As filed with the Securities and Exchange Commission on November 22, 2002

Securities Act Registration No. 333-_______

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] Pre-Effective Amendment No. _____ [_] Post-Effective Amendment No. _____
(Check appropriate box or boxes)

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(Exact Name of Registrant as Specified in Charter)

1 (800) 321-8563
(Registrant's Area Code and Telephone Number)

One Franklin Parkway, San Mateo, CA 94403-1906
(Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)

Karen L. Skidmore with a copy to: Keith J. Rudolf
Assistant Secretary Jorden Burt LLP
(650) 312-5651 (202) 965-8156
One Franklin Parkway 1025 Thomas Jefferson Street, N.W.
San Mateo, CA 94403-1906 Washington, DC 20007-5208

(Name and Address of Agent for Service, Number, Street, City, State, Zip Code)

Approximate date of proposed public offering: As soon as practicable after this
registration statement becomes effective under the Securities Act of 1933, as
amended.

Calculation of Registration Fee under the Securities Act of 1933:

TITLE OF SECURITIES BEING REGISTERED

Shares of Beneficial Interest, Par Value $0.01 Per Share
Franklin Small Cap Fund - Class 1
Franklin Small Cap Fund - Class 2

No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.

It is proposed that this filing will become effective December 23, 2002,
pursuant to Rule 488.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

CROSS REFERENCE SHEET

Items Required by Form N-14

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Part A
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Item No. Form N-14 Item Caption Prospectus Caption
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1. Beginning of Registration Statement and Cover Page of Registration Statement; Cross
Outside Front Cover Page of Prospectus Reference Sheet; Front Cover Page of Prospectus
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2. Beginning and Outside Back Cover Page of Table of Contents
Prospectus
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3. Fee Table, Synopsis Information and Risk Summary; Some Important Information About The
Factors Funds
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4. Information About the Transaction Information About the Transaction
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5. Information About the Registrant Incorporation of Documents By Reference in the
Prospectus; Exhibit B
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6. Information About the Company Being Acquired Incorporation of Documents By Reference in the
Prospectus; Exhibit C
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7. Voting Information Voting Information
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8. Interest of Certain Persons and Experts Not Applicable
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9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
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Part B
- -------------------------------------------------------------------------------------------------------------
Item No. Form N-14 Item Caption Prospectus Caption

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10. Cover Page Cover Page of Statement of Additional
Information
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11. Table of Contents Table of Contents of Statement of Additional
Information
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12. Additional Information About the Registrant Statement of Additional Information of
Franklin Templeton Variable Insurance Products
Trust, dated May 1, 2002
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Item No. Form N-14 Item Caption Prospectus Caption

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13. Additional Information About the Company Statement of Additional Information of
Being Acquired Franklin Templeton Variable Insurance Products
Trust, dated May 1, 2002
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14. Financial Statements Financial Statements as Noted in the Statement
of Additional Information

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Part C
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Item No. Form N-14 Item Caption Prospectus Caption
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15. Indemnification Indemnification
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16. Exhibits Exhibits
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17. Undertakings Undertakings
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[logo]

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

January xx, 2003

The Board of Trustees of Franklin Templeton Variable Insurance Products
Trust (the Trust) has called a special meeting of shareholders (the Meeting) for
February 26, 2003, at which shareholders of Franklin Technology Securities Fund
(Technology) will be asked to vote on a Plan of Reorganization (the Plan) which
provides for a transaction (the Transaction) in which the assets of Technology
are to be acquired by, and in exchange for, shares of Franklin Small Cap Fund
(Small Cap), another fund of the Trust. As a contract owner, you will receive a
voting instruction card for Technology.

The Trustees of your Fund recommend that you vote in favor of this
proposal.

On the following pages, you will find a notice of the Meeting, a brief
overview of the Plan and a complete Prospectus and Proxy Statement, which
discusses the Transaction. There will be no change in the value of your contract
as a result of the Transaction. After the Transaction, your contract value will
depend on the performance of Small Cap instead of that of Technology. We request
that you review the enclosed materials and return the completed voting
instructions card in the enclosed postage-paid envelope as soon as you can.

We appreciate your taking the time to respond on this important matter.

Sincerely,

Rupert H. Johnson, Jr.
President

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN TECHNOLOGY SECURITIES FUND
One Franklin Parkway
San Mateo, California 94403-1906

NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To be held on February 26, 2003

To the Shareholders:

NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
Meeting) of Franklin Technology Securities Fund (Technology) will be held at
11:00 a.m. Pacific time, on February 26, 2003, at the offices of Franklin
Templeton Variable Insurance Products Trust (the Trust), One Franklin Parkway,
San Mateo, California 94403-1906. The Meeting is being held to consider and vote
on the following matter, as well as any other business that may properly come
before the Meeting or an adjournment:

To approve or disapprove a Plan of Reorganization (the Plan) of the
Trust on behalf of two of its Series, Technology and Franklin Small Cap
Fund (Small Cap) that provides for: (a) the acquisition of the assets
of Technology by Small Cap in exchange for shares of Small Cap; (b) the
distribution of such shares to the shareholders of Technology; and (c)
the complete liquidation and dissolution of Technology. Pursuant to the
Plan, Class 1 shareholders of Technology will receive Class 1 shares of
Small Cap and Class 2 shareholders of Technology will receive Class 2
shares of Small Cap. A copy of the Plan is Exhibit A of the attached
Prospectus and Proxy Statement.

The Board of Trustees of the Trust has fixed the close of business on
December 27, 2002, as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
You may revoke your proxy at any time before it is exercised by the subsequent
execution and submission of a revised proxy, by giving written notice of
revocation to Technology at any time before the proxy is exercised or by voting
in person at the Meeting. Each shareholder who does not expect to attend the
Meeting in person is requested to date, fill in, sign and return promptly the
enclosed proxy card in the enclosed envelope, which needs no postage if mailed
in the United States.

Please review the enclosed Prospectus and Proxy Statement for
additional information regarding the Plan.

By Order of the Board of Trustees,

Murray L. Simpson
Secretary

San Mateo, California
January xx, 2003

PROSPECTUS AND PROXY STATEMENT
Dated January xx, 2003

Acquisition of the Assets of
FRANKLIN TECHNOLOGY SECURITIES FUND
By and in Exchange for Shares of
FRANKLIN SMALL CAP FUND

(Both funds (the Funds) are series of Franklin Templeton Variable Insurance
Products Trust, an open-end management investment company.)

