums
to their net asset values. Investment by a fund in shares of closed-end
investment companies would involve duplication of fees, in that shareholders
would bear both their proportionate share of expenses of the fund (including
management and advisory fees) and, indirectly, the expenses of such closed-end
investment companies. Emerging Fixed Income Markets Series may invest in
open-end investment companies as well, subject to the above restrictions, and
subject to a maximum of 10% of its total assets in closed and open-end funds
combined.

CONVERTIBLE SECURITIES 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 its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.

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

A 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.

The funds may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.

The funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.

Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a fund may invest, consistent with its objectives and policies.

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

CONCENTRATION AND DIVERSIFICATION Each fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, each fund will invest at least 65% of its assets in
issuers domiciled in at least three different nations (one of which may be the
United States). Each fund, except Emerging Fixed Income Markets Series, may
invest no more than 5% of its total assets in securities issued by any one
company or government, exclusive of U.S. government securities.

PORTFOLIO TURNOVER Growth Series, Foreign Equity Series and Emerging Markets
Series each invests for long-term growth of capital and does not intend to place
emphasis upon short-term trading profits. Accordingly, each of these funds
expects to have a portfolio turnover rate of less than 50%. The manager may
engage in short-term trading in the portfolio of Emerging Fixed Income Markets
Series when such trading is considered consistent with the fund's investment
objective. Also, a security may be sold and another of comparable quality
simultaneously purchased to take advantage of what the manager believes to be a
temporary disparity in the normal yield relationship between the two securities.
As a result of its investment policies, under certain market conditions, the
portfolio turnover rate of Emerging Fixed Income Markets Series may be higher
than that of other mutual funds, and is expected to be between 200% and 300%.
Because a higher turnover rate increases transaction costs and may increase
capital gains, the manager carefully weighs the anticipated benefits of
short-term investment against these consequences.

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.

Each fund MAY NOT:

PAGE

therein); invest in other open-end investment companies except as permitted by
the Investment Company Act of 1940 (1940 Act); invest in interests (other than
debentures or equity stock interests) in oil, gas or other mineral exploration
or development programs; or purchase or sell commodity contracts (except futures
contracts as described in this SAI).

2. Purchase or retain securities of any company in which directors or officers
of Templeton Institutional Funds, Inc. or a fund's manager, individually owning
more than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.

3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the fund's total
assets (i) more than 5% of the fund's total assets would then be invested in
securities of any single issuer, or (ii) the fund would then own more than 10%
of the voting securities of any single issuer; provided, however, that this
restriction does not apply to the Emerging Fixed Income Markets Series.

4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but a fund
may make margin payments in connection with options on securities or securities
indices and foreign currencies; futures contracts and related options; and
forward contracts and related options).

5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although a fund may buy from a bank or broker-dealer U.S. government obligations
with a simultaneous agreement by the seller to repurchase them within no more
than seven days at the original purchase price plus accrued interest and loan
its portfolio securities. Emerging Fixed Income Markets Series may invest in
debt instruments of all types consistent with its investment objectives and
policies.

6. Borrow money, except that a fund may borrow money from banks in an amount not
exceeding 33 1/3% of the value of its total assets (including the amount
borrowed).

PAGE

7. Invest more than 5% of the value of its total assets in securities of issuers
which have been in continuous operation less than three years; provided that
this restriction does not apply to Emerging Fixed Income Markets Series.

8. Invest more than 5% of its total assets in warrants, whether or not listed on
the NYSE or the American Stock Exchange, including no more than 2% of its total
assets which may be invested in warrants that are not listed on those exchanges;
provided that this restriction does not apply to Emerging Fixed Income Markets
Series. Warrants acquired by a fund in units or attached to securities are not
included in this restriction.

9. Invest more than 25% of its total assets in a single industry.(1)

10. Participate on a joint or a joint and several basis in any trading account
in securities; (See "Risks" below and "Goals and Strategies" above as to
transactions in the same securities for a fund and/or other mutual funds with
the same or affiliated advisers.)

- -----------
1 The SEC considers each foreign government to be a separate industry.

A fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.

If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a 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.

If a percentage restriction 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 or the amount of assets will not be considered a violation
of any of the foregoing restrictions.

PAGE

If a fund receives from an issuer of securities held by the fund subscription
rights to purchase securities of that issuer, and if the fund exercises such
subscription rights at a time when the fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth in Investment
Restrictions 3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after announcement of
such rights, the fund has sold at least as many securities of the same class and
value as it would receive on exercise of such rights.

RISKS

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

Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the funds, nor can
there be any assurance that a fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the funds can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the funds' portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the managers will not always be
profitable or prove to have been correct. In addition to the factors which
affect the value of individual securities, a shareholder may anticipate that the
value of the shares of the funds will fluctuate with movements in the broader
equity and bond markets, as well. A decline in the stock market of any country
or region in which a fund is invested in equity securities may also be reflected
in declines in the price of the shares of the fund. Changes in prevailing rates
of interest in any of the countries or regions in which a fund is invested in
fixed income securities will likely affect the value of such holdings and thus
the value of fund shares. Increased rates of interest which frequently accompany
inflation and/or a growing economy are likely to have a negative effect on the
value of a fund's shares. In addition, changes in currency valuations will
affect the price of the shares of a fund. History reflects both decreases and
increases in stock markets and interest rates in individual countries and
throughout the world and in currency valuations, and these may occur
unpredictably in the future. The funds are not intended as a complete investment
program.

FOREIGN SECURITIES RISK You should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments. There may
be less publicly available information about foreign companies comparable to the
reports and ratings published about companies in the U.S. Foreign companies are
not generally subject to uniform accounting or financial reporting standards,
and auditing practices and requirements may not be comparable to those
applicable to U.S. companies. The fund, therefore, may encounter difficulty in
obtaining market quotations for purposes of valuing its portfolio and
calculating its net asset value. Foreign markets have substantially less volume
than the New York Stock Exchange (NYSE) and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.

EMERGING MARKETS. Investments in companies domiciled in developing countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies that 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 developing 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 developing 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 developing 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 such 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 developing countries. Finally, even though the
currencies of some developing 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 fund shareholders.

RUSSIAN SECURITIES. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in the
U.S. securities markets, and should be considered highly speculative. Such risks
include, together with Russia's continuing political and economic instability
and the slow-paced development of its market economy, the following: (a) delays
in settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be impossible
or more difficult than in other countries to obtain and/or enforce a judgment;
(c) pervasiveness of corruption, insider trading, and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (f) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the fund's ability to exchange local currencies for U.S. dollars; (g) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly

PAGE

smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.

There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the fund to lose its registration

PAGE

through fraud, negligence or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.

CURRENCY. 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 which would prevent the fund from
transferring cash out of the country, 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 tax 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 those nations.

PAGE

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. Further,
certain currencies may not be internationally traded.

Certain of these 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.
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.

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 considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which 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 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's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.

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.

Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. 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.

INTEREST RATE RISK 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, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.

LOW-RATED SECURITIES RISK 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 obligations on which no interest is being paid.

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 of 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.

PAGE

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, and 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 investing 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 payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery. A fund will not invest more than 5% of its total assets in defaulted
debt securities, which may be illiquid.

AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS

AAA .....................................................23.83%
BBB- .....................................................1.44%
BB+ ......................................................1.48%
BB ......................................................35.86%
BB- .....................................................13.26%
B+.......................................................12.00%
B.........................................................9.97%
B-........................................................1.29%
CCC-.....................................................0.87%

PAGE

MORTGAGE SECURITIES RISK Mortgage 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
prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates. An
unexpected rise in interest rates could reduce the rate of principal prepayments
on mortgage securities and extend the life of these securities. This could cause
the price of these securities and the fund's share price to fall and would make
these securities more sensitive to interest rate changes. This is called
"extension risk."

SMALLER COMPANIES RISK Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions.

Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.

DERIVATIVE SECURITIES RISK The fund's ability to reduce or eliminate its futures
and related options positions will depend upon the liquidity of the secondary
markets for such futures and options. The fund intends to purchase or sell
futures and related options 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. Use of stock index futures and related options for hedging may
involve risks because of imperfect correlations between movements in the prices
of the futures or related options and movements in the prices of the securities
being hedged. Successful use of futures and related options by the fund for
hedging purposes also depends upon the manager's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.

REPURCHASE AGREEMENT RISK 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 the 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.

OFFICERS AND DIRECTORS

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

The Company has a board of directors. The board is responsible for the overall
management of the funds, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the funds who
are responsible for administering the funds' day-to-day operations. The board
also monitors the Foreign Equity 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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.

POSITION(S) HELD
WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE COMPANY DURING THE PAST FIVE YEARS
<S> <C> <C>
- ----------------------------------------- --------------------- ----------------------------

Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830

Director

Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 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).

*Nicholas F. Brady (69)
The Bullitt House
102 East Dover Street
Easton, MD 21601

Director

Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 21 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).

Frank J. Crothers (54)
P.O. Box N-3238
Nassau, Bahamas

Director

Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities
Co., Ltd.; President, Provo Power Corporation; director of various other
business and non-profit organizations; and director or trustee, as the case may
be, of seven of the investment companies in the Franklin Templeton Group of
Funds.

PAGE

S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945

Director

Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.

John Wm. Galbraith (77)
360 Central Avenue
Suite 1300
St. Petersburg, FL 33701

Director

President, Galbraith Properties, Inc. (personal investment company); Director
Emeritus, Gulf West Banks, Inc. (bank holding company) (1995-present); director
or trustee, as the case may be, of 20 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Mercantile Bank
(1991-1995), Vice Chairman, Templeton, Galbraith & Hansberger Ltd. (1986-1992),
and Chairman, Templeton Funds Management, Inc. (1974-1991).

Andrew H. Hines, Jr. (76)
150 2nd Avenue N.
St. Petersburg, FL 33701

Director

Consultant,Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.

PAGE

Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016

Director

Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).

*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Director

President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and 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 50 of the investment companies in the Franklin Templeton Group of
Funds.

PAGE

Betty P. Krahmer (69)
2201 Kentmere Parkway
Wilmington, DE 19806

Director

Director or trustee of various civic associations; director or trustee, as the
case may be, of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.

Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817

Director

Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.

Fred R. Millsaps (70)
2665 NE 37th Drive
Fort Lauderdale, FL 33308

Director

Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).

Constantine Dean Tseretopoulos (45)
Lyford Cay Hospital
P.O. Box N-7776
Nassau Bahamas

Director

Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; director or trustee, as the case may be, of seven of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine
Intern, Greater Baltimore Medical Center (1982-1985).

PAGE

James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Treasurer

Certified Public Accountant; Senior Vice President, Templeton Worldwide, Inc.,
Templeton Global Investors, Inc. and Templeton Funds Trust Company; officer of
22 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Senior Tax Manager, Ernst & Young (certified public accountants)
(1977-1989).

Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Executive Vice President and Director, Franklin Resources, Inc., 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 53 of the investment companies
in the Franklin Templeton Group of Funds.

Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, Inc.;
Executive Vice President 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, Inc. 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 53 of the investment companies in the Franklin Templeton Group of
Funds.

PAGE

Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

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, Inc. and Franklin Mutual Advisers, Inc.;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.

Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Secretary

Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).

Mark G. Holowesko (39)
Lyford Cay
Nassau, Bahamas

PAGE

Vice President

President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 21 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).

Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President

Senior Vice 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.; Vice President, Franklin Advisers, 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 34 of the investment companies in
the Franklin Templeton Group of Funds.

Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President and
Director, Franklin Advisory Services, Inc.; 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 53 of
the investment companies in the Franklin Templeton Group of Funds.

John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President

PAGE

Vice President and Treasurer, Templeton Worldwide, Inc.; Assistant Vice
President, Franklin Templeton Distributors, Inc.; officer of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Vice President and Controller, Keystone Group, Inc.

Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President - Compliance

General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).

J. Mark Mobius (62)
Two Exchange Square
39th Floor, Suite 3905-08
Hong Kong

Vice President

Portfolio Manager of various Templeton advisory affiliates; Managing Director,
Templeton Asset Management Ltd.; officer of eight of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, President, International
Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987) and Director, Vickers da Costa, Hong Kong (1983-1986).

Donald F. Reed (54)
1 Adelaide Street East, Suite 2101
Toronto, Ontario Canada M5C 3B8

President

Executive Vice President, Templeton Worldwide, Inc.; President, Templeton
Investment Counsel, Inc.; President and Chief Executive Officer, Templeton
Management Limited; Co-founder and Director, International Society of Financial
Analysts; Chairman, Canadian Council of Financial Analysts; and FORMERLY,
President and Director, Reed Monahan Nicholishen Investment Counsel (1982-1989).
</TABLE>

PAGE

*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and Templeton Global Advisors
Limited. Mr. Brady and Franklin Resources, Inc. are both limited partners of
Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby Emerging Markets
Fund, L.P.

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

The Company pays noninterested board members and Mr. Brady an annual retainer of
$10,000 and a fee of $800 per board meeting attended. Board members who serve on
the audit committee of the Company 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 Company. 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 following table provides the total fees paid to
noninterested board members and Mr. Brady by the Company and by the Franklin
Templeton Group of Funds.

TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE COMPANY* GROUP OF FUNDS** WHICH EACH SERVES***
<S> <C> <C> <C>
Harris J. Ashton $13,200 $ 361,157 49
Nicholas F. Brady......... 13,200 140,975 21
Frank J. Crothers......... 15,280 47,700 7
S. Joseph Fortunato 13,200 367,835 51
John Wm. Galbraith 13,200 134,425 20
Andrew H. Hines, Jr 13,200 208,075 22
Edith E. Holiday 13,200 211,400 25
Betty P. Krahmer 13,200 141,075 21
Gordon S. Macklin......... 13,200 361,157 49
Fred R. Millsaps 14,056 210,075 22
Constantine D. Tseretopoulos 14,240 51,500 7
</TABLE>

PAGE

1. For the fiscal year ended December 31, 1998.

2. For the calendar year ended December 31, 1998.

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 54 registered investment companies, with approximately 164 U.S. based
funds or series.

Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each 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.

MANAGEMENT AND OTHER SERVICES

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

MANAGER AND SERVICES PROVIDED The Growth Series and Foreign Equity Series'
manager is Templeton Investment Counsel, Inc. The Emerging Markets Series
investment manager is Templeton Asset Management Ltd. - Hong Kong. The Emerging
Fixed Income Markets Series' manager is Templeton Investment Counsel, Inc.,
through its Global Bond Managers division. The managers are wholly owned by
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.

The managers provide investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and its
officers, directors and employees are covered by fidelity insurance. Templeton
Asset Management Ltd. - Hong Kong renders its services to the Emerging Fixed
Income Markets Series from outside the U.S.

PAGE

The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, Australia, Bahamas, Brazil, the
British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United
Kingdom and the U.S.

The managers and their affiliates manage numerous other investment companies and
accounts. The managers 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 managers on behalf of the funds. Similarly, with respect to the
funds, the managers are not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the managers 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 managers are
not obligated to refrain from investing in securities held by the funds or other
funds it manages. Of course, any transactions for the accounts of the managers
and other access persons will be made in compliance with the funds' code of
ethics.

Under the funds' 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.

PAGE

MANAGEMENT FEES Growth Series, Foreign Equity Series and Emerging Fixed Income
Markets Series pay their respective managers a monthly fee equal on an annual
basis to 0.70% of their average daily net assets during the year. Emerging
Markets Series pays its manager a monthly fee equal on an annual basis to 1.25%
of its average daily net assets during the year

For the last three fiscal years ended December 31, the funds paid the following
management fees:

Management Fees Paid ($)
1998 1997 1996
- --------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C>
Growth Series 434,268 1,946,728 1,656,913
Foreign Equity Series 30,272,145 23,912,568 16,525,094
Emerging Markets Series 23,147,831 25,766,850 15,676,692
Emerging Fixed Income Markets Series 15,136 0/1/ -
</TABLE>

1. For the period June 4, 1997 through December 31, 1997, management fees,
before any advance waiver, totaled $8,484. Under an agreement by the
manager to waive its fees, the fund paid no management fees.

ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Company to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' managers and principal underwriter.

The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.

ADMINISTRATION FEES The Company pays FT Services a monthly fee equal to an
annual rate of:

/bullet/ 0.15% of the funds' combined average daily net assets up to $200
million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2
billion; and

/bullet/ 0.075% of average daily net assets over $1.2 billion.

PAGE

During the last three fiscal years ended December 31, the Company paid the
following administration fees:
<TABLE>
<CAPTION>

Administration Fees Paid ($)
1998 1997 1996/1/
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Growth Series 52,170 236,356 211,998
Foreign Equity Series 3,636,696 2,903,341 2,117,449
Emerging Markets Series 1,557,264 1,751,904 1,127,833
Emerging Fixed Income Markets Series 1,818 0/2/ -
</TABLE>

1. Before October 1, 1996, Templeton Global Investors, Inc. provided
adminstration services to the funds.

2. For the period June 4, 1997 through December 31, 1997, administration fees,
before any advance waiver, totaled $1,030. Under an agreement by FT Services to
waive its fees, the fund paid no administration fees.

SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.

For its services, Investor Services receives a fixed fee per account. The funds
may also reimburse Investor Services for certain 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 funds. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.

CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the funds' assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.

AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
funds' independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews the
funds' registration statement filed with the U.S. Securities and Exchange
Commission (SEC).

PAGE

PORTFOLIO TRANSACTIONS

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

The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreements
and any directions that the board may give.

When placing a portfolio transaction, the managers seek 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 managers 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 managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine 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 managers' overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the managers 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 managers in carrying out their investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the managers in carrying out their overall
responsibilities to its clients.

PAGE

It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the managers to supplement their 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 managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the funds' 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, may also be considered a factor in the selection of broker-dealers to
execute the funds' 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 funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the funds,
any portfolio securities tendered by the funds will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the managers 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.

If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the managers 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 managers, 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
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.

Sale or purchase of securities, without payment of brokerage commissions, fees
(except customary transfer fees) or other remuneration in connection therewith,
may be effected between any of these funds, or between funds and private
clients, under procedures adopted by the Company's Board pursuant to Rule 17a-7
under the 1940 Act.

PAGE

During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:

1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Growth Series 81,134 391,067 173,658
Foreign Equity Series 3,863,065 2,666,430 2,138,850
Emerging Markets Series 5,522,111 6,813,142 3,832,003
Emerging Fixed Income Markets Series 0 0/1/ -
</TABLE>

1. For the period June 4, 1997 through December 31, 1997

As of December 31, 1999, the funds did not own securities of their regular
broker-dealers.

DISTRIBUTIONS AND TAXES

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

The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.

DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes a fund's net investment income
from which dividends may be paid to you. Any distributions by a fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.

PAGE

when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce a fund's ordinary income
distributions to you, and may cause some or all of a fund's previously
distributed income to be classified as a return of capital.

A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
fiscal year are invested in securities of foreign corporations, a fund may elect
to pass-through to you your pro rata share of foreign taxes paid by the fund. If
this election is made, the year-end statement you receive from a fund will show
more taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.

PAGE

EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending December 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.

REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.

All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in such fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.

PAGE

The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.

U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 3.03% of the dividends paid by the Growth
Series for the most recent fiscal year qualified for the dividends-received
deduction. In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by a fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.

Because the Emerging Market Series' and Foreign Equity Series' income is derived
primarily from investments in foreign rather than domestic U.S securities, no
portion of their distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by these Funds for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.

Because the Emerging Fixed Income Markets Series' income consists of interest
rather than dividends, no portion of its distributions will generally be
eligible for the intercorporate dividends-received deduction. None of the
dividends paid by this Fund for the most recent calendar year qualified for such
deduction, and it is anticipated that none of the current year's dividends will
so qualify.

PAGE

INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund and/or defer a fund's ability to recognize losses, and, in limited
cases, subject a fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a fund.

- ------------------------------------------------------------------------------
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS

Each fund is an open-end management investment company, commonly called a mutual
fund. The Company was organized as a Maryland corporation on July 6, 1990, and
is registered with the SEC.

The Foreign Equity Series currently offers two classes of shares, Primary Shares
and Plan Shares. Before January 1, 1999, Class A shares were designated Class I.
The fund may offer additional classes of shares in the future.

The full title of each class is:

/bullet/ Foreign Equity Series - Primary Shares
/bullet/ Foreign Equity Series - Plan Shares

Shares of each class of the Foreign Equity Series represent proportionate
interests in the fund's assets. On matters that affect the Company 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 Company for matters that affect the Company
as a whole. Additional series may be offered in the future.

The Company 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.

page

The Company does not intend to hold annual shareholder meetings. The Company or
a 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 may also be called by the board in its discretion.

As of February 5, 1999, the principal shareholders of the funds, beneficial or
of record, were:

Name and Address Percentage (%)

- ------------------------------------------------------ ------------------------
EMERGING FIXED INCOME MARKETS SERIES

Templeton Global Investors Inc 100
Corporate Accounting
Attn. Michael Corcoran
555 Airport Blvd. 4th Fl.
Burlingame, CA 94010

GROWTH SERIES

Peter Norton TTEE 35.31
Norton Family Cru Trust
DTD 2-15-92
225 Arizona Ave. 2nd Fl. W
Santa Monica, CA 90401-1210

Peter Norton TTEE 12.23
Norton Family Foundation Trust
DTD 12-12-88
225 Arizona Ave. 2nd Fl. W
Santa Monica, CA 90401-1210

Northern Trust Company Cust. 6.95
FBO Peter Norton
DTD 4-28-89
P.O. Box 92956
Chicago, IL 6067502956

National City Bank 8.69
Cust. Mt. Union College
Attn. Mutual Funds
P.O. Box 94984

T Rowe Price TTEE 28.42
FBO Honeywell
10090 Red Run Blvd.
Owings Mills, MD 21117

PAGE

EMERGING MARKETS SERIES

New York State Common 19.02
Retirement Fund
Alfred E. Smith
State Office Building Sixth Fl.
Albany, NY 12236

As of February 5, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.

BUYING AND SELLING SHARES

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

The funds continuously offer its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.

For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.

All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.

PAGE

When you buy shares, if you submit a check or a draft that is returned unpaid to
the funds we may impose a $10 charge against your account for each returned
item.

If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.

GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.

A qualified group is one that:

/bullet/ Was formed at least six months ago,

/bullet/ Has a purpose other than buying fund shares,

/bullet/ Has more than 10 members,

/bullet/ Can arrange for meetings between our representatives and group
members,

/bullet/ Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,

/bullet/ Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and

/bullet/ Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.

PAGE

redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.

Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.

EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.

If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the funds' general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.

PAGE

The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.

REDEMPTIONS IN KIND The funds have committed themselves to pay in cash (by
check) all requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the funds' net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities and
Exchange Commission (SEC). In the case of redemption requests in excess of these
amounts, the board reserves the right to make payments in whole or in part in
securities or other assets of the funds, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the funds. In these circumstances, the securities distributed
would be valued at the price used to compute the funds' net assets and you may
incur brokerage fees in converting the securities to cash. The funds do 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.

SUBSTANTIAL REDEMPTIONS A number of fund shareholders are institutions with
significant shareholdings that may be redeemed at any time. If a substantial
number or amount of redemptions should occur within a relatively short period of
time, a fund may have to sell portfolio securities it would otherwise hold and
incur the additional transactions costs. The sale of portfolio securities may
result in the recognition of capital gains, which will be distributed annually
and generally will be taxable to shareholders as ordinary income or capital
gains. Shareholders are notified annually regarding the federal tax status of
distributions they receive (see Distribution and Taxes).

SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.

PAGE

Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.

GENERAL INFORMATION If dividend checks are returned to a fund marked "unable to
forward" by the postal service, we will consider this a request by you to change
your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.

Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. A fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.

In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.

The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.

PAGE

reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.

If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.

Certain shareholder servicing agents may be authorized to accept your
transaction request.

For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.

In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.

PRICING SHARES

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

When you buy and sell shares, you pay 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.

PAGE

The funds 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 funds do 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, each 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. Occasionally events that affect the

PAGE

values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.

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 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.

PAGE

THE UNDERWRITER

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

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each 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 does not receive compensation from the Foreign Equity Fund for
acting as underwriter of the the fund's x shares.

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 quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.

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 TOTAL RETURN 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 charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.

PAGE

The average annual total returns for the indicated periods ended December 31,
1998, were:

Inception
Date 1 Year 5 Years Since Inception
- ------------------------------------- ---------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Growth Series 5/3/93 2.98% 10.46% 12.76%
Foreign Equity Series 10/18/90 10.16% 11.07% 12.55%
Emerging Markets Series 5/3/93 -18.03% -5.44% 0.09%
Emerging Fixed Income Markets Series 6/4/97 -3.98% - 4.97%

</TABLE>

These figures were 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 income dividends and capital gain distributions are reinvested at
net asset value. 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. The cumulative total returns for the indicated periods ended
December 31, 1998, were:

Inception
Date 1 Year 5 Years Since Inception
- ------------------------------------- ---------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Growth Series 5/3/93 2.98% 64.42% 97.37%
Foreign Equity Series 10/18/90 10.16% 69.01% 163.70%
Emerging Markets Series 5/3/93 -18.03% -24.38% 0.52%
Emerging Markets Fixed Income Series 6/4/97 -3.98% - 7.95%
</TABLE>

PAGE

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 a 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.

OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the fund
as a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.

The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.

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:

PAGE

tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.

From time to time, the funds and the managers may also refer to the following
information:

/bullet/ The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic
Insight or a similar statistical organization.

/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.

/bullet/ The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.

/bullet/ The geographic and industry distribution of the fund's portfolio and
the fund's top ten holdings.

/bullet/ The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due
to a liberalization of securities laws and a reduction of foreign
exchange controls, and improving communication technology, of various
countries as published by various statistical organizations.

/bullet/ To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical
returns of various investments and published indices (E.G., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).

/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.

/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.

PAGE

/bullet/ Allegorical stories illustrating the importance of persistent
long-term investing.

/bullet/ The funds' portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services,
Inc. or Morningstar, Inc.

/bullet/ A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for
undervalued or "bargain" securities and its diversification by
industry, nation and type of stocks or other securities.

/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.

/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.

From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.

Advertisements or information may also 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 decrease. 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.

- ---------------------
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.

PAGE

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 funds 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 in order 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.

The Company 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 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 $220 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 115 U.S. based open-end investment companies to the public. Each
fund may identify itself by its NASDAQ symbol or CUSIP number.

Currently, there are more mutual funds than there are stocks listed on the New

PAGE

York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.

The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.

You will receive the funds' financial reports every six months. If you would
like to receive an interim report of the funds' portfolio holdings, please call
1-800/DIAL BEN(R).

DESCRIPTION OF BOND RATINGS

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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.

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

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

STANDARD & POOR'S CORPORATION (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 may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.

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

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

PAGE
PART B
FOREIGN EQUITY SERIES
TEMPLETON INSTITUTIONAL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION

PAGE

TEMPLETON FOREIGN EQUITY SERIES

PLAN SHARES

TEMPLETON INSTITUTIONAL FUNDS, INC.