One Franklin Parkway
San Mateo, California 94403-1906
1 (800) 342-3863

This Prospectus and Proxy Statement is being furnished in connection with a
solicitation of proxies by the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust (the Trust) on behalf of its series Franklin Technology
Securities Fund (Technology), for use at a special meeting of the shareholders
(Meeting) of Technology, which is scheduled for 11:00 a.m. Pacific time on
February 26, 2003, at the offices of the Trust at One Franklin Parkway, San
Mateo, California 94403-1906, and any adjournments of the Meeting.

At the Meeting, shareholders of Technology will be asked to consider and
approve or disapprove a Plan of Reorganization (Plan). If the Plan is approved,
the assets of Technology will be acquired by, and in exchange for, shares of
Franklin Small Cap Fund (Small Cap), another series of the Trust, and Technology
will be liquidated and dissolved. The Board of Trustees of the Trust, on behalf
of Technology, is soliciting these proxies. This Prospectus and Proxy Statement
will first be sent to shareholders on or about January xx, 2003.

If shareholders of Technology vote to approve the Plan, the separate
accounts of your insurance company invested in Technology will receive either
Class 1 or Class 2 shares of Small Cap. The separate accounts holding Class 1
shares of Technology will receive Class 1 shares of Small Cap. The separate
accounts holding Class 2 shares of Technology will receive Class 2 shares of
Small Cap. The exchange of shares will be made at the Funds' respective net
asset values.

As an owner of a variable annuity or variable life insurance contract
(contract) issued by an insurance company, you have the right to instruct the
insurance company how to vote certain shares of Technology at the meeting.
Although you are not directly a shareholder of Technology, some of your contract
value is invested by your insurance company, as provided by your contract, in
Technology. You have the right under your contract to instruct the insurance
company how to vote the shares attributable to your contract. For the limited
purpose of this prospectus and proxy statement, the term "shareholder" refers to
you as a contract owner, unless the context otherwise requires. As a contract
owner, you should complete and return the enclosed voting instruction card in
the enclosed envelope.

The investment goals of Technology and Small Cap are similar. Each Fund's
investment goal is capital growth, with the investment goal of Technology stated
as capital appreciation and the investment goal of Small Cap stated as long-term
capital growth in their respective prospectuses. Franklin Advisers, Inc.
(Advisers) serves as investment adviser to both Funds.

This Prospectus and Proxy Statement sets forth concisely the information
you should know before voting on the Plan. You should read it carefully and
retain it for future reference. Additional information about Technology and
Small Cap has been filed with the Securities and Exchange Commission (SEC) and
can be found in the following documents:

. The Prospectuses of Small Cap - Class 1 or Class 2, dated May 1, 2002, are
enclosed with and considered a part of this Prospectus and Proxy Statement.

. The Prospectuses of Technology - Class 1 or Class 2, dated May 1, 2002, as
amended November 21, 2002, are enclosed with and considered a part of this
Prospectus and Proxy Statement.

. The Annual Report to Shareholders of Small Cap, dated December 31, 2001, is
enclosed with and considered a part of this Prospectus and Proxy Statement.

. The Semi-Annual Report to Shareholders of Small Cap, dated June 30, 2002,
is enclosed with and considered a part of this Prospectus and Proxy
Statement.

. A Statement of Additional Information (SAI) dated January xx, 2003,
relating to this Prospectus and Proxy Statement has been filed with the SEC
and is incorporated by reference into this Prospectus and Proxy Statement.

You may request a free copy of the SAI and other information by calling 1
(800) 342-3863 or by writing to Small Cap at One Franklin Parkway, San Mateo,
California 94403-1906. The Trust files reports, proxy materials and other
information with the SEC. You can inspect those reports, proxy materials and
other information at the public reference facilities maintained by the SEC at
450 Fifth Street N.W., Washington D. C. 20549. Copies of such materials may also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, 450 Fifth Street,
Washington D.C. 20549, at prescribed rates, or at no charge from the EDGAR
database on the SEC's Web site at www.sec.gov.

The SEC has not approved or disapproved these securities or passed upon the
adequacy of this Prospectus and Proxy Statement. Any representation to the
contrary is a criminal offense.

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 U.S. government
agency. Mutual fund shares involve investment risks, including the possible loss
of principal.

TABLE OF CONTENTS

PAGE

OUTSIDE FRONT COVER ............................................................................. Cover

TABLE OF CONTENTS ............................................................................... i

SUMMARY

What proposal am I voting on? ..............................................................
Why has the Board of Trustees of the Trust decided to recommend the
acquisition of Technology by Small Cap? ...............................................
How have the Funds performed in relation to each other? ....................................
What are the potential benefits of the Plan? ...............................................
Who will pay the fees and expenses incurred by the Funds in
connection with the Transaction? ......................................................
What are the investment goals, strategies and procedures of the Funds? .....................
How have the expense ratios of the Funds compared? .........................................
What might be the size of Small Cap after the Transaction? .................................
What are the likely federal tax implications? ..............................................
Has the Board approved the Plan? ...........................................................
Why am I giving voting instructions? .......................................................

SOME IMPORTANT INFORMATION ABOUT THE FUNDS ......................................................

What are the principal risks of an investment in the Funds? ................................
How do the performance records of Technology and Small Cap compare? ........................
Who manages the Funds? .....................................................................
What service providers do the Funds use? ...................................................
How are shares bought and sold? ............................................................
When are dividends and distributions made? .................................................
How do the investment goals and strategies of the Funds compare? ...........................
How do the fundamental investment restrictions of the Funds compare? .......................
What distribution and service fees do the Funds have? ......................................
What are the fees and expenses of the Funds and what might they be .........................
after the transaction? ................................................................

INFORMATION ABOUT THE TRANSACTION

What are the terms of the Plan? ............................................................
Who will pay the expenses of the Transaction? ..............................................
What are the reasons for recommending the Plan? ............................................
What are the federal tax consequences of the Transaction? ..................................
What other things should I know about the shares of Small Cap? .............................
What is the capitalization of each Fund and what might the
capitalization of Small Cap be after the Transaction? .................................

VOTING INFORMATION

Why is the Meeting being called? ..........................................
Who is eligible to vote? ..................................................
Why am I giving voting instructions? ......................................
How are proxies being solicited? ..........................................
Can I revoke my voting instructions? ......................................

ANNUAL MEETINGS AND SPECIAL MEETINGS

OTHER BUSINESS

PRINCIPAL SHAREHOLDERS

EXHIBITS TO PROSPECTUS AND PROXY STATEMENT

Exhibit A Franklin Templeton Variable Insurance Products Trust Plan of
Reorganization of Franklin Technology Securities Fund and
Franklin Small Cap Fund.

Exhibit B Prospectus of Franklin Small Cap Fund -Class 1 or Class 2, dated
May 1, 2002.

Exhibit C Prospectus of Franklin Technology Securities Fund -Class 1 or
Class 2, dated May 1, 2002, as amended November 21, 2002.

Exhibit D Annual Report to Shareholders of Franklin Small Cap Fund, dated
December 31, 2001.

Exhibit E Semi-Annual Report to Shareholders of Franklin Small Cap Fund,
dated June 30, 2002.

SUMMARY

IMPORTANT INFORMATION TO HELP YOU
UNDERSTAND AND VOTE ON THE PROPOSAL

This brief overview of the Plan is provided for your convenience and is
qualified in its entirety by reference to the complete Prospectus and Proxy
Statement. Please read the more complete information in the rest of this
Prospectus and Proxy Statement, and its Exhibits, which include the Plan,
prospectuses for Technology and Small Cap, and the Annual and Semi-Annual
Reports to Shareholders of Small Cap.

What proposal am I voting on?

At a meeting held on November 12, 2002, the Board of Trustees of the Trust,
on behalf of Technology, considered a proposal to merge Technology into Small
Cap, approved the Plan and voted to recommend that shareholders of Technology
vote to approve the Plan. If shareholders approve the Plan, it will result in
the transfer of substantially all of Technology's assets to Small Cap, in
exchange for Class 1 and Class 2 shares of Small Cap of equivalent aggregate net
asset value. This means that, although the total value of your investment will
be the same immediately before and after the exchange, the number of Small Cap
shares that you receive will likely be different than the number of Technology
shares that you surrender. After the shares of Small Cap are distributed to
Technology shareholders, Technology will be completely liquidated and dissolved.
The proposed transaction is referred to in this Prospectus and Proxy Statement
as the Transaction. As a result of the Transaction, you will cease to be a
shareholder of Technology. The exchange will occur on the closing date of the
Transaction, which is the specific date and time on which the Transaction takes
places (Effective Time), which is scheduled for the close of business on the New
York Stock Exchange on April 30, 2003.

Why has the Board of Trustees of the Trust decided to recommend the acquisition
of Technology by Small Cap?

The Board of Trustees of the Trust (the Board) reviewed the potential
benefits and costs of the Transaction to shareholders of Technology and Small
Cap; the expense ratios of Technology and Small Cap; the comparative investment
performance of Technology and Small Cap; the compatibility of the investment
goals, strategies, and restrictions of Small Cap with those of Technology; and
the likely tax consequences of the Transaction.

The Board considered that shareholders of both Funds, but primarily those
of Technology, potentially could be advantaged by the growth in assets realized
by combining the Funds. A larger fund should have an enhanced ability to effect
portfolio transactions on more favorable terms and should have greater
investment flexibility. Higher aggregate net assets and the opportunity for net
cash inflows also may reduce the risk that, if the net assets of Technology fail
to grow, or diminish, its total expense ratio could rise as certain fixed
expenses become a larger percentage of net assets. Shareholders of Technology
are projected to achieve a lower expense ratio after the Transaction.

How have the Funds performed in relation to each other?

Small Cap has outperformed Technology. Moreover, Small Cap has established
a longer, proven track record. From its inception on November 1, 1995 to
September 30, 2002, the Small Cap has attained an average annual return of
4.83%.

What are the potential benefits of the Plan?

Because Small Cap is substantially larger than Technology, shareholders of
Technology should benefit from certain operational economies of scale by
spreading fixed costs over a larger pool of assets and by efficiencies in
portfolio management. In addition, there should be benefits to shareholders in
the management of the portfolio as the substantially larger assets may also
afford greater flexibility and portfolio diversification in pursuing the Fund's
investment objectives. Also, Small Cap has had a lower expense ratio than
Technology.

Who will pay the fees and expenses incurred by the Funds in connection with the
Transaction?

Small Cap and Technology will each pay one-fourth of the fees and expenses
incurred in connection with the Transaction, and one-half of such fees and
expenses will be paid by Franklin Advisers, Inc., the investment adviser for
both Funds.

What are the investment goals, strategies and procedures of the Funds?

The principal investment goal of each of Technology and Small Cap is
capital growth. In their current prospectuses, the principal investment goal of
Technology is stated as capital appreciation, while that of Small Cap is stated
as long-term capital growth.

Technology seeks to achieve its investment goal by normally investing at
least 80% of its net assets in investments of companies expected to benefit from
the development, advancement, and use of technology, and may invest up to 35% of
its assets in foreign securities, although it is currently limiting such foreign
investment to 10-15% of its assets. Small Cap seeks to achieve its investment
goal by normally investing at least 80% of its assets in investments of U.S.
small capitalization companies. Small Cap defines small capitalization companies
as those with market capitalization values not exceeding $1.5 billion, or the
highest market capitalization value of the Russell 2000 Index, whichever is
greater. The manager of Small Cap generally expects that the median market
capitalization of its portfolio will significantly exceed that of the Russell
2000 Index. Small Cap may invest up to 20% of its assets in investments of
larger companies and may invest up to 25% of its assets in foreign securities,
although it is currently limiting investments in foreign securities to 10% of
its assets.

The Funds also have the same distribution, purchase and redemption
procedures, the same dividend payment and reinvestment procedures and the same
exchange rights.

How have the expense ratios of the Funds compared?

The expense ratio of Small Cap is lower than that of Technology. For the
six month period ended June 30, 2002, the annualized expense ratios for Small
Cap were 0.75% for Class 1 shares and 1.00% for Class 2 shares while the
annualized expense ratios for Technology were 1.04% for Class 1 shares and 1.29%
for Class 2 shares.

What might be the size of Small Cap after the Transaction?

As of November 11, 2002, Technology had net assets of $9.8 million, and
Small Cap had net assets of $531.2 million. The net assets of Technology
represent less than 2% of the net assets of Small Cap. The manager of Small Cap
believes that the transfer of the assets of

Technology will permit them to be managed more efficiently and will not have any
adverse effect on Small Cap.

What are the likely federal tax implications?

The Transaction contemplated by the Plan is not expected to qualify as a
tax-free "reorganization" under the Internal Revenue Code of 1986, as amended.
However, the Transaction will not proceed unless, prior to the Effective Time,
the Trust has received an opinion of tax counsel that (i) any gains recognized
by Technology on the Transaction will be offset by a deduction for dividends
paid to its shareholders, and (ii) no gain or loss will be recognized by any
contract owner as a result of the Transaction.