STATEMENT OF
ADDITIONAL INFORMATION

MAY 1, 1999

100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/321/8563 (INSTITUTIONAL SERVICES)

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated May 1, 1999, 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.

The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).

For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/321-8563.

CONTENTS

Goal and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings

- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT;

/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK;

/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------

GOAL AND STRATEGIES

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

The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.

Under normal market conditions, the fund will invest primarily in the equity
securities of companies located outside the U.S., including emerging markets.
The fund seeks long-term capital growth through a flexible policy of investing
primarily in equity securities and debt obligations of companies and governments
outside the U.S. including emerging markets securities. The fund normally will
invest at least 65% of its total assets in foreign equity securities. The fund
may also invest up to 35% of its total assets in debt securities when, in the
judgment of the manager, they offer greater potential for capital appreciation
than is available through investment in stocks. In selecting securities for the
fund, the manager attempts to identify those companies that offer above-average
opportunities for capital appreciation in various countries and industries where
economic and political factors, including currency movements, are favorable to
capital growth.

The fund may invest up to 5% of its assets in warrants (not counting warrants
acquired in units or attached to other securities), and up to 10% of its net
assets in illiquid securities. The fund will not invest more than 5% of its
total assets in any of the following: (i) debt securities rated at the time of
purchase lower than BBB by S&P or Baa by Moody's, (ii) structured investments,

PAGE

and (iii) securities of Russian issuers. The fund may borrow up to one-third of
the value of its total assets and may lend portfolio securities with an
aggregate market value of up to one-third of its total assets. The fund may
purchase and sell put and call options on securities or indices, provided that
(i) the value of the underlying securities on which options may be written at
any one time will not exceed 25% of the fund's total assets, and (ii) the fund
will not purchase put or call options if the aggregate premium paid for such
options would exceed 5% of its total assets. The fund may enter into forward
foreign currency contracts and may purchase and write put and call options on
foreign currencies. For hedging purposes only, the fund may buy and sell
financial futures contracts, stock index futures contracts, foreign currency
futures contracts and options on any of these futures contracts, provided that
(i) the fund will not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options, and (ii) the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the fund.

The following is a description of the various types of securities the fund may
buy.

PAGE

circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price. A warrant is typically a long-term
option issued by a corporation that gives the holder the privilege of buying a
specified number of shares of the underlying common stock at a specified
exercise price at any time on or before the expiration date. Stock index
warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the fund does not exercise or dispose of a warrant before its expiration, it
will expire worthless.

DEPOSITARY RECEIPTS Depositary receipts are certificates 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"). 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 pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of depositary receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored depositary
receipts and there may not be a correlation between such information and the
market value of the depositary receipts. Depositary receipts also involve the
risks of investments in foreign securities, as discussed below. For purposes of
the fund's investment policies, the fund's investments in depositary receipts
will be deemed to be investments in the underlying securities.

PAGE

The fund is not limited as to the type of debt securities in which it may
invest. For example, bonds may include Eurobonds, Global Bonds, Yankee Bonds,
bonds sold under SEC Rule 144A, restructured external debt such as Brady Bonds,
as well as restructured external debt that has not undergone a Brady-style debt
exchange, or other types of instruments structured or denominated as bonds.
Issuers of debt securities may include the U.S. government, its agencies or
instrumentalities; a foreign government, its agencies or instrumentalities;
supranational organizations; local governments, their agencies or
instrumentalities; U.S. or foreign corporations; and U.S. or foreign banks,
savings and loan associations, and bank holding companies.

Debt securities purchased by the fund may be rated below BBB by S&P or Baa by
Moody's or, if unrated, of comparable quality as determined by the fund's
manager. The fund will limit its investment in such debt securities to 5% of its
total assets. The board may consider a change in this operating policy if, in
its judgment, economic conditions change such that a different level of
investment in high risk, lower quality debt securities would be consistent with
the interests of the fund and their shareholders. Debt securities rated C by
Moody's are the lowest rated class of bonds and may be regarded as having
extremely poor prospects of ever attaining any real investment standing. Debt
securities rated C by S&P are typically subordinated to senior debt which is
vulnerable to default and is dependent on favorable conditions to meet timely
payment of interest and repayment of principal. Debt securities rated C are
therefore risky and speculative investments.

The fund may invest a portion of its assets, and may invest without limit for
defensive purposes, in commercial paper which, at the date of investment, must
be rated Prime-1 by Moody's or A-1 by S&P or, if not rated, be issued by a
company which at the date of investment has an outstanding debt issue rated Aaa
or Aa by Moody's or AAA or AA by S&P. Certain debt securities can provide the

PAGE

potential for capital appreciation based on various factors such as changes in
interest rates, economic and market conditions, improvement in an issuer's
ability to repay principal and pay interest, and ratings upgrades. The fund may
invest in debt or preferred securities which have equity features, such as
conversion or exchange rights, or which carry warrants to purchase common stock
or other equity interests. Such equity features may enable the holder of the
bond or preferred security to benefit from increases in the market price of the
underlying equity.

EMERGING MARKETS SECURITIES An "emerging market" country is any country that is
generally considered to be developing or emerging by the International Bank for
Reconstruction and Development (commonly referred to as the World Bank) and the
International Finance Corporation, as well as countries that are classified by
the United Nations or otherwise regarded by their authorities as developing.
Currently, the countries not in this category include Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. In addition, as used in
this prospectus, emerging market companies means (i) companies whose principal
securities trading markets are in emerging market countries, as defined above,
(ii) companies that derive 50% or more of their total revenue from either goods
or services produced in emerging market countries or sales made in emerging
market countries, or (iii) companies organized under the laws of, and with
principal offices in, emerging market countries.

STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the fund may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
Brady Bonds) and the issuance by that entity of one or more classes of

PAGE

securities ("structured investments") backed by, or representing interests in,
the underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.

The fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the purchase
of subordinated structured investments would have a similar economic effect to
that of borrowing against the underlying securities, the purchase will not be
deemed to be leveraged for purposes of the limitations placed on the extent of
assets that may be used for borrowing activities.

Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, the fund's investment in these structured investments may be limited by
the restrictions contained in the 1940 Act. Structured investments are typically
sold in private placement transactions, and there currently is no active trading
market for structured investments. To the extent such investments are illiquid,
they will be subject to the fund's restrictions on investments in illiquid
securities. The fund will limit its investment in structured investments to 5%
of its total assets.

PAGE

Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Fannie Mae, and other government agencies. If there is no
guarantee provided by the issuer, mortgage-backed securities purchased by the
fund will be those which at the time of purchase are rated investment grade by
one or more NRSRO, or, if unrated, are deemed by the manager to be of investment
grade quality.

REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. 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 seller, including possible delays or restrictions upon the
fund's ability to dispose of the underlying securities. The fund will enter into
repurchase agreements only with parties who meet creditworthiness standards
approved by the board, i.e., banks or broker-dealers which have been determined
by the manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.

LOANS OF PORTFOLIO SECURITIES The fund may lend to qualified securities dealers
or other institutional investors portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
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
loans at any time and obtain the return of the securities loaned within five
business days. The fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.

PAGE

BORROWING The fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the
Investment Company Act of 1940, the fund 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 such
liquidations of the fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing may 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 or gains received from
the securities purchased with borrowed funds.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES The fund may purchase securities on
a when-issued or delayed delivery basis. Securities purchased on a when-issued
or delayed delivery basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a when-issued or delayed delivery basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. The fund will only make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date to attempt to "lock" in gains or avoid losses, or if
otherwise deemed advisable by the manager.

Purchasing a security on a when-issued or delayed delivery basis can involve a
risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, and therefore there could be an unrealized loss at
the time of delivery. In addition, while an issuer of when-issued securities has
made a commitment to issue the securities as of a specified future date, there
can be no assurance that the securities will be issued and that the trade will
settle. In the event settlement does not occur, any appreciation in the value of
the when-issued security would be lost, including the amount of any appreciation
"locked" in by the sale of an appreciated security prior to settlement. The fund
will establish a segregated account in which it will maintain liquid assets in
an amount at least equal in value to the fund's net commitments to purchase
securities on a when-issued or delayed delivery basis. If the value of these
assets declines, the fund will place additional liquid assets in the account on
a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.

Under such circumstances, the fund may invest up to 100% of its total assets in
the following money market securities, denominated in U.S. dollars or in the
currency of any foreign country, issued by entities organized in the United
States or any foreign country: short-term (less than twelve months to maturity)
and medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. government or the governments of foreign countries, their
agencies or instrumentalities; finance company and corporate commercial paper,
and other short-term corporate obligations, in each case rated Prime-1 by
Moody's or A or better by S&P or, if unrated, of comparable quality as
determined by the fund's manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks having total assets in
excess of $1 billion; and repurchase agreements with banks and broker-dealers
with respect to such securities. In addition, for temporary defensive purposes,
the fund may invest up to 25% of its total assets in obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. foreign
banks; provided that the fund will limit its investment in time deposits for
which there is a penalty for early withdrawal to 10% of its total assets.

ILLIQUID INVESTMENTS The fund's policy is not to invest more than 10% of net
assets, at the time of purchase, in illiquid securities. 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.

The manager, based on a continuing review of the trading markets, may consider
certain restricted securities which may otherwise be deemed to be illiquid, that
are offered and sold to "qualified institutional buyers," to be liquid. The
board has adopted guidelines and delegated to the manager the daily function of

PAGE

determining and monitoring the liquidity of restricted securities. The board,
however, will oversee and be ultimately responsible for the determinations. If
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.

FUTURES CONTRACTS Although the fund has the authority to buy and sell financial
futures contracts, it presently has no intention of entering into such
transactions. For hedging purposes only (including anticipatory hedges where the
manager seeks to anticipate an intended shift in maturity, duration or asset
allocation), the fund may buy and sell covered financial futures contracts,
stock index futures contracts, foreign currency futures contracts and options on
any of the foregoing. A financial futures contract is an agreement between two
parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. When the fund enters into a futures contract, it
must make an initial deposit, known as "initial margin," as a partial guarantee
of its performance under the contract. As the value of the security, index or
currency fluctuates, either party to the contract is required to make additional
margin payments, known as "variation margin," to cover any additional obligation
it may have under the contract. In addition, when the fund enters into a futures
contract, it will segregate assets or "cover" its position in accordance with
the Investment Company Act of 1940. Although some financial futures contracts
call for making or taking delivery of the underlying securities, in most cases
these obligations are closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their terms
call for cash settlements.

The fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not

PAGE

exceed 25% of the total assets of the fund.

At the time the fund purchases a futures contract, an amount of cash, U.S.
government securities or other highly liquid debt securities equal to the market
value of the futures contract will be deposited in a segregated account with the
fund's custodian. When writing a futures contract, the fund will maintain with
its custodian liquid assets that, when added to the amounts deposited with a
futures commission merchant or broker as margin, are equal to the market value
of the instruments underlying the contract. Alternatively, the fund may "cover"
its position by owning the instruments underlying the contract (or, in the case
of an index futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is based), or holding
a call option permitting the fund to purchase the same futures contract at a
price no higher than the price of the contract written by the fund (or at a
higher price if the difference is maintained in liquid assets with the fund's
custodian).

OPTIONS ON SECURITIES OR INDICES Although the fund has the authority to write
(i.e., sell) covered put and call options and purchase put and call options on
securities or securities indices that are traded on U.S. and foreign exchanges
or in the over-the-counter markets in order to hedge against market shifts
and/or to generate income to offset operating expenses, it presently has no
intention of entering into such transactions.

The fund may write a call or put option only if the option is "covered." A call
option on a security written by the fund is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional consideration held in a segregated account by its custodian) upon

PAGE

conversion or exchange of other securities held in its portfolio. A call option
on a security 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 high-grade U.S. government securities in a
segregated account with its custodian. A put option on a security written by the
fund is "covered" if the fund maintains cash or liquid assets with a value equal
to the exercise price in a segregated account with its custodian, 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 cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's 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. Nevertheless, where the fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, 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 will receive a premium from writing a put or call option, which
increases the fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
fund has written a call option falls or remains the same, the fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the fund's investments. By writing a
put option, the fund assumes the risk of a decline in the underlying security or

PAGE

index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.

The fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security or index and the changes in value of the fund's security holdings being
hedged.

The fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, the fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options,
the fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.

There can be no assurance that a liquid market will exist when the fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.

The value of the underlying securities on which options may be written at any
one time will not exceed 25% of the total assets of the fund. The fund will not
purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.

PAGE

FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency
exchange rate risks, the fund may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The fund may also
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.

The fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. The fund will
generally not enter into forward contracts with terms of greater than one year.
A forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The fund may 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 the security. In addition, 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, or 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. This second investment practice is generally referred to as
"cross-hedging." The fund's forward transactions may call for the delivery of
one foreign currency in exchange for another foreign currency and may at times
not involve currencies in which its portfolio securities are then denominated.
The fund has no specific limitation on the percentage of assets it may commit to
forward contracts, subject to its stated investment goal and policies, except
that the fund will not enter into a forward contract if the amount of assets set
aside to cover the contract would impede portfolio management or the fund's
ability to meet redemption requests. Because in connection with the fund's
forward foreign currency transactions an amount of the fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to pay
for the commitment, the fund will always have cash, cash equivalents or
high-quality debt securities available sufficient to cover any commitments under

PAGE

these contracts or to limit any potential risk. In addition, when the fund sells
a forward contract, it will cover its obligation under the contract by
segregating cash, cash equivalents or high quality debt securities, or by owning
securities denominated in the corresponding currency and with a market value
equal to or greater than the fund's obligation. The segregated account will be
marked-to-market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission, it may in the future
assert authority to regulate forward contracts. In such event, the fund's
ability to utilize forward contracts in the manner set forth above may be
restricted. Forward contracts may limit potential gain from a positive change in
the relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the fund
than if it had not engaged in such contracts.

The fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with 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, and the fund could be required
to purchase 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 fluctuation in exchange rates, although,
in the event of rate movements adverse to the fund's position, the fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies written or purchased by the fund will be traded on U.S.
and foreign exchanges or over-the-counter.

The fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only 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 successful use of foreign
currency futures will usually depend on the ability of the fund's manager to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, the fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.

PAGE

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.

PAGE

The fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.

The fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will

PAGE

necessarily convert into either cash or a specified number of shares of common
stock.

Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which the fund may invest, consistent with its goal and policies.

An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. 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 creditworthiness 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.

CONCENTRATION AND DIVERSIFICATION The fund reserves the right to invest more
than 25% of its assets in any one country, but will not invest more than 25% of
its total assets in any one industry (excluding the U.S. government). Under
normal circumstances, the fund will invest at least 65% of its assets in issuers
domiciled in at least three different nations (one of which may be the United
States). The fund may invest no more than 5% of its total assets in securities
issued by any one company or government, exclusive of U.S. government
securities.

PORTFOLIO TURNOVER The fund invests for long-term growth of capital and does not
intend to place emphasis upon short-term trading profits. Accordingly, the fund
expects to have a portfolio turnover rate of less than 50%.

PAGE

The fund may not:

1. Invest in real estate or mortgages on real estate (although a fund may invest
in marketable securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein); invest in other open-end investment companies except as permitted by
the Investment Company Act of 1940 (1940 Act); invest in interests (other than
debentures or equity stock interests) in oil, gas or other mineral exploration
or development programs; or purchase or sell commodity contracts (except futures
contracts as described in this SAI).

2. Purchase or retain securities of any company in which directors or officers
of Templeton Institutional Funds, Inc. or the fund's manager, individually
owning more than 1/2 of 1% of the securities of such company, in the aggregate
own more than 5% of the securities of such company.

PAGE

6. Borrow money, except that a fund may borrow money from banks in an amount not
exceeding 33 1/3% of the value of its total assets (including the amount
borrowed).

7. Invest more than 5% of the value of its total assets in securities of issuers
which have been in continuous operation less than three years.

8. Invest more than 5% of its total assets in warrants, whether or not listed on
the NYSE or the American Stock Exchange, including no more than 2% of its total
assets which may be invested in warrants that are not listed on those exchanges.
Warrants acquired by a fund in units or attached to securities are not included
in this restriction.

9. Invest more than 25% of its total assets in a single industry.(1)

10. Participate on a joint or a joint and several basis in any trading account
in securities.

- -----------------
1 The SEC considers each foreign government to be a separate industry.

A fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.

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.

PAGE

If the fund receives from an issuer of securities held by the fund subscription
rights to purchase securities of that issuer, and if the fund exercises such
subscription rights at a time when the fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth in Investment
Restrictions 3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after announcement of
such rights, the fund has sold at least as many securities of the same class and
value as it would receive on exercise of such rights.

RISKS

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

Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the fund, nor can
there be any assurance that the fund's investment goal will be attained. As with
any investment in securities, the value of, and income from, an investment in
the fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the fund's portfolio
securities, including general economic conditions and market factors.
Additionally, investment decisions made by the manager will not always be
profitable or prove to have been correct. In addition to the factors which
affect the value of individual securities, a shareholder may anticipate that the
value of the shares of the fund will fluctuate with movements in the broader
equity and bond markets, as well. A decline in the stock market of any country
or region in which the fund is invested in equity securities may also be
reflected in declines in the price of the shares of the fund. Changes in
prevailing rates of interest in any of the countries or regions in which the
fund is invested in fixed income securities will likely affect the value of such
holdings and thus the value of fund shares. Increased rates of interest which
frequently accompany inflation and/or a growing economy are likely to have a
negative effect on the value of the fund's shares. In addition, changes in
currency valuations will affect the price of the shares of the fund. History
reflects both decreases and increases in stock markets and interest rates in
individual countries and throughout the world and in currency valuations, and
these may occur unpredictably in the future. The fund is not intended as a
complete investment program.

PAGE

continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing 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

non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.

PAGE

for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the fund to lose its registration
through fraud, negligence or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.

PAGE

national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign tax 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 those nations.

PAGE

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's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.

PAGE

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.

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 payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery. The fund will not invest more than 5% of its total assets in defaulted
debt securities, which may be illiquid.

PAGE

prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates. An
unexpected rise in interest rates could reduce the rate of principal prepayments
on mortgage securities and extend the life of these securities. This could cause
the price of these securities and the fund's share price to fall and would make
these securities more sensitive to interest rate changes. This is called
"extension risk."

Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.

PAGE

OFFICERS AND DIRECTORS

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

The Company has a board of directors. The board is responsible for the overall
management of the fund, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the fund who
are responsible for administering the fund'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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.

POSITION(S) HELD
WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE COMPANY DURING THE PAST FIVE YEARS
- ----------------------------------------- --------------------- --------------------------
<S> <C> <C>
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830

PAGE

Director

*Nicholas F. Brady (69)
The Bullitt House
102 East Dover Street
Easton, MD 21601

Director

Frank J. Crothers (54)
P.O. Box N-3238
Nassau, Bahamas

Director

S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945

PAGE

Director

Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.

John Wm. Galbraith (77)
360 Central Avenue
Suite 1300
St. Petersburg, FL 33701

Director

Andrew H. Hines, Jr. (76)
150 2nd Avenue N.
St. Petersburg, FL 33701

Director

Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016

PAGE

Director

*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Director

Betty P. Krahmer (69)
2201 Kentmere Parkway
Wilmington, DE 19806

Director

PAGE

Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817

Director

Fred R. Millsaps (70)
2665 NE 37th Drive
Fort Lauderdale, FL 33308

Director

Constantine Dean Tseretopoulos (45)
Lyford Cay Hospital
P.O. Box N-7776
Nassau Bahamas

Director

PAGE

James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Treasurer

Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

PAGE

Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Secretary

Mark G. Holowesko (39)
Lyford Cay
Nassau, Bahamas

Vice President

PAGE

Charles E. Johnson (42)
500 East Broward Blvd.

Fort Lauderdale, FL 33394-3091

Vice President

Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President

PAGE

Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President - Compliance

J. Mark Mobius (62)
Two Exchange Square
39th Floor, Suite 3905-08
Hong Kong

Vice President

Donald F. Reed (54)
1 Adelaide Street East, Suite 2101
Toronto, Ontario Canada M5C 3B8

President

PAGE

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

1. For the fiscal year ended December 31, 1998.

2. For the calendar year ended December 31, 1998.

PAGE

MANAGEMENT AND OTHER SERVICES

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

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

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 Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, Australia, Bahamas, Brazil, the
British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United
Kingdom and the U.S.

PAGE

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. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.

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.

MANAGEMENT FEES The fund pays the manager a monthly fee equal to an annual rate
of 0.70% of the value of its average daily net assets during the year.

Each class of the fund's shares pays its proportionate share of the fee.

For the last three fiscal years ended December 31, the fund paid the following
management fees:

PAGE

Management Fees Paid ($)
- ---------------------- -----------------------------------------------
1998 30,272,145
1997 23,912,568
1996 16,525,094

ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Company to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.

The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.

ADMINISTRATION FEES The Company pays FT Services a monthly fee equal to an
annual rate of:

/bullet/ 0.15% of the fund's combined average daily net assets up to $200
million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2
billion; and
/bullet/ 0.075% of average daily net assets over $1.2 billion.

During the last three fiscal years ended December 31, the Company paid the
following administration fees:

Administration Fees Paid ($)
- ---------------------- -----------------------------------------------
1998 3,636,696
1997 2,903,341
19961 2,117,449

1. Before October 1, 1996, Templeton Global Investors, Inc. provided
adminstration services to the fund.

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 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.

For its services, Investor Services receives a fixed fee per account. The fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated

PAGE

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 may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.

CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the fund's assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.

AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
fund's independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews the
fund's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).

PORTFOLIO TRANSACTIONS

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

The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreements
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

PAGE

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 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.

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, may also 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 tender 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

PAGE

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.

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 fund 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.

Sale or purchase of securities, without payment of brokerage commissions, fees
(except customary transfer fees) or other remuneration in connection therewith,
may be effected between any of the fund, or between funds and private clients,
under procedures adopted by the Company's Board pursuant to Rule 17a-7 under the
1940 Act.

During the last three fiscal years ended December 31, the fund paid the
following brokerage commissions:

Brokerage Commissions ($)
- ---------------------- -----------------------------------------------
1998 3,863,065
1997 2,666,430
1996 2,138,850

As of December 31, 1999, the fund did not own securities of its regular
broker-dealers.

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
the difference in any distribution and service (Rule 12b-1) fees of the class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.

DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on their investments. This income, less expenses

PAGE

incurred in the operation of a fund, constitutes a fund's net investment income
from which dividends may be paid to you. Any distributions by a fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.

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

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at

PAGE

the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the fund generally pays no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.

PAGE

incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.

DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In doing so, all or a portion of the sales charge that you paid for your
original shares in a fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from investments in foreign rather than domestic U.S
securities, no portion of their distributions will generally be eligible for the
intercorporate dividends-received deduction. None of the dividends paid by the

PAGE

fund for the most recent calendar year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.

INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund and/or defer a fund's ability to recognize losses, and, in limited
cases, subject a fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a fund.

- -------------------------------------------------------------------------------
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS

Each fund is an open-end management investment company, commonly called a mutual
fund. The Company was organized as a Maryland corporation on July 6, 1990, and
is registered with the SEC.

The fund currently offers two classes of shares, Primary Shares Plan Shares.
Before January 1, 1999, Primary Shares were designated Class I. The fund may
offer additional classes of shares in the future. The full title of each class
is:

/bullet/ Foreign Equity Series - Primary Shares
/bullet/ Foreign Equity Series - Plan Shares

Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the Company 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 Company for matters that affect the Company as a whole. Additional series
may be offered in the future.

PAGE

As of February 5, 1999, the principal shareholders of the fund, beneficial or of
record, was:

From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class

BUYING AND SELLING SHARES

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

The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.

For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for

PAGE

compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.

When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.

GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.

A qualified group is one that:

/bullet/ Was formed at least six months ago,

/bullet/ Has a purpose other than buying fund shares,

/bullet/ Has more than 10 members,

/bullet/ Can arrange for meetings between our representatives and group
members,

/bullet/ Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,
PAGE

/bullet/ Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and

/bullet/ Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.

DEALER COMPENSATION Distributors and/or its affiliates provide financial support
to various securities dealers that sell shares of the Franklin Templeton Group
of Funds. This support is based primarily on the amount of sales of fund shares.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.

PAGE

If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.

The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The fund you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.

SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.

Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.

Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal

PAGE

amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.

You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.

REDEMPTIONS IN KIND The fund have committed themselves to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
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.

PAGE

for any reason, a redemption request by wire is not processed as described in
the prospectus.

Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.

Certain shareholder servicing agents may be authorized to accept your
transaction request.

For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.

PAGE

PRICING SHARES

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

When you buy and sell shares, you pay 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.

PAGE

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. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.

PAGE

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

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

Distributors does not receive compensation from the Foreign Equity Fund for
acting as underwriter of the fund's shares.

DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution or "Rule
12b-1" plan for its Plan Shares. Under the plan, the fund shall pay or may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell Plan Shares. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.

Payments by the fund under the plan may not exceed 0.35% per year of average
daily net assets, payable quarterly. Expenses not reimbursed in any quarter may
be reimbursed in future quarters or years. This includes expenses not reimbursed
because they exceeded the applicable limit under the plan.

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

PAGE

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

To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.

The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the board, including a majority vote of
the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plan, 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 noninterested
members of the fund's board. The plan and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 class. The plan may also be
terminated by any act that constitutes an assignment of the underwriting
agreement with Distributors. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.

The plan 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 class], and all material amendments to the

PAGE

plan or any related agreements shall be approved by a vote of the noninterested
board members, 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 plan 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 plan should be continued.

PERFORMANCE

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

Before May 1, 1999, only a single class of fund shares was offered without Rule
12b-1 expenses. Returns shown are a restatement of the original class to include
the Rule 12b-1 fees applicable to Plan Shares as though in effect from the
fund's inception.

PAGE

performance information will be restated to reflect the maximum initial sales
charge currently in effect.

The average annual total returns for the indicated periods ended December 31,
1998, were:

Inception
Date 1 Year 5 Years Since Inception
- ------------------- ------------- --------- ---------- ------------------------
<S> <C> <C> <C> <C>
Plan Shares 10/18/90 % % %
</TABLE>

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

Inception
Date 1 Year 5 Years Since Inception
- ---------------- ----------- -------- --------- ----------------
<S> <C> <C> <C> <C>
Plan Shares 10/18/90 % % %
</TABLE>

PAGE

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.

The fund may include in its advertising or sales material information relating
to investment goals and performance results of fund belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.

(i) unmanaged indices so that you may compare the fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.

PAGE

From time to time, the fund and the manager may also refer to the following
information:

/bullet/ The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic
Insight or a similar statistical organization.

/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.

/bullet/ The geographic and industry distribution of the fund's portfolio and
the fund's top ten holdings.

/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.

/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.

/bullet/ Allegorical stories illustrating the importance of persistent
long-term investing.

/bullet/ The funds' portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services,
Inc. or Morningstar, Inc.

PAGE

/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.

/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.

From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.

- --------------------
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.

PAGE

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 in order 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.

Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.

PAGE

You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please call
1-800/DIAL BEN(R).