The insurance companies that hold shares of Technology in one or more
separate accounts with respect to variable life insurance or annuity contracts
that have shares of Technology as an underlying investment will not incur any
tax on any dividends that may be paid them by Technology as a result of the
Transaction, and will not impose any charges under any contract as a result of
the Transaction.

Has the Board approved the Plan?

Yes. The Board has approved the Plan. The Board recommends that you vote in
favor of the Plan.

Why am I giving voting instructions?

A voting instruction card is, in essence, a ballot. While only insurance
companies are the shareholders of record of Technology, and therefore entitled
to vote at the Meeting, your insurance company will vote in accordance with your
instructions. If you complete and sign the voting instruction card, the shares
of Technology attributable to your contract will be voted by your insurance
company as you instruct. If you simply sign the voting instruction card without
otherwise completing it, those shares will be voted in favor of the Plan and in
accordance with the views of management upon any unexpected matters that come
before the Meeting or any adjournment of the Meeting. If you do not return a
voting instruction card at all, those shares will be voted in the same
proportion as shares for which the insurance company has received voting
instructions from other contract owners.

The vote of shareholders of Small Cap is not being solicited, because their
approval and consent is not necessary for the approval of the Plan.

SOME IMPORTANT INFORMATION ABOUT THE FUNDS

What are the principal risks of an investment in the Funds?

Market Risk

An investment in either Technology or Small Cap involve risks common to
many mutual funds, including the risks of investing in stocks. There is no
guarantee against losses resulting from an investment in either Fund, or that
either Fund will achieve its investment goals.

Growth Investing Risk

Both Technology and Small Cap have risks associated with aggressive
"growth" style investing. Growth stock prices reflect projections of future
earnings or revenues and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks also may be more expensive relative to
their earnings or assets compared to value or other stocks. Because the manager
of Technology and Small Cap uses an aggressive growth strategy, an investment in
either of the Funds involves greater risk and more volatility than an investment
in less aggressive growth funds.

Sector Concentration Risk

Because Technology concentrates its investments in the industries in the
technology sector, it carries much greater risks of adverse developments in that
sector than a fund that invests in a wide variety of industries. Technology
company stocks can be subject to abrupt or erratic price movements and
historically have been more volatile than other securities, due to the rapid
pace of product change and development affecting such companies. Technology
companies are subject to significant competitive pressures such as new market
entrants, aggressive pricing, and competition for market share, and the
potential for falling profit margins. These companies also face risks that their
products will not be accepted or will become obsolete.

Small Cap also has risks associated with focusing on particular sectors
from time to time, including technology companies, electronic technology and
technology services companies. Small Cap also may focus on health technology
companies, which are subject to risks associated with government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability and similar matters. The health technology
industry is characterized by competition and rapid technological developments
that may make a company's products or services obsolete in a short period of
time.

Small Cap Investment Risk and Unseasoned Company Risk

Small Cap and, to a much lesser extent, Technology, each has risks
associated with investing in smaller companies. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the short term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because borrowing costs go up
and it may be more difficult for them to obtain credit to expand, and their
growth prospects may be less certain. Smaller companies may lack depth of
management or may have limited financial resources for growth or development.
They may have limited product lines or market share. Smaller companies may be in
new industries, or their new products or services may not find an

established market or may rapidly become obsolete. Smaller companies' securities
may be less liquid which may adversely affect their price. Investments in these
companies may be considered speculative. Small cap also has risks associated
with initial public offerings issued by unseasoned companies with little or no
operating history.

Foreign Investing Risk

Technology and, to a lesser extent, Small Cap, also have risks associated
with investing in foreign securities, which typically involves more risks than
investing in U.S. securities. These risks can increase the potential for losses
in the Fund and may include, among others, currency risks (fluctuations on
currency exchange rates; devaluations by governments; and the new euro
currency), country risks (political, social and economic instability, for
example, regional conflicts, terrorism and war; currency devaluations and
policies that have the effect of limiting or restricting foreign investment or
the movement of assets), and company risks (different trading practices; less
government supervision; less publicly available information; limited trading
markets and greater volatility).

Non-Diversification Risk

Unlike Small Cap, Technology is non-diversified, which means that it may
have a greater portion of its assets invested in the securities of one issuer
and may have securities of a smaller number of issuers than a diversified fund.
Therefore, Technology may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities.

For a more complete discussion of the risks of investing in Technology and
Small Cap, please consult their prospectuses, which are enclosed with and
considered a part of this Prospectus and Proxy Statement. The prospectuses also
have more information about the Funds' investments goals and strategies.

How do the performance records of Small Cap and Technology compare?

Small Cap has outperformed Technology, Moreover, unlike Technology, Small
Cap has established a longer, proven track record since its inception in 1995.
The performance of the Funds as of September 30, 2002, is shown below:

Class 1 Comparative Performance

Average Annual Returns Cumulative Total Returns
(%) (%)
------------------------------------------------------------------
Fund Inception 1 Year 5 Years From 1 Year 5 Years From
Date to to Inception to 9.30.02 to Inception
9.30.02 9.30.02 to 9.30.02 9.30.02 to 9.30.02
------------------------------------------------------------------

Technology 5/1/2000 (30.68) N/A (43.38) (30.68) N/A (74.70)
Small Cap 11/1/1995 (21.73) (3.79) 4.83 (21.73) (17.57) 38.59

Class 2 Comparative Performance/1/

Average Annual Returns Cumulative Total Returns
(%) (%)
------------------------------------------------------------------------------------
Fund Inception Date 1 Year 5 Years From Inception 1 Year 5 Years From Inception
to 9.30.02 to 9.30.02 to 9.30.02 to 9.30.02 to 9.30.02 to 9.30.02
------------------------------------------------------------------------------------

Technology 5/1/2000 (31.04) N/A (43.56) (31.04) N/A (74.90)
Small Cap 11/1/1995 (21.88) (3.97) 4.69 (21.88) (18.32) 37.34

Performance reflects all Fund expenses (including 12b-1 distribution and
service fees for Class 2) but does not include any expenses, fees or sales
charges imposed by the variable insurance contract for which the Fund is an
investment option. If they had been included, performance would be lower.

Total return figures are based on the inception of each Fund, which may
have started before the contract. Total return represents the cumulative or
average annual change in value, assuming reinvestment of dividends and capital
gains. Average returns smooth out variations in returns, which can be
significant; they are not the same as year by year results.

- ---------------------
1. Because Class 2 shares were not offered until 01.06.99 for Small Cap and
09.01.00 for Technology, Class 2 share performance for prior periods
represents the historical results of Class 1 shares. For periods beginning
after 01.06.99 for Small Cap and 09.01.00 for Technology, Class 2 share
performance reflect an additional 12b-1 fee, which also will affect future
performance.

Who manages the Funds?

The management of the business and affairs of the Funds is the
responsibility of the Board.

Franklin Advisers, Inc. (Advisers or Manager) is the investment adviser of
both Small Cap and Technology. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. (Resources). Resources is a publicly-owned company engaged in
various aspects of the financial services industry through its subsidiaries.
Together, Franklin Templeton Investments has over $259 billion in assets under
management for more than 5 million U.S. based mutual fund shareholder and other
accounts. Franklin Templeton Investments offers 106 U.S. based open-end
investment companies to the public The principal shareholders of Resources are
Charles B. Johnson and Rupert H. Johnson, Jr.

Mr. Edward B. Jamieson, Mr. Michael McCarthy and Mr. Aidan O'Connell are
responsible for the day to day management of the portfolio of Small Cap. Mr.
Jamieson has been with Franklin Templeton Investments since 1987, Mr. McCarthy
and Mr. O'Connell since 1992 and 1998, respectively. Mr. Ian Link, Mr. Robert
Dean and Mr. Conrad Herrmann are responsible for management of the portfolio of
Technology. Mr. Link and Mr. Herrmann have been with Franklin Templeton
Investments since 1989 and Mr. Dean since 1995.

Under the investment advisory agreements between Advisers and the Trust on
behalf of Technology and on behalf of Small Cap, Advisers receives a management
fee from each Fund based on the schedule below:

---------------------------------------------------------------------------
Rate Net Assets
---------------------------------------------------------------------------
0.550% First $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
---------------------------------------------------------------------------

---------------------------------------------------------------------------
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% Over $21.5 billion
---------------------------------------------------------------------------

What service providers do the Funds use?

Administrative services. Franklin Templeton Services, LLC, an indirect
wholly-owned subsidiary of Resources, provides certain administrative
services and facilities for each Fund.

Auditor. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105 is the Trust's independent auditor. The auditor gives an
opinion on the financial statements included in the Trust's Annual Report
to Shareholders and reviews the Trust's registration statement filed with
the SEC.

Custody services. Bank of New York, Mutual Funds Division, 90 Washington
Street, New York, New York 10286, acts as custodian of the Funds'
securities and other assets.

Distribution services. Franklin Templeton Distributors, Inc. (Distributors)
acts as the principal underwriter in the continuous public offering of both
of the Funds' shares.

Shareholder servicing and transfer agent. Franklin Templeton Investor
Services, LLC is the Funds' shareholder servicing agent and acts as the
Funds' transfer agent and dividend-paying agent.

How are shares bought and sold?

Shares of both Technology and Small Cap are offered and sold only to
insurance company separate accounts. Shares are sold at net asset value and are
redeemed at net asset value. Individuals may not purchase these shares directly
from the Funds. Class 1 and Class 2 shares of both Funds may serve as the
underlying investment vehicles for both variable annuity and variable life
insurance contracts issued by insurance companies.

Contract owners may exchange shares of any one class for shares of other
classes or shares of other Funds through a transfer between investment options
available under a variable insurance contract, subject to the terms and any
specific limitations on the exchange (or transfer) privilege described in the
contract prospectus. Market timing transfers may not be permitted.

When are dividends and distributions made?

Both Technology and Small Cap normally intend to pay an annual dividend
representing substantially all of their net investment income and to distribute
annually any net realized capital gains. If the Plan is approved, Technology
will pay a special dividend in order to distribute its net investment income and
net realized capital gains prior to the Effective Time.

How do the investment goals and strategies of the Funds compare?

Each of Technology and Small Cap has as its principal investment goal
capital growth. In their current prospectuses, the principal investment goal of
Technology is stated as capital

appreciation, while that of Small Cap is stated as long-term capital growth.

As a sector fund, Technology seeks to achieve its investment goal by
normally investing at least 80% of its net assets in investments of companies in
the technology sector. These are companies that are expected to benefit from the
development, advancement, and use of technology such as semiconductors, packaged
software, information technology services, computing hardware,
telecommunications, health technology, biotechnology, aerospace and defense
technologies, and media and information services. The Fund may invest in
companies of any size, and may invest up to 35% of its total assets in foreign
securities, but generally invests predominantly in U.S. companies. The Fund may
also invest in initial public offerings.

Small Cap seeks to achieve its investment goal by normally investing at
least 80% of its assets in investments of U.S. small capitalization (small cap)
companies. For Small Cap, small cap companies are those companies with market
capitalization values not exceeding $1.5 billion, or the highest market
capitalization value of the Russell 2000 Index; whichever is greater, at the
time of purchase. The manager of Small Cap generally expects that the median
market capitalization of its portfolio will significantly exceed that of the
Russell 2000 Index. The manager may continue to hold an investment for further
capital growth opportunities even if the company is no longer small cap. Small
Cap may also invest up to 20% of its net assets in larger companies' securities,
and also may invest in initial public offerings of securities and a very small
portion of its assets in private or illiquid securities, such as late stage
venture capital financings. Although not intended to be a technology sector
fund, the prospectus of Small Cap discloses that it may invest substantially in
the technology sector.

Small Cap also may invest in debt securities that the Manager believes have
the potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. Technology will invest less than 5% of its net
assets in debt securities.

The main differences between the portfolios of Technology and Small Cap
are: (i) Technology normally invests primarily in companies that gain from
technological advancement and may hold a substantial portion of assets in one or
more industries of the technology sector, such as electronic and health
technology, while Small Cap primarily invests in small cap securities and may
invest substantially in various technology sectors from time to time; and (ii)
while Technology can invest up to 35% of its assets in foreign securities, it is
currently limiting such investment to 10-15%, whereas Small Cap intends to limit
its investments in foreign securities to no more than 10% of its assets
(including up to 5% in emerging markets securities) but can invest up to 25% in
such securities; and (iii) Technology is non-diversified, whereas Small Cap is
diversified.

How do the fundamental investment restrictions of the Funds compare?

Policies or restrictions that are deemed fundamental by Technology or Small
Cap may only be changed with the approval of the lesser of: (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 (Majority Vote).

The following restrictions have been adopted as fundamental policies for both
Funds:

Borrowing. Each Fund may not borrow money, except that the Fund may borrow
money from banks or affiliated investment companies to the extent permitted
by

the 1940 Act, or any exemptions therefrom which may be granted by the SEC,
or for temporary or emergency purposes and then in an amount not exceeding
33 1/3% of the value of the Fund's total assets (including the amount
borrowed).