DESCRIPTION OF BOND RATINGS

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

CORPORATE BOND RATINGS

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

PAGE

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

STANDARD & POOR'S CORPORATION (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.

PAGE

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.

PAGE
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) Articles of Incorporation /4/
( ii) Articles of Amendment dated January 11, 1993 /4/
( iii) Articles Supplementary dated January 11, 1993/4/
( iv) Articles Supplementary dated April 28, 1993/4/
( v) Articles Supplementary dated July 1, 1993/4/
( vi) Articles Supplementary dated September 30, 1993/4/
( vii) Articles Supplementary dated March 1, 1994 /5/
(viii) Articles Supplementary dated January 5, 1995/5/
( ivx) Articles Supplementary dated January 17, 1996/3/
( x) Articles Supplementary dated April 15, 1996/4/
( xi) Articles Supplementary dated December 27, 1996/2/
( xii) Articles Supplementary dated April 10, 1997/2/
(xiii) Articles Supplementary dated February 27, 1998/1/

(B) BY-LAWS
(i) By-Laws/2/

Not Applicable

(D) INVESTMENT ADVISORY CONTRACTS

( i) Amended and Restated Investment Management Agreement
for Foreign Equity Series/4/
(ii) Amended and Restated Investment Management Agreement
for Growth Series/4 /
(iii) Amended and Restated Investment Management Agreement
for Emerging Markets Series/4/
( iv) Form of Investment Management Agreement for Emerging
Fixed Income Markets Series/3/
( v) Addendum to the Investment Management Agreement for
Emerging Markets Series/1/

(E) UNDERWRITING CONTRACTS
( i) Form of Amended and Restated Distribution
Agreement/3/
( ii) Form of Dealer Agreement between Registrant and
Franklin Templeton Distributors, Inc. and Securities
Dealers dated March 1, 1998
(iii) Amendment of Dealer Agreement dated May 15, 1998

(F) BONUS OR PROFIT SHARING CONTRACTS

Not Applicable

<PAGE>

(G) CUSTODY AGREEMENTS
( i) Form of Amended and Restated Custody Agreement/3/
( ii) Amendment dated March 1, 1998 to the Custody
Agreement
(iii) Amendment No. 2 dated July 23, 1998 to the Custody
Agreement

(H) OTHER MATERIAL CONTRACTS
( i) Form of Amended and Restated Transfer Agent
Agreement/2/
(ii) Form of Amended and Restated Fund Administration
Agreement/3/

(I) LEGAL OPINION
(i) Opinion and Consent of Counsel/1/

(J) OTHER OPINION
(i) Consent of Independent Public Accountants

(K) OMITTED FINANCIAL STATEMENTS

Not Applicable

(L) INITIAL CAPITAL AGREEMENTS
(i) Letter concerning initial capital/4/

(M) RULE 12B-1 PLANS

Not Applicable

(O) RULE 18F-3 PLAN

Not Applicable

(P) POWER OF ATTORNEY
(i) Powers of Attorney dated December 11, 1998

(27) FINANCIAL DATA SCHEDULES
( i) Financial Data Schedule for Foreign Equity Series
( ii) Financial Data Schedule for Emerging Markets Series
(iii) Financial Data Schedule for Growth Series
( iv) Financial Data Schedule for Emerging Fixed Income
Markets Series

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

1 Filed with Post-Effective Amendment No. 13 to the Registration Statement on
April 30, 1998

2 Filed with Post-Effective Amendment No. 11 to the Registration Statement on
May 1, 1997

3 Filed with Post-Effective Amendment No. 10 to the Registration Statement on
February 14, 1997

4 Filed with Post-Effective Amendment No. 9 to the Registration Statement on
April 28, 1996

5 Filed with Post-Effective Amendment No. 8 to the Registration Statement on May
1, 1995

PAGE

ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

NONE

ITEM 25. INDEMNIFICATION.

Reference is made to Articles Eight and Eleven of the Registrant's
Articles of Incorporation, incorporated by reference hereto
Post-Effective Amendment No. 9 filed on April 28, 1996.

Reference is made to Article Five of the Registrant's By-Laws,
incorporated by reference hereto Post-Effective Amendment No. 11 filed
on May 1, 1997.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant by the Registrant pursuant to
the Articles of Incorporation or otherwise, the Registrant is aware
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by directors, officers or
controlling persons of the Registrant in connection with the
successful defense of any act, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issues.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT

(a) Templeton Asset Management Ltd.

The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent,
Franklin Resources, Inc., 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 the Fund's Investment Manager (SEC File 801-46997),
incorporated herein by reference, which sets forth the officers and
directors of the investment manager 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.

(b) Templeton Investment Counsel, Inc.

The officers and Directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent,
Franklin Resources, Inc., 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 the Fund's Investment Manager (SEC File 801-15125),
incorporated herein by reference, which sets forth the officers and
directors of the investment manager 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.

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Franklin Templeton Distributors, Inc. ("Distributors") also acts
as principal underwriter of shares of:

Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Variable Products Series Fund

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

(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 Form 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

Certain accounts, books, and other documents required to be maintained
by Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940 and rules thereunder are located at 500 East Broward Blvd.,
Fort Lauderdale, Florida 33394. Other records are maintained at the
offices of Franklin Templeton Investor Services, Inc., 100 Fountain
Parkway, St. Petersburg, Florida 33716-1205 and Franklin Resources,
Inc., 777 Mariners Island Blvd., San Mateo, California 94404.

ITEM 29. MANAGEMENT SERVICES

There are no management-related service contracts not discussed in
Part A or Part B.

ITEM 30. UNDERTAKINGS.

Not Applicable.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in San Mateo, California on the 2nd day of March,
1999.

TEMPLETON INSTITUTIONAL FUNDS, INC.

By:
--------------------------------
Donald F. Reed, President*

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated:

SIGNATURE TITLE DATE
<S> <C> <C>

- --------------------------------------------
Charles B. Johnson* Director March 2, 1999

- --------------------------------------------
Constantine Dean Tseretopoulos* Director March 2, 1999

- --------------------------------------------
Frank J. Crothers* Director March 2, 1999

- --------------------------------------------
Harris J. Ashton* Director March 2, 1999

- --------------------------------------------
S. Joseph Fortunato* Director March 2, 1999

- --------------------------------------------
Fred R. Millsaps* Director March 2, 1999

- --------------------------------------------
Gordon S. Macklin* Director March 2, 1999

- --------------------------------------------
Andrew H. Hines, Jr.* Director March 2, 1999

- --------------------------------------------
John Wm. Galbraith* Director March 2, 1999

- --------------------------------------------
Nicholas F. Brady* Director March 2, 1999

- --------------------------------------------
Betty P. Krahmer* Director March 2, 1999

- --------------------------------------------
Edith E. Holiday* Director March 2, 1999

- --------------------------------------------
Donald F. Reed* President (Chief March 2, 1999
Executive Officer)

- --------------------------------------------
James R. Baio* Treasurer (Chief March 2, 1999
Financial and Accounting
Officer)

</TABLE>

*By: /s/LEIANN NUZUM
------------------
Leiann Nuzum
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)

PAGE

TEMPLETON INSTITUTIONAL FUNDS, INC.
REGISTRATION STATEMENT
EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>
EX-99(a)(i) Articles of Incorporation *

EX-99(a)(ii) Articles of Amendment dated January 11, 1993 *

EX-99(a)(iii) Articles Supplementary dated January 11, 1993 *

EX-99(a)(iv) Articles Supplementary dated April 28, 1993 *

EX-99(a)(v) Articles Supplementary dated July 1, 1993 *

EX-99(a)(vi) Articles Supplementary dated September 30, 1993 *

EX-99(a)(vii) Articles Supplementary dated March 1, 1994 *

EX-99(a)(vii) Articles Supplementary dated January 5, 1995 *

EX-99(a)(ivx) Articles Supplementary dated January 17, 1996 *

EX-99(a)(x) Articles Supplementary dated April 15, 1996 *

EX-99(a)(xi) Articles Supplementary dated December 27, 1996 *

EX-99(a)(xii) Articles Supplementary dated April 10, 1997 *

EX-99(a)(xiii) Articles Supplementary dated February 27, 1998 *

EX-99(b)(i) By-Laws *

EX-99(d)(i) Amended and Restated Investment Management Agreement *
for Foreign Equity Series

EX-99(d)(ii) Amended and Restated Investment Management Agreement *
for Growth Series

EX-99(d)(iii) Amended and Restated Investment Management Agreement *
for Emerging Markets Series

EX-99(d)(iv) Form of Amended and Restated Investment Management *
Agreement for Emerging Fixed Income Markets Series

EX-99(d)(v) Addendum to the Investment Management Agreement for *
Emerging Markets Series

EX-99(e)(i) Form of Amended and Restated Distribution Agreement *

EX-99(e)(ii) Form of Dealer Agreement between Registrant and Franklin Attached
Templeton Distributors, Inc. and Securities Dealers dated
March 1, 1998

EX-99(e)(iii) Amendment of Dealer Agreement dated May 15, 1998 Attached

EX-99(g)(i) Form of Amended and Restated Custody Agreement *

EX-99(g)(ii) Amendment dated March 1, 1998 to the Custody Agreement Attached

EX-99(g)(iii) Amendment No. 2 dated July 23, 1998 to the Custody Attached
Agreement

EX-99(h)(i) Form of Amended and Restated Transfer Agent Agreement *

EX-99(h)(ii) Form of Amended and Restated Fund Administration *
Agreement

EX-99(i)(i) Opinion and Consent of Counsel *

EX-99(j)(i) Consent of Independent Public Accountants Attached

EX-99(l)(i) Letter Concerning Initial Capital *

EX-99(p)(i) Powers of Attorney Attached

EX-27(i) Financial Data Schedule for Foreign Equity Series Attached

EX-27(ii) Financial Data Schedule for Emerging Markets Series Attached

EX-27(iii) Financial Data Schedule for Growth Series Attached

EX-27(iv) Financial Data Schedule for Emerging Fixed Income Attached
Markets Series
</TABLE>

* Incorporated by reference.

DEALER AGREEMENT

Effective: March 1, 1998

Dear Securities Dealer:

Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate
in the distribution of shares of the Franklin Templeton investment companies
(the "Funds") for which we now or in the future serve as principal underwriter,
subject to the terms of this Agreement. We will notify you from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement supersedes any prior dealer agreements
between us, as stated in Section 18, below.

1. LICENSING.

(a) You represent that you are (i) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD") and
are presently licensed to the extent necessary by the appropriate regulatory
agency of each jurisdiction in which you will offer and sell shares of the
Funds, or (ii) a broker, dealer or other company licensed, registered or
otherwise qualified to effect transactions in securities in a country (a
"foreign country") other than the United States of America (the "U.S.") where
you will offer or sell shares of the Funds. You agree that termination or
suspension of such membership with the NASD, or of your license to do business
by any regulatory agency having jurisdiction, at any time shall terminate or
suspend this Agreement forthwith and shall require you to notify us in writing
of such action. If you are not a member of the NASD but are a broker, dealer or
other company subject to the laws of a foreign country, you agree to conform to
the Conduct Rules of the NASD. This Agreement is in all respects subject to the
Conduct Rules of the NASD, particularly Conduct Rule 2830 of the NASD, which
shall control any provision to the contrary in this Agreement.

(b) You agree to notify us immediately in writing if at
any time you are not a member in good standing of the Securities Investor
Protection Corporation ("SIPC").

2. SALES OF FUND SHARES. You may offer and sell shares of each
Fund and class of each Fund only at the public offering price which shall be
applicable to, and in effect at the time of, each transaction. The procedures
relating to all orders and the handling of them shall be subject to the terms of
the applicable then current prospectus and statement of additional information
(hereafter, the "prospectus") and new account application, including amendments,
for each such Fund and each class of such Fund, and our written instructions
from time to time. This Agreement is not exclusive, and either party may enter
into similar agreements with third parties.

3. DUTIES OF DEALER: You agree:

(a) To act as principal, or as agent on behalf of your
customers, in all transactions in shares of the Funds except as provided in
Section 4 hereof. You shall not have any authority to act as agent for the
issuer (the Funds), for the Principal Underwriter, or for any other dealer in
any respect, nor will you represent to any third party that you have such
authority or are acting in such capacity.

(b) To purchase shares only from us or from your
customers.

(c) To enter orders for the purchase of shares of the
Funds only from us and only for the purpose of covering purchase orders you have
already received from your customers or for your own bona fide investment.

(d) To maintain records of all sales, redemptions and
repurchases of shares made through you and to furnish us with copies of such
records on request.

(e) To distribute prospectuses and reports to your
customers in compliance with applicable legal requirements, except to the extent
that we expressly undertake to do so on your behalf.

PAGE

(f) That you will not withhold placing customers'
orders for shares so as to profit yourself as a result of such withholding or
place orders for shares in amounts just below the point at which sales charges
are reduced so as to benefit from a higher sales charge applicable to an amount
below the breakpoint.

(g) That if any shares confirmed to you hereunder are
repurchased or redeemed by any of the Funds within seven business days after
such confirmation of your original order, you shall forthwith refund to us the
full concession, allowed to you on such orders, including any payments we made
to you from our own resources as provided in Section 6(b) hereof with respect to
such orders. We shall forthwith pay to the appropriate Fund the share, if any,
of the sales charge we retained on such order and shall also pay to such Fund
the refund of the concession we receive from you as herein provided (other than
the portion of such concession we paid to you from our own resources as provided
in Section 6(b) hereof). We shall notify you of such repurchase or redemption
within a reasonable time after settlement. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.