Lending. Each Fund may not make loans to other persons except: (a) through
the lending of its portfolio securities; (b) through the purchase of debt
securities, loan participations and/or engaging in direct corporate loans
in accordance with its investment objectives and policies; and (c) to the
extent the entry into a repurchase agreement is deemed to be a loan. The
Funds may also make loans to affiliated investment companies to the extent
permitted by the 1940 Act or any exemptions therefrom which may be granted
by the SEC.

Underwriting. Neither Fund may act as an underwriter except to the extent
the Fund may be deemed to be an underwriter when disposing of securities it
owns or when selling its own shares.

Commodities and real estate. Neither Fund may purchase or sell real estate
and commodities, except that a Fund may purchase or sell securities of real
estate investment trusts, may purchase or sell currencies, may enter into
futures contracts on securities, currencies, and other indices or any other
financial instruments, and may purchase and sell options on such futures
contracts.

Senior securities. Neither Fund may issue securities senior to the Fund's
presently authorized shares of beneficial interest, except that this
restriction shall not be deemed to prohibit the Fund from: (a) making any
permitted borrowings, loans, mortgages or pledges; (b) entering into
options, futures contracts, forward contracts, repurchase transactions or
reverse repurchase transactions; or (c) making short sales of securities,
to the extent permitted by the 1940 Act and any rule or order thereunder,
or SEC staff interpretations thereof.

The following additional restrictions have been adopted as fundamental
policies for Small Cap, which may not:

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

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

What distribution and service fees do the Funds have?

Class 2 shares of each Fund have a distribution plan, sometimes known as a
rule 12b-1 plan, that allows the Fund to pay distribution fees to those who sell
and distribute Class 2 shares

and provide services to shareholders and contract owners. The maximum amount
payable by each Fund under the plan is 0.35% per year of each Fund's average net
assets, however the Board has set the current rate at 0.25%. A portion of the
fees payable to Distributors or others under the plan may be retained by
Distributors for distribution expenses. Neither Fund has adopted a rule 12b-1
plan applicable to its Class 1 shares.

What are the fees and expenses of the Funds and what might they be after the
transaction?

Fee Tables

The tables below describe the fees and expenses of the Funds for the fiscal
year ended December 31, 2001, and for the six month period ended June 30, 2002.
The tables and the examples do not include any fees, expenses or sales charges
imposed by the insurance companies under the variable insurance contracts for
which the Funds serve as investment options. If they were included, your costs
would be higher.

ANNUAL FUND OPERATING EXPENSES

For fiscal year ended December 31, 2001
(expenses that are deducted from Fund assets)

Projected/1/ Small Cap
Technology Small Cap After Transaction

Class 1 Class 2 Class 1 Class 2 Class 1 Class 2
Description of Fees (%) (%) (%) (%) (%) (%)
- ---------------------------------------------------------------------------------------------------------------------

Shareholder Fees
.. Maximum sales charge (load) 0.00 0.00 0.00 0.00 0.00 0.00
imposed on purchases 0.00 0.00 0.00 0.00 0.00 0.00
.. Maximum deferred sales charge
(load)
Management fees 0.55 0.55 0.53 0.53 0.53 0.53
Distribution and service (12b-1) fees 0.00 0.25/2/ 0.00 0.25/2/ 0.00 0.25/2)/
Other expenses 0.51 0.51 0.31 0.31 0.31 0.31
---------------------------------------------------------------------------
Total annual Fund operating expenses 1.06 1.31 0.84 1.09 0.84 1.09
---------------------------------------------------------------------------
Management fee reduction/3/ (0.03) (0.03) (0.08) (0.08) (0.08) (0.08)
---------------------------------------------------------------------------
Net annual Fund operating expenses 1.03 1.28 0.76 1.01 0.76 1.01
---------------------------------------------------------------------------

1. Projected expenses based on current Small Cap expenses.
2. While the maximum amount payable under the Funds' Class 2 rule 12b-1 plan
is 0.35% per year of each Fund's average daily net assets, the Board has
set the current rate for each Fund at 0.25% per year.
3. The manager has agreed to reduce its fee to reflect reduced services
resulting from each Fund's investment in a Franklin Templeton money fund.
This reduction is required by the Board and an SEC order permitting the
Funds to invest in an affiliated money fund.

EXAMPLE

The examples below can help you compare the cost of investing in Technology
with the cost of investing in Small Cap, and the cost of investing in the Funds
with the cost of investing in other mutual funds. They assume:

. You invest $10,000 in each Fund for the periods shown;

. Your investment has a 5% return each year; and

. The Funds' operating expenses remain the same.

Although your actual costs may be higher or lower than the example above,
based on these assumptions your costs would be:

Fund 1 Year 3 Years 5 Years 10 Years
($) ($) ($) ($)
- ------------------------------------------------------------------------------------------

Technology
.. Class 1 105 328 569 1,259
.. Class 2 130 406 702 1,546

Small Cap
.. Class 1 78 243 422 942
.. Class 2 103 322 558 1,236

Projected Small Cap (after Transaction)
.. Class 1 78 243 422 942
.. Class 2 103 322 558 1,236

Six month period ended June 30, 2002/1/

Projected/2/ Small
Technology Small Cap Cap After
Transaction

Shareholder Fees
.. Maximum sales charge (load) 0.00 0.00 0.00 0.00 0.00 0.00
imposed on purchases 0.00 0.00 0.00 0.00 0.00 0.00
.. Maximum deferred sales charge
(load)
Management fees 0.55 .055 0.52 0.52 0.52 0.52
Distribution and service (12b-1) fees 0.00 0.25/3/ 0.00 0.25/3/ 0.00 0.25/3/
Other expenses 0.51 0.51 0.29 0.29 0.29 0.29
-----------------------------------------------------------------------
Total annual Fund operating expenses 1.06 1.31 0.81 1.06 0.81 1.06
-----------------------------------------------------------------------
Management fee reduction/4/ (0.02) (0.02) (0.06) (0.06) (0.06) (0.06)
-----------------------------------------------------------------------
Net annual Fund operating expenses 1.04 1.29 0.75 1.00 0.75 1.00
-----------------------------------------------------------------------

1. Annualized.

2. Projected expenses based on current Small Cap expenses.
3. While the maximum amount payable under the Funds' Class 2 rule 12b-1 plan
is 0.35% per year of each Fund's average daily net assets, the Board has
set the current rate for each Fund at 0.25% per year.
4. The manager has agreed to reduce its fee to reflect reduced services
resulting from each Fund's investment in a Franklin Templeton money fund.
This reduction is required by the Board and an SEC order permitting the
Funds to invest in an affiliated money fund.

EXAMPLE

The following example is based on the same assumptions as those for the
example above for the fiscal year ended December 31, 2001. The June 30, 2002,
semi-annual numbers are, however, annualized:

Fund 1 Year 3 Years 5 Years 10 Years
($) ($) ($) ($)
- -------------------------------------------------------------------------------------------

Technology
.. Class 1 106 331 574 1,271
.. Class 2 131 409 708 1,557

Small Cap
.. Class 1 77 240 417 930
.. Class 2 102 318 552 1,225

Projected Small Cap (after Transaction)
.. Class 1 77 240 417 930
.. Class 2 102 318 552 1,225

INFORMATION ABOUT THE TRANSACTION

What are the terms of the Plan?

The terms of the Plan are summarized below. The summary is qualified in its
entirety by reference to the Plan, a copy of which is attached as Exhibit A.

If the shareholders of Technology approve the Plan, the Transaction will
take place after various conditions are satisfied by the Trust on behalf of the
Funds, including the preparation of certain documents. If the shareholders of
Technology do not approve the Plan, the Transaction will not take place. In such
case, the Board will consider what further action is appropriate, including the
liquidation of Technology.

If the shareholders of Technology approve the Plan, Technology will
transfer its assets to Small Cap, in exchange for Class 1 or Class 2 shares of
Small Cap equal in value to the Class 1 or Class 2 shares of Technology. Small
Cap Class 1 or Class 2 shares issued to Technology will then be distributed by
Technology to the insurance company separate accounts that hold its shares, in
redemption of its outstanding shares. As a result, the separate accounts will
cease to own shares of the Technology and will instead own shares of Class 1 or
Class 2 of Small Cap having an aggregate net asset value equal to all Class 1
and Class 2 shares of Technology at the Effective Time. Technology then will be
liquidated and dissolved. The Transaction is expected to take place at the close
of business on the New York Stock Exchange on April 30, 2003, or soon

thereafter, or such other date as is determined by the Board. After the
Transaction, your contract values will depend on the performance of Small Cap
instead of that of Technology.

To the extent permitted by law, the Trust may, on behalf of the Funds,
agree to amend the Plan without shareholder approval. The Trust may also decide
to terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of Technology.

Who will pay the expenses of the Transaction?

The fees and expenses incurred in connection with the Transaction, whether
or not the Plan is approved at the Meeting or the Transaction is consummated,
will be divided between the Funds and the Manager. Each of Technology and Small
Cap will pay one-fourth of such total fees and expenses, and the Manager will
pay one-half of such total fees and expenses. The cost to Technology and Small
Cap is estimated to be approximately $27,500 each.

What are the reasons for recommending the Plan?

Shareholders of both Funds, but primarily those of Technology, potentially
could be advantaged by the growth in assets realized by combining the Funds. A
larger fund should have an enhanced ability to effect portfolio transactions on
more favorable terms and should have greater investment flexibility. Higher
aggregate net assets and the opportunity for net cash inflows also may reduce
the risk that, if the net assets of Technology fail to grow, or diminish, its
total expense ratio could rise as certain fixed expenses become a larger
percentage of net assets. Shareholders of Technology are projected to achieve a
reduction in expense ratio following the Transaction.

At a meeting held on October 10, 2002, the Board reviewed the potential
benefits and costs of the Transaction to shareholders of Technology and Small
Cap; the expense ratios of Technology and Small Cap; the comparative investment
performance of Technology and Small Cap; the compatibility of the investment
goals, policies, restrictions and investments of Technology with those of Small
Cap; and the tax consequences of the Transaction. The Board also reviewed the
allocation of the fees and expenses of the Transaction, which will be paid
one-fourth by each of Technology and Small Cap and one-half by Advisers.

The Board, including a majority of the trustees who are not interested
persons of the Funds, concluded that the Transaction is in the best interests of
the shareholders of both Funds and that no dilution of value of the interests of
the shareholders of either Technology or Small Cap would result from the
Transaction. The Board approved the Plan on November 12, 2002, and recommends
that shareholders of Technology vote to approve the Transaction.

What are the federal tax consequences of the Transaction?

It is not expected that the Transaction will qualify as a tax-free
"reorganization" under the applicable provisions of the Internal Revenue Code of
1986, as amended. However, the consummation of the Transaction is subject to the
receipt of an opinion of special tax counsel to the Trust that: (i) no gain or
loss will be recognized by Small Cap in connection with the Transaction; (ii)
any gains recognized by Technology in connection with the Transaction will be
offset by a deduction for dividends paid to its shareholders; and (iii) no gain
or loss will be recognized by contract owners for whose contracts shares of
either Technology or Small Cap are underlying investments.

The insurance companies that hold shares of Technology in one or more
separate accounts with respect to variable life insurance or annuity contracts
that have shares of Technology as an underlying investment will not incur tax on
any dividends that may be paid to them by Technology as a result of the
Transaction, and will not impose any charges under the contracts as a result of
the Transaction.

The foregoing is only a summary of the principal federal income tax
consequences of the Transaction and should not be considered to be tax advice.
There can be no assurance that the Internal Revenue Service will concur on all
or any of the issues discussed above. You may wish to consult with your own tax
advisers regarding the federal, state, and local tax consequences with respect
to the foregoing matters and any other considerations that may apply in your
particular circumstances.

What other things should I know about the shares of Small Cap?

Shares of Small Cap will be distributed to shareholders of the
corresponding class of Technology and will have the same legal characteristics
as the shares of Technology with respect to such matters as voting rights,
assessability, conversion rights, and transferability. Both Technology and Small
Cap are series of the Trust. The Trust is an open-end management investment
company, commonly called a mutual fund. The Trust was organized as a
Massachusetts business trust on April 26, 1988, and is registered with the SEC.

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

What is the capitalization of each Fund and what might the capitalization of
Small Cap be after the Transaction?

The following table sets forth, as of November 11, 2002, the capitalization
of Class 1 and Class 2 shares of Technology and Small Cap (the only two classes
of shares of the Funds outstanding). The table also shows the projected
capitalization of Small Cap as adjusted to give effect to the proposed
Transaction, as if the Transaction has occurred on that date. The capitalization
of Small Cap and its classes is likely to be different when the Transaction is
consummated, due to changes in market value of portfolio securities of the Funds
between November 11, 2002, and the Effective Time, changes in the amount of
undistributed net investment income and net realized capital gains of both Funds
during that period resulting from income and distributions, and changes in the
accrued liabilities of both Funds during the same

period. It is not possible to predict the number or value of shares of Small Cap
that actually will be issued and distributed in connection with the Transaction.