(h) That if payment for the shares purchased is not
received within the time customary or the time required by law for such payment,
the sale may be canceled without notice or demand and without any responsibility
or liability on our part or on the part of the Funds, or at our option, we may
sell the shares which you ordered back to the Funds, in which latter case we may
hold you responsible for any loss to the Funds or loss of profit suffered by us
resulting from your failure to make payment as aforesaid. We shall have no
liability for any check or other item returned unpaid to you after you have paid
us on behalf of a purchaser. We may refuse to liquidate the investment unless we
receive the purchaser's signed authorization for the liquidation.

(i) That you shall assume responsibility for any loss
to the Funds caused by a correction made subsequent to trade date, provided such
correction was not based on any error, omission or negligence on our part, and
that you will immediately pay such loss to the Funds upon notification.

(j) That if on a redemption which you have ordered,
instructions in proper form, including outstanding certificates, are not
received within the time customary or the time required by law, the redemption
may be canceled forthwith without any responsibility or liability on our part or
on the part of any Fund, or at our option, we may buy the shares redeemed on
behalf of the Fund, in which latter case we may hold you responsible for any
loss to the Fund or loss of profit suffered by us resulting from your failure to
settle the redemption.

(k) To obtain from your customers all consents required
by applicable privacy laws to permit us, any of our affiliates or the Funds to
provide you either directly or through a service established for that purpose
with confirmations, account statements and other information about your
customers' investments in the Funds.

4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with
orders for the purchase of shares on behalf of an Individual Retirement Account,
Self-Employed Retirement Plan or other retirement accounts, by mail, telephone,
or wire, you shall act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application and payments),
and you shall not place such an order until you have received from your customer
payment for such purchase and, if such purchase represents the first
contribution to such a plan, the completed documents necessary to establish the
plan and enrollment in the plan. You agree to indemnify us and Franklin
Templeton Trust Company and/or Templeton Funds Trust Company as applicable for
any claim, loss, or liability resulting from incorrect investment instructions
received from you which cause a tax liability or other tax penalty.

5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from
you any conditional orders for shares of any of the Funds. Delivery of
certificates or confirmations for shares purchased shall be made by the Funds
only against constructive receipt of the purchase price, subject to deduction
for your concession and our portion of the sales charge, if any, on such sale.
No certificates for shares of the Funds will be issued unless specifically
requested.

PAGE

6. DEALER COMPENSATION.

(a) On each purchase of shares by you from us, the
total sales charges and your dealer concessions shall be as stated in each
Fund's then current prospectus, subject to NASD rules and applicable laws. Such
sales charges and dealer concessions are subject to reductions under a variety
of circumstances as described in the Funds' prospectuses. For an investor to
obtain these reductions, we must be notified at the time of the sale that the
sale qualifies for the reduced charge. If you fail to notify us of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither we nor any of the Funds will be liable for amounts necessary to
reimburse any investor for the reduction which should have been effected.

(b) In accordance with the Funds' prospectuses, we or
our affiliates may, but are not obligated to, make payments to you from our own
resources as compensation for certain sales which are made at net asset value
("Qualifying Sales"). If you notify us of a Qualifying Sale, we may make a
contingent advance payment up to the maximum amount available for payment on the
sale. If any of the shares purchased in a Qualifying Sale are repurchased or
redeemed within twelve months of the month of purchase, we shall be entitled to
recover any advance payment attributable to the repurchased or redeemed shares
by reducing any account payable or other monetary obligation we may owe to you
or by making demand upon you for repayment in cash. We reserve the right to
withhold advances to you, if for any reason we believe that we may not be able
to recover unearned advances from you. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.

7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of
shares of the Funds will be made at the net asset value of such shares, less any
applicable deferred sales or redemption charges, in accordance with the
applicable prospectuses. Except as permitted by applicable law, you agree not to
purchase any shares from your customers at a price lower than the net asset
value of such shares next computed by the Funds after the purchase (the
"Redemption/Repurchase Price"). You shall, however, be permitted to sell shares
of the Funds for the account of the record owner to the Funds at the
Redemption/Repurchase Price for such shares.

8. EXCHANGES. Telephone exchange orders will be effective only
for uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.

9. TRANSACTION PROCESSING. All orders are subject to acceptance
by us and by the Fund or its transfer agent, and become effective only upon
confirmation by us. If required by law, each transaction shall be confirmed in
writing on a fully disclosed basis and if confirmed by us, a copy of each
confirmation shall be sent simultaneously to you if you so request. All sales
are made subject to receipt of shares by us from the Funds. We reserve the right
in our discretion, without notice, to suspend the sale of shares of the Funds or
withdraw the offering of shares of the Funds entirely. Orders will be effected
at the price(s) next computed on the day they are received if, as set forth in
the applicable Fund's current prospectus, the orders are received by us, an
agent appointed by us or the Funds prior to the time the price of the Fund's
shares is calculated. Orders received after that time will be effected at the
price(s) computed on the next business day. All orders must be accompanied by
payment in U.S. Dollars. Orders payable by check must be drawn payable in U.S.
Dollars on a U.S. bank, for the full amount of the investment.

10. MULTIPLE CLASSES. We may from time to time provide to you
written compliance guidelines or standards relating to the sale or distribution
of Funds offering multiple classes of shares (each, a "Class") with different
sales charges and distribution related operating expenses. In addition, you will

PAGE

be bound by any applicable rules or regulations of government agencies or
self-regulatory organizations generally affecting the sale or distribution of
shares of investment companies offering multiple classes of shares.

11. RULE 12B-1 PLANS. You are invited to participate in all
distribution plans (each, a "Plan") adopted for a Class of a Fund or for a Fund
that has only a single Class (each, a "Plan Class") pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act").

To the extent you provide administrative and other services,
including, but not limited to, furnishing personal and other services and
assistance to your customers who own shares of a Plan Class, answering routine
inquiries regarding a Fund or Class, assisting in changing account designations
and addresses, maintaining such accounts or such other services as a Fund may
require, to the extent permitted by applicable statutes, rules, or regulations,
we shall pay you a Rule 12b-1 servicing fee. To the extent that you participate
in the distribution of Fund shares that are eligible for a Rule 12b-1
distribution fee, we shall also pay you a Rule 12b-1 distribution fee. All Rule
12b-1 servicing and distribution fees shall be based on the value of shares
attributable to customers of your firm and eligible for such payment, and shall
be calculated on the basis and at the rates set forth in the compensation
schedule then in effect for the applicable Plan (the "Schedule"). Without prior
approval by a majority of the outstanding shares of a particular Class of a Fund
which has a Plan, the aggregate annual fees paid to you pursuant to such Plan
shall not exceed the amounts stated as the "annual maximums" in such Plan Class'
prospectus, which amount shall be a specified percent of the value of such Plan
Class' net assets held in your customers' accounts which are eligible for
payment pursuant to this Agreement (determined in the same manner as such Plan
Class uses to compute its net assets as set forth in its effective prospectus).

You shall furnish us and each Fund that has a Plan Class
(each, a "Plan Fund") with such information as shall reasonably be requested by
the Board of Directors, Trustees or Managing General Partners (hereinafter
referred to as "Directors") of such Plan Fund with respect to the fees paid to
you pursuant to the Schedule of such Plan Fund. We shall furnish to the Boards
of Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.

Each Plan and the provisions of any agreement relating to such
Plan must be approved annually by a vote of the Directors of the Fund that has
such Plan, including such persons who are not interested persons of such Plan
Fund and who have no financial interest in such Plan or any related agreement
("Rule 12b-1 Directors"). Each Plan or the provisions of this Agreement relating
to such Plan may be terminated at any time by the vote of a majority of the Rule
12b-1 Directors, or by a vote of a majority of the outstanding shares of the
Class that has such Plan, on sixty (60) days' written notice, without payment of
any penalty. A Plan or the provisions of this Agreement may also be terminated
by any act that terminates the Underwriting Agreement between us and the Fund
that has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.

Continuation of a Plan and provisions of this Agreement
relating to such Plan are conditioned on Rule 12b-1 Directors being ultimately
responsible for selecting and nominating any new Rule 12b-1 Directors. Under
Rule 12b-1, Directors of any of the Plan Funds have a duty to request and
evaluate, and persons who are party to any agreement related to a Plan have a
duty to furnish, such information as may reasonably be necessary to an informed
determination of whether the Plan or any agreement should be implemented or
continued. Under Rule 12b-1, a Plan Fund is permitted to implement or continue a
Plan or the provisions of this Agreement relating to such Plan from year-to-year
only if, based on certain legal considerations, the Board of Directors of such
Plan Fund is able to conclude that such Plan will benefit the Plan Class. Absent
such yearly determination, such Plan and the provisions of this Agreement
relating to such Plan must be terminated as set forth above. In addition, any
obligation assumed by a Fund pursuant to this Agreement shall be limited in all
cases to the assets of such Fund and no person shall seek satisfaction thereof
from shareholders of a Fund. You agree to waive payment of any amounts payable

PAGE

to you by us under a Fund's Plan until such time as we are in receipt of such
fee from the Fund.

The provisions of the Plans between the Plan Funds and us
shall control over the provisions of this Agreement in the event of any
inconsistency.

12. REGISTRATION OF SHARES. Upon request, we shall notify you of
the states or other jurisdictions in which each Fund's shares are currently
noticed, registered or qualified for offer or sale to the public. We shall have
no obligation to make notice filings of, register or qualify, or to maintain
notice filings of, registration of or qualification of, Fund shares in any state
or other jurisdiction. We shall have no responsibility, under the laws
regulating the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.

13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13
relates solely to shares of Funds that represent a beneficial interest in the
Franklin Floating Rate Trust and shares issued by any other continuously offered
closed-end investment company registered under the 1940 Act for which we or an
affiliate of ours serve as principal underwriter and that periodically
repurchases its shares (each, a "Trust"). Shares of a Trust that are offered to
the public will be registered under the 1933 Act, and are expected to be offered
during an offering period that may continue indefinitely ("Continuous Offering
Period"). There is no guarantee that such a continuous offering will be
maintained by a Trust. The Continuous Offering Period, shares of a Trust and
certain of the terms on which such shares are offered shall be as described in
the prospectus of the Trust.

As set forth in a Trust's then current prospectus, we may, but
are not obligated to, provide you with appropriate compensation for selling
shares of the Trust. In addition, you may be entitled to a fee for servicing
your clients who are shareholders in a Trust, subject to applicable law and NASD
Conduct Rules. You agree that any repurchases of shares of a Trust that were
originally purchased as Qualifying Sales shall be subject to Subsection 6(b)
hereof.

You expressly acknowledge and understand that, notwithstanding
anything to the contrary in this Agreement:

(a) No Trust has a Rule 12b-1 Plan and in no event will
a Trust pay, or have any obligation to pay, any compensation directly or
indirectly to you.

(b) Shares of a Trust will not be repurchased by either
the Trust (other than through repurchase offers by the Trust from time to time,
if any) or by us and no secondary market for such shares exists currently, or is
expected to develop. Any representation as to a repurchase or tender offer by a
Trust, other than that set forth in the Trust's then current prospectus,
notification letters, reports or other related material provided by the Trust,
is expressly prohibited.

PAGE

(c) An early withdrawal charge payable by shareholders
of a Trust to us may be imposed on shares accepted for repurchase by the Trust
that have been held for less than a stated period, as set forth in the Trust's
then current Prospectus.

(d) In the event your customer cancels his or her order for
shares of a Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.

14. FUND INFORMATION. No person is authorized to give any
information or make any representations concerning shares of any Fund except
those contained in the Fund's then current prospectus or in materials issued by
us as information supplemental to such prospectus. We will supply reasonable
quantities of prospectuses, supplemental sales literature, sales bulletins, and
additional information as issued by the Fund or us. You agree not to use other
advertising or sales material relating to the Funds except that which (a)
conforms to the requirements of any applicable laws or regulations of any
government or authorized agency in the U.S. or any other country having
jurisdiction over the offering or sale of shares of the Funds, and (b) is
approved in writing by us in advance of such use. Such approval may be withdrawn
by us in whole or in part upon notice to you, and you shall, upon receipt of
such notice, immediately discontinue the use of such sales literature, sales
material and advertising. You are not authorized to modify or translate any such
materials without our prior written consent.

15. INDEMNIFICATION. You agree to indemnify, defend and hold
harmless us, the Funds, and the respective officers, directors and employees of
the Funds and us from any and all losses, claims, liabilities and expenses
arising out of (1) any alleged violation of any statute or regulation (including
without limitation the securities laws and regulations of the U.S. or any state
or foreign country) or any alleged tort or breach of contract, in or related to
the offer or sale by you of shares of the Funds pursuant to this Agreement
(except to the extent that our negligence or failure to follow correct
instructions received from you is the cause of such loss, claim, liability or
expense), (2) any redemption or exchange pursuant to telephone instructions
received from you or your agents or employees, or (3) the breach by you of any
of the terms and conditions of this Agreement. This Section 15 shall survive the
termination of this Agreement.

16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party
to this Agreement may terminate its participation in this Agreement by giving
written notice to the other parties. Such notice shall be deemed to have been
given and to be effective on the date on which it was either delivered
personally to the other parties or any officer or member thereof, or was mailed
postpaid or delivered by electronic transmission to the other parties' chief
legal officers at the addresses shown herein or in the most recent NASD Manual.
This Agreement shall terminate immediately upon the appointment of a Trustee
under the Securities Investor Protection Act or any other act of insolvency by
you. The termination of this Agreement by any of the foregoing means shall have
no effect upon transactions entered into prior to the effective date of
termination. A trade placed by you subsequent to your voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of a dealer, will be effective only upon
written notification by us to you. This Agreement will terminate automatically
in the event of its assignment by us. For purposes of the preceding sentence,
the word "assignment" shall have the meaning given to it in the 1940 Act. This
Agreement may not be assigned by you without our prior written consent. This
Agreement may be amended by us at any time by written notice to you and your
placing of an order or acceptance of payments of any kind after the effective
date and receipt of notice of any such Amendment shall constitute your
acceptance of such Amendment.