Technology Small Cap Small Cap Projected
(unaudited) (unaudited) After Transaction
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------

Net assets (all classes) (thousands) $9,801 $531,187 $540,988
Total shares outstanding (all classes) 3,330,171 43,486,929 44,289,878
Class 1 net assets (thousands) $1,896 $159,535 $161,431
Class 1 shares outstanding 641,202 12,998,870 13,153,350
Class 1 net asset value per share $2.96 $12.27 $12.27
Class 2 net assets (thousands) $7,905 $371,652 $379,557
Class 2 shares outstanding 2,688,969 30,488,059 31,136,528
Class 2 net asset value per share $2.94 $12.19 $12.19

VOTING INFORMATION

Why is the Meeting being called?

In order to complete the Plan, the approval of the shareholders of record
of Technology representing a majority of the shares outstanding as of the close
of business on December 27, 2002, is required.

If a sufficient vote in favor of approving the Plan is not received by the
time scheduled for the Meeting, the persons named in the proxy may propose one
or more adjournments of the Meeting to permit further solicitation of proxies
with respect to the proposal. Any proposed adjournment requires the affirmative
vote of holders of a majority of those shares present at the Meeting.

Who is eligible to vote?

Shareholders of record of Technology at the close of business on December
27, 2002, the record date, are entitled to vote at the Meeting. As of the record
date, Technology had [_____________] shares outstanding and entitled to be
voted. The Class 1 and Class 2 shares of Technology will vote together as a
single class at the Meeting.

Each share is entitled to one vote. Shareholders may vote by executing a
proxy card. You will be able to give your insurance company voting instructions
for those shares attributable to your contract as of the record date for the
Meeting.

The vote of shareholders of Small Cap is not being solicited, because their
approval and consent is not necessary for the approval of the Plan.

Why am I giving voting instructions?

views of management upon any unexpected matters that come before the Meeting or
any adjournment of the Meeting. If you do not return a voting instruction card
at all, those shares will be voted in the same proportion as shares for which
the insurance company has received voting instructions from other contract
owners.

How are proxies being solicited?

We will solicit proxies primarily by mail. Additional solicitations may be
made by telephone, facsimile or personal contact by officers or employees of the
Trust or Franklin Templeton Investments who will not be specially compensated
for these services. Technology, Small Cap and Advisers will share the costs of
the Meeting, including the costs of preparing and mailing the notice, prospectus
and proxy statement and of any solicitation of proxies. One-half of such costs
will be paid by Advisers and one-fourth will be paid by each of Technology and
Small Cap.

Can I revoke my voting instructions?

You may revoke your voting instructions at any time before the proxy is
voted by: (i) delivering a written revocation to the Secretary of the Trust at
One Franklin Parkway, San Mateo, California 94403-1906 prior to the Meeting;
(ii) forwarding a later-dated voting instruction that is received by the Trust
prior to the Meeting; or (iii) being present at the Meeting and giving new
voting instructions in person.

Annual Meetings and Special Meetings

The Trust's Declaration does not provide for annual meetings of
shareholders. The Trust does not intend to hold such a meeting in the year 2003.
Proposals included in the proxy statement for any subsequent meeting must be
received within a reasonable time before any such meeting at the Trust's
offices, One Franklin Parkway, San Mateo, California 94403-1906. If a
shareholder submits a proposal after such time, the proposal will not appear in
the proxy statement.

OTHER BUSINESS

We do not know of any business to be brought before the Meeting other than
the matters set forth in this Prospectus and Proxy Statement. Should any other
matters requiring a vote of shareholders arise, however, the proxies will vote
on such matters according to their best judgment.

PRINCIPAL SHAREHOLDERS

Your insurance company will vote on the Plan as you instruct. Thus, your
insurance company does not exercise control over Technology solely as the record
owner of the Fund's shares. As of December 27, 2002, the Trustees and officers
of the Trust, as a group, owned less than 1% of the outstanding shares of
Technology.

The name, address and percentage of ownership of shareholders that owned of
record 5% or more of Technology and Small Cap, on behalf of certain separate
accounts, on December 27, 2002, and the percentage of Small Cap that would be
owned by these shareholders after completing the Transaction based upon their
holdings as of December 27, 2002, are as follows:

Pro Forma
Percentage of
Class of Small
Class of Percentage of Cap Owned on
Shares Class Owned Consummation
Name and Address Owned on Record Date
- ---------------------------------------------------------------------------------------------------------------------

Technology

[name of 5% holder] Class 1 % %
[address]
[name of 5% holder] Class 2 % %
[address]

Small Cap

[name of 5% holder] Class 1 % %
[address]
[name of 5% holder] Class 2 % %
[address]

* Christopher H. Pinkerton serves as Trustee of the Trust and is President,
Chairman and Chief Executive Officer, USAllianz Investor Services, LLC and
USAllianz Advisors; President and Chief Executive Officer, USAllianz
Investment Advisor and USAllianz VIP Trust; Senior Vice President, Variable
Products Division Allianz Life Insurance Company of North America. Mr.
Pinkerton may not be viewed as an independent person of the Trust under the
1940 Act because of the share ownership of Allianz Life.

EXHIBITS TO PROSPECTUS AND PROXY STATEMENT

Exhibit

A Franklin Templeton Variable Insurance Products Trust Plan of
Reorganization of Franklin Technology Securities Fund and Franklin
Small Cap Fund.

B Prospectus of Franklin Small Cap Fund - Class 1 or Class 2, dated May
1, 2002 (enclosed).

C Prospectus of Franklin Technology Securities Fund - Class 1 or Class
2, dated May 1, 2002, as amended November 21, 2002 (enclosed).

D Annual Report to Shareholders of Franklin Small Cap Fund dated
December 31, 2001 (enclosed).

E Semi Annual Report to Shareholders of Franklin Small Cap Fund dated
June 30, 2002 (enclosed).

EXHIBIT A

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

PLAN OF REORGANIZATION
OF
FRANKLIN TECHNOLOGY SECURITIES FUND
AND
FRANKLIN SMALL CAP FUND

THIS PLAN OF REORGANIZATION (the "Plan"), is made by Franklin Templeton
Variable Insurance Products Trust, a business trust created under the laws of
The Commonwealth of Massachusetts (the "Trust") as of this 12th day of November,
2002, on behalf of its series, Franklin Technology Securities Fund (the
"Acquired Fund") and Franklin Small Cap