17. SETOFF; DISPUTE RESOLUTION. Should any of your concession
accounts with us have a debit balance, we may offset and recover the amount owed
to us or the Funds from any other account you have with us, without notice or
demand to you. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules of the NASD or the American
Arbitration Association. Judgment upon any arbitration award may be entered by
any court having jurisdiction. This Agreement shall be construed in accordance

PAGE

with the laws of the State of California, not including any provision that would
require the general application of the law of another jurisdiction.

18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative
and supersedes any agreement previously in effect. It shall be binding upon the
parties hereto when signed by us and accepted by you. If you have a current
dealer agreement with us, your first trade or acceptance of payments from us
after your receipt of this Agreement, as it may be amended pursuant to Section
16, above, shall constitute your acceptance of its terms. Otherwise, your
signature below shall constitute your acceptance of its terms.

FRANKLIN/TEMPLETON DISTRIBUTORS, INC.

By /s/ GREG JOHNSON
Greg Johnson, President

777 Mariners Island Blvd.
San Mateo, CA 94404

Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue

St. Petersburg, Florida 33701-3628
813/823-8712

Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.

DEALER NAME:
By _________________

(Signature)
Name:

Title:
Address:

Telephone:
NASD CRD #

Franklin Templeton Dealer #
(Internal Use Only)

May 15, 1998

Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16

Dear Securities Dealer:

This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:

1. Defined terms in this amendment have the meanings as stated
in the Agreement unless otherwise indicated.

2. Section 6 is modified to add a subsection 6(c), as follows:

(1) Consistent with the NASD Conduct Rules, the total
compensation to be paid to us and selected dealers and their affiliates,
including you and your affiliates, in connection with the distribution of shares
of a Trust will not exceed the underwriting compensation limitation prescribed
by NASD Conduct Rule 2710. The total underwriting compensation to be paid to us
and selected dealers and their affiliates, including you and your affiliates,
may include: (i) at the time of purchase of shares a payment to you or another
securities dealer of 1% of the dollar amount of the purchased shares by the
Distributor; and (ii) a quarterly payment at an annual rate of .50% to you or
another securities dealer based on the value of such remaining shares sold by
you or such securities dealer, if after twelve (12) months from the date of
purchase, the shares sold by you or such securities dealer remain outstanding.

(2) The maximum compensation shall be no more
than as disclosed in the section "Payments to Dealers" of the prospectus of the
applicable Trust.

Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.

FRANKLIN/TEMPLETON DISTRIBUTORS, INC.

By /s/GREG JOHNSON
Greg Johnson, President

777 Mariners Island Blvd.
San Mateo, CA 94404

Attention: Chief Legal Officer (for legal notices only)
650/312-2000

100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712

AMENDMENT, dated March 1, 1998 to the custody agreements (each an
"Agreement"), between the Templeton funds listed on Schedule A hereto (each a
"Fund"), with each having a place of business at 500 East Broward Blvd., Ft.
Lauderdale, FL 33394 and The Chase Manhattan Bank ("Chase"), having a place of
business at 270 Park Ave., New York, NY 10017-2070.

It is hereby agreed as follows:

Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement.

Section 2. The Agreement is amended as follows:

Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:

(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it, of the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in SEC rule 17f-5(a)(2)), both for the purpose of selecting Eligible
Foreign Custodians (as that term is defined herein) to hold Securities and Cash
and of evaluating the contractual arrangements with such Eligible Foreign
Custodians (as set forth in SEC rule 17f-5(c)(2)); provided that, the term
Eligible Foreign Custodian shall not include any "Compulsory Depository." A
Compulsory Depository shall mean a Foreign Securities Depository or clearing
agency the use of which is compulsory because: (1) its use is required by law or
regulation, (2) securities cannot be withdrawn from the depository, or (3)
maintaining securities outside the depository is not consistent with prevailing
custodial practices in the country which the depository serves.

PAGE

Compulsory Depositories used by Chase as of the date hereof are set forth in
Appendix 1-A hereto, and as the same may be amended on notice to Fund from time
to time.

(i) In connection with the foregoing, Chase shall:

(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of
any material change in the arrangements with such Eligible Foreign
Custodians, with such reports to be provided to Fund's Board at such
times as the Board deems reasonable and appropriate based on the
circumstances of Fund's foreign custody arrangements;

(2) exercise such reasonable care, prudence and diligence in performing
as Fund's Foreign Custody Manager as a person having responsibility for
the safekeeping of Securities and Cash would exercise;

(3) in selecting an Eligible Foreign Custodian, first have determined
that Securities and Cash placed and maintained in the safekeeping of
such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Securities and Cash, including, without limitation, those factors set
forth in SEC rule 17f-5(c)(1)(i)-(iv);

(4) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a
non-Compulsory Depository or clearing agency, such contract, the rules
or established practices or procedures of the Depository, or any
combination of the foregoing) requires that the Eligible Foreign
Custodian will provide reasonable care for Securities and Cash based on
the standards applicable to custodians in the relevant market; and

PAGE

Subject to (i)(1)-(5) above, Chase is hereby authorized to place and maintain
Securities and Cash on behalf of Fund with Eligible Foreign Custodians pursuant
to a written contract deemed appropriate by Chase.

(ii) Except as expressly provided herein, Fund shall be solely responsible
to assure that the maintenance of Securities and Cash hereunder complies with
the rules, regulations, interpretations and exemptive orders promulgated by or
under the authority of the SEC.

(iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being
placed and maintained in Chase's custody are subject to the Investment Company
Act of 1940, as amended (the "1940 Act"), as the same may be amended from time
to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.

PAGE

(iv) Chase shall assist Fund in monitoring Country Risk by furnishing such
information relating to the Country Risk as is specified in Appendix 1-B hereto.
Fund hereby acknowledges that: (1) such information is solely designed to inform
Fund of market conditions and procedures and is not intended as a recommendation
to invest or not invest in particular markets; and (2) Chase has gathered the
information from sources it considers reliable, but that Chase shall have no
responsibility for inaccuracies or incomplete information except to the extent
negligently obtained by Chase.

Section 3. Add the following at the end of Section 3(d):

and which shall be limited to Eligible Foreign Custodians as defined in
(i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained
herein; provided that, for purposes of the sections of this Agreement
addressing Chase liability (including, but not limited to, Sections 7, 10,
14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which
Chase has not acted as Foreign Custody Manager.

Section 4. Add the following at the end of Section 3(e):

and which shall be limited to Eligible Foreign Custodians as
defined in (iii) and (iv)-(v) of the definition of Eligible
Foreign Custodians contained herein; provided that, for
purposes of the sections of this Agreement addressing Chase
liability (including, but not limited to, Sections 7, 10, 14,
and 16-17) the term Foreign Securities Depository shall not
include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody
Manager.

Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:

PAGE

(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).

(2) an "Eligible Foreign Custodian," shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that country's
government or an agency thereof, (ii) a majority-owned direct or indirect
subsidiary of a U.S. Bank or bank holding company which subsidiary is
incorporated or organized under the laws of a country other than the United
States; (iii) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, that
acts as a system for the central handling of securities or equivalent
book-entries in that country and that is regulated by a foreign financial
regulatory authority as defined under section 2(a)(50) of the 1940 Act,
(iv) a securities depository or clearing agency organized under the laws of
a country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of securities
or equivalent book-entries, and (v) any other entity that shall have been
so qualified by exemptive order, rule or other appropriate action of the
SEC.

Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:

At the request of Fund, Chase may, but need not, add an Eligible
Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign
Securities Depository where Chase has not acted as Foreign Custody
Manager with respect to the selection thereof; provided that, any such
entities shall not be included for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event
that it elects to add any such entity.

*********************

PAGE

IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.

TEMPLETON THE CHASE MANHATTAN BANK

By:/s/BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
----------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President

PAGE

Appendix 1-A

LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD

PAGE

Appendix 1-B

INFORMATION REGARDING COUNTRY RISK

1. To aid Fund's board in its determinations regarding Country Risk,
Chase shall furnish board annually and upon the initial placing of Securities
and Cash into a country the following information (check items applicable):

A Opinions of local counsel concerning:

___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.

___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.

___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.

B. Written information concerning:

___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.

PAGE

___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.

C. A market report with respect to the following topics:

(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).

2. To aid Fund's board in monitoring Country Risk, Chase shall furnish
board the following additional information:

As more fully described in the FCM procedures, market flashes,
including with respect to changes in the information in market reports.

PAGE

Schedule A

TEMPLETON U.S. FUNDS
As of February 28, 1998

TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETONVARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
FRANKLIN/TEMPLETON JAPAN FUND - 6/24/94
TEMPLETON VARIABLE ANNUITY FUND - 1/27/88

AMENDMENT No. 2, dated July 23, 1998 to the custody agreements (each an
"Agreement"), between each of the Templeton finds listed on Schedule A hereto
(each a "Fund"), with each having a place of business at 500 East Broward Blvd.,
Ft. Lauderdale, FL 33394, and The Chase Manhattan Bank ("Chase"), having a place
of business at 270 Park Ave., New York, NY 10017-2070.

It is hereby agreed as follows:

Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement. This Amendment supersedes in all
respects the Amendment between the parties, dated March 1, 1998, which shall
have no further force or effect as of the date hereof.

Section 2. The Agreement is amended as follows:

Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:

(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it of, the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in Securities and Exchange Commission ("SEC") rule 17f-5(a)(2)), both
for the purpose of selecting Eligible Foreign Custodians (as that term is
defined herein) to hold Securities and Cash and of evaluating the contractual
arrangements with such Eligible Foreign Custodians (as set forth in SEC rule
17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not
include any "Compulsory Depository." A Compulsory Depository shall mean a
Foreign Securities Depository or clearing agency the use of which is compulsory
because: (1) its use is required by law or regulation, (2) securities cannot be
withdrawn from the depository, or (3) maintaining securities outside the
depository is not consistent with prevailing custodial practices in the country
which the depository serves. Compulsory Depositories used by Chase as of the
date hereof are set forth in Appendix 1-A hereto, and as the same may be amended
on notice to Fund from time to time.

(i) In connection with the foregoing, Chase shall:

PAGE

(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of any
material change in the arrangements with such Eligible Foreign Custodians,
with such reports to be provided to Fund's Board at such times as the Board
deems reasonable and appropriate based on the circumstances of Fund's
foreign custody arrangements;

(2) exercise such reasonable care, prudence and diligence in performing as
Fund's Foreign Custody Manager as a person having responsibility for the
safekeeping of Securities and Cash would exercise;

(3) in selecting an Eligible Foreign Custodian, first have determined that
Securities and Cash placed and maintained in the safekeeping of such
Eligible Foreign Custodian shall be subject to reasonable care, based on
the standards applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such Securities and
Cash, including, without limitation, those factors set forth in SEC rule
17f-5(c)(1)(i)-(iv);

(4) determine that the written contract with the Eligible Foreign Custodian
requires that the Eligible Foreign Custodian will provide reasonable care
for Securities and Cash based on the standards applicable to custodians in
the relevant market; provided that, in the case of an Eligible Foreign
Custodian that is a non-Compulsory Depository or clearing agency, such
determination shall only be made to the extent required by SEC rule 17f-5
as in effect from time to time and where so required shall be made based on
such contract, the rules or established practices or procedures of the
Depository, or any combination thereof; and

(5) have established a system to monitor the continued appropriateness of
maintaining Securities and Cash with particular Eligible Foreign Custodians
and of the governing contractual arrangements. Chase shall also monitor
Compulsory Depositories and shall advise Fund of any material negative
change in the performance of, or arrangements with, any Compulsory
Depository as the same would adversely affect the custody of assets. With
respect to monitoring Compulsory Depositories, Chase shall use its
reasonable efforts to obtain the information with respect to the factors
set forth on Schedule 1-C hereto: (i) by November 20, 1998 with respect to
any Compulsory Depository in a country in which Securities are held as of
the date hereof; (ii)

PAGE

to the extent feasible in light of the circumstances then prevailing in a
given country in which Securities are held, no later than 90 days after the
establishment of, or a determination by Chase that a depository has become,
a Compulsory Depository in such country; and (iii) to the extent feasible
in light of the circumstances then prevailing in a given country, no later
than 90 days after the first placement of Securities after the date hereof
with a Subcustodian where such country has a Compulsory Depository. Chase
shall advise Fund when, to Chase's knowledge based on such reasonable
efforts, there is a negative answer with respect to a Compulsory Depository
as to any of such factors. In connection with the foregoing: (i) Fund
acknowledges and agrees that Chase's agreements with Eligible Foreign
Custodians do not, as of the date hereof, comply with factor (i) on
Schedule 1-C and that Chase shall not amend such agreements to so comply
unless Rule 17f-5 is amended or interpreted by the Securities and Exchange
Commission to incorporate such a factor into the Rule with respect to
Compulsory Depositories; and (ii) to the extent that Rule 17f-5 is amended
or interpreted by the Securities and Exchange Commission to incorporate
materially one or more of (i)-(viii), Chase shall be obligated to obtain
the relevant information on such incorporated factors rather than being
limited only to using its reasonable efforts to do so.

In the event that the SEC adopts standards or criteria different from those
set forth in Schedule 1-C, the above provisions and Schedule 1-C shall be
deemed to be amended to conform to the standards or criteria adopted by the
SEC, it being understood that the time within which Chase must furnish the
required information shall be a reasonable time in light of such
differences.

Subject to (i)(1)-(4) and the first sentence of (5) above, Chase is hereby
authorized to place and maintain Securities and Cash on behalf of Fund with
Eligible Foreign Custodians pursuant to a written contract deemed appropriate by
Chase.

(ii) Except as expressly provided herein, Fund shall be responsible to
assure that the maintenance of Securities and Cash hereunder complies with the
rules, regulations, interpretations and exemptive orders promulgated by or under
the authority of the SEC.

PAGE

to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.

Section 3. Add the following at the end of Section 3(d):

Section 4. Add the following at the end of Section 3(e):

and which shall be limited to Eligible Foreign Custodians as defined
in (iii) and (iv)-(v) of the definition of Eligible Foreign Custodians
contained herein; provided that, for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository
shall not include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody Manager.

PAGE

Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:

(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).

(2) an "Eligible Foreign Custodian," shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such
by that country's government or an agency thereof, (ii) a
majority-owned direct or indirect subsidiary of a U.S. Bank or bank
holding company which subsidiary is incorporated or organized under
the laws of a country other than the United States; (iii) a securities
depository or clearing agency, incorporated or organized under the
laws of a country other than the United States, that acts as a system
for the central handling of securities or equivalent book-entries in
that country and that is regulated by a foreign financial regulatory
authority as defined under section 2(a)(50) of the 1940 Act, (iv) a
securities depository or clearing agency organized under the laws of a
country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of
securities or equivalent book-entries, and (v) any other entity that
shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC.

Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:

*********************

IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.

PAGE

TEMPLETON THE CHASE MANHATTAN BANK
(on behalf of each of the Funds
listed on Schedule A hereto)

By:/s/ BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
-------------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President

PAGE

Schedule A
TEMPLETON U.S. FUNDS
As of June 30, 1998

TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund

PAGE

Appendix 1-A

LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD

PAGE

Appendix 1-B

INFORMATION REGARDING COUNTRY RISK

A Opinions of local counsel concerning:

___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.

___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.

___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.

B. Written information concerning:

___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.

___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.

C. A market report with respect to the following topics:

PAGE

2. To aid Fund in monitoring Country Risk, Chase shall furnish the
following additional information:

As more fully described in the Foreign Custody Manager procedures,
market flashes, including with respect to changes in the information in market
reports.

PAGE

Appendix 1-C

FACTORS REGARDING COMPULSORY DEPOSITORIES

(i) Whether the Eligible Foreign Custodian which is participating in
the Compulsory Depository has undertaken to adhere to the roles,
practices and procedures of such Compulsory Depository;

(ii) Whether no regulatory authority with oversight responsibility for
the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material capital,
solvency, insurance or other similar financial strength requirements
imposed by such authority or, in the case of such notice having been
issued, that such notice has been withdrawn or the remedy of such
noncompliance has been publicly announced by the Compulsory
Depository;

(iii) Whether no regulatory authority with oversight responsibility
over the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material internal
controls requirement imposed by such authority or, in the case of such
notice having been issued, that such notice has been withdrawn or the
remedy of such noncompliance has been publicly announced by the
Compulsory Depository;

(iv) Whether the Compulsory Depository maintains Fund's assets
deposited with the Compulsory Depository by the Eligible Foreign
Custodian participant under no less favorable safekeeping conditions
than those that apply generally to other participants in the
Compulsory Depository;

(v) Whether the Compulsory Depository maintains records that segregate
the Compulsory Depository's own assets from the assets of participants
in the Compulsory Depository;

PAGE

(vi) Whether the Compulsory Depository maintains records that identify
the assets of each of its participants;

(vii) Whether the Compulsory Depository provides periodic reports to
its participants with respect to the safekeeping of assets maintained
by the Compulsory Depository including by way of example, notification
of any transfer to or from participant accounts; and

(viii) Whether the Compulsory Depository is subject to periodic
review, such as audits by independent accountants or inspections by
regulatory authorities.

MCGLADREY & PULLEN, LLP

Certified Public Accountants and Consultants

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use of our report dated January 28,1999 on the
financial statements of the Growth Series, the Foreign Equity Series, the
Emerging Markets Series and the Emerging Fixed Income Market Series of
Templeton Institutional Funds, Inc. referred to therein, which appears in the
1998 Annual Report to Shareholders, and which is incorporated herein by
reference, in Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A, File No. 33-35779, as filed with the Securities and Exchange
Commission.

We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights" and in the Statement of Additional Information
under the caption "Auditors".

/s/McGladrey & Pullen, LLP

New York, New York
March 1, 1999

POWER OF ATTORNEY

The undersigned Officers and Directors of TEMPLETON INSTITUTIONAL FUNDS,
INC. (the "Registrant") hereby appoint Allan S. Mostoff, Jeffrey L. Steele, Mark
H. Plafker, Bruce G. Leto, Deborah R. Gatzek, Barbara J. Green, Larry L. Greene,
and Leiann Nuzum (with full power to each of them to act alone) his/her
attorney-in-fact and agent, in all capacities, to execute, and to file any of
the documents referred to below relating to Post-Effective Amendments to the
Registrant's registration statement on Form N-1A under the Investment Company
Act of 1940, as amended, and under the Securities Act of 1933, as amended,
covering the sale of shares by the Registrant under prospectuses becoming
effective after this date, including any amendment or amendments increasing or
decreasing the amount of securities for which registration is being sought, with
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he/she could do if
personally present, thereby ratifying all that said attorneys-in-fact and
agents, may lawfully do or cause to be done by virtue hereof.

This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which shall be deemed to be
a single document.

The undersigned Officers and Directors hereby execute this Power of
Attorney as of the 11th day of December, 1998.

<TABLE>

<S> <C>

/s/HARRIS J. ASHTON /s/CHARLES B. JOHNSON
- ------------------------------------ ----------------------------------------
Harris J. Ashton, Director Charles B. Johnson, Director

/s/NICHOLAS F. BRADY /s/BETTY P. KRAHMER
- ------------------------------------ ----------------------------------------
Nicholas F. Brady, Director Betty P. Krahmer, Director

/s/FRANK J. CROTHERS /s/GORDON S. MACKLIN
- ------------------------------------ ---------------------------------------
Frank J. Crothers, Director Gordon S. Macklin, Director

/s/S. JOSEPH FORTUNATO /s/FRED R. MILLSAPS
- ------------------------------------ ---------------------------------------
S. Joseph Fortunato, Director Fred R. Millsaps, Director

/s/JOHN WM. GALBRAITH /s/CONSTANTINE D. TSERETOPOULOS
- ------------------------------------ ---------------------------------------
John Wm. Galbraith, Director Constantine D. Tseretopoulos, Director

/s/ANDREW H. HINES, JR. /s/DONALD F. REED
- ------------------------------------ ----------------------------------------
Andrew H. Hines, Jr., Director Donald F. Reed, President

/s/EDITH E. HOLIDAY /s/JAMES R. BAIO
- ------------------------------------ ----------------------------------------
Edith E. Holiday, Director James R. Baio, Treasurer

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
TIFI Foreign Equity Series Fund December 31, 1998 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 001
<NAME> FOREIGN EQUITY SERIES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3820334511
<INVESTMENTS-AT-VALUE> 4537163393
<RECEIVABLES> 51813219
<ASSETS-OTHER> 4205849
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4593182461
<PAYABLE-FOR-SECURITIES> 12772704
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28746740
<TOTAL-LIABILITIES> 41519174
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3821539297
<SHARES-COMMON-STOCK> 256310677
<SHARES-COMMON-PRIOR> 213429570
<ACCUMULATED-NII-CURRENT> 4984472
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8240605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 716898913
<NET-ASSETS> 4551663287
<DIVIDEND-INCOME> 98219682
<INTEREST-INCOME> 38493282
<OTHER-INCOME> 0
<EXPENSES-NET> (35961811)
<NET-INVESTMENT-INCOME> 100751153
<REALIZED-GAINS-CURRENT> 210476058
<APPREC-INCREASE-CURRENT> 69995443
<NET-CHANGE-FROM-OPS> 381222654
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (95131004)
<DISTRIBUTIONS-OF-GAINS> (213861645)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 94164555
<NUMBER-OF-SHARES-REDEEMED> (67623948)
<SHARES-REINVESTED> 16340500
<NET-CHANGE-IN-ASSETS> 845657143
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 11780326
<OVERDISTRIB-NII-PRIOR> (675469)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (30272145)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (35961811)
<AVERAGE-NET-ASSETS> 4324592143
<PER-SHARE-NAV-BEGIN> 17.36
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> 1.29
<PER-SHARE-DIVIDEND> (.40)
<PER-SHARE-DISTRIBUTIONS> (.91)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.76
<EXPENSE-RATIO> .83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
TIFI Emerging Markets Series Fund December 31, 1998 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 002
<NAME> EMERGING MARKETS SERIES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 2323891902
<INVESTMENTS-AT-VALUE> 1722001770
<RECEIVABLES> 17582951
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1739584721
<PAYABLE-FOR-SECURITIES> 226930
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5750913
<TOTAL-LIABILITIES> 5977843
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2474738242
<SHARES-COMMON-STOCK> 208550286
<SHARES-COMMON-PRIOR> 185527984
<ACCUMULATED-NII-CURRENT> 605716
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (139846948)
<ACCUM-APPREC-OR-DEPREC> (601890132)
<NET-ASSETS> 1733606878
<DIVIDEND-INCOME> 46804096
<INTEREST-INCOME> 18885864
<OTHER-INCOME> 0
<EXPENSES-NET> (28023168)
<NET-INVESTMENT-INCOME> 37666792
<REALIZED-GAINS-CURRENT> (90517102)
<APPREC-INCREASE-CURRENT> (334534102)
<NET-CHANGE-FROM-OPS> (387384432)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (40080848)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 72904287
<NUMBER-OF-SHARES-REDEEMED> (54174577)
<SHARES-REINVESTED> 4292592
<NET-CHANGE-IN-ASSETS> (190274352)
<ACCUMULATED-NII-PRIOR> 1568894
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (47878968)
<GROSS-ADVISORY-FEES> (23147831)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (28023168)
<AVERAGE-NET-ASSETS> 1851826498
<PER-SHARE-NAV-BEGIN> 10.37
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> (2.05)
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.31
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
TIFI Growth Series Fund December 31, 1998 annual report and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000865722
<NAME>TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 003
<NAME> TEMPLETON GROWTH SERIES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 50376022
<INVESTMENTS-AT-VALUE> 55539972
<RECEIVABLES> 418259
<ASSETS-OTHER> 50046
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 56008277
<PAYABLE-FOR-SECURITIES> 85719
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 143125
<TOTAL-LIABILITIES> 228844
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51037146
<SHARES-COMMON-STOCK> 8444751
<SHARES-COMMON-PRIOR> 8840303
<ACCUMULATED-NII-CURRENT> 34134
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (455797)
<ACCUM-APPREC-OR-DEPREC> 5163950
<NET-ASSETS> 55779433
<DIVIDEND-INCOME> 1686929
<INTEREST-INCOME> 273883
<OTHER-INCOME> 0
<EXPENSES-NET> (549563)
<NET-INVESTMENT-INCOME> 1411249
<REALIZED-GAINS-CURRENT> 1782944
<APPREC-INCREASE-CURRENT> (1330371)
<NET-CHANGE-FROM-OPS> 1863822
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1406840)
<DISTRIBUTIONS-OF-GAINS> (37925749)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1936045
<NUMBER-OF-SHARES-REDEEMED> (7737881)
<SHARES-REINVESTED> 5406284
<NET-CHANGE-IN-ASSETS> (64590234)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 35728972
<OVERDISTRIB-NII-PRIOR> (16933)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (434268)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (549563)
<AVERAGE-NET-ASSETS> 62038278
<PER-SHARE-NAV-BEGIN> 13.62
<PER-SHARE-NII> .19
<PER-SHARE-GAIN-APPREC> .46
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> (7.47)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.61
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TIFI EMERGING FIXED INCOME MARKETS SERIES FUND DECEMBER 31, 1998 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000865722
<NAME> TEMPLETON INSTITUTIONAL FUNDS, INC.
<SERIES>
<NUMBER> 004
<NAME> EMERGING FIXED INCOME MARKETS SERIES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 2030408
<INVESTMENTS-AT-VALUE> 1835753
<RECEIVABLES> 35058
<ASSETS-OTHER> 36743
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1907554
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26196
<TOTAL-LIABILITIES> 26196
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2187684
<SHARES-COMMON-STOCK> 218947
<SHARES-COMMON-PRIOR> 214746
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (111671)
<ACCUM-APPREC-OR-DEPREC> (194655)
<NET-ASSETS> 1881358
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 211888
<OTHER-INCOME> 0
<EXPENSES-NET> (27028)
<NET-INVESTMENT-INCOME> 184860
<REALIZED-GAINS-CURRENT> (28751)
<APPREC-INCREASE-CURRENT> (251468)
<NET-CHANGE-FROM-OPS> (95359)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (186928)
<DISTRIBUTIONS-OF-GAINS> (122344)
<DISTRIBUTIONS-OTHER> (7339)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 4201
<NET-CHANGE-IN-ASSETS> (367947)
<ACCUMULATED-NII-PRIOR> 942
<ACCUMULATED-GAINS-PRIOR> 40550
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (15136)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (80936)
<AVERAGE-NET-ASSETS> 2162232
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .84
<PER-SHARE-GAIN-APPREC> (1.27)
<PER-SHARE-DIVIDEND> (.86)
<PER-SHARE-DISTRIBUTIONS> (.56)
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 8.59
<EXPENSE-RATIO> 1.25<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by
affiliates is 3.74%.
</FN>

</TABLE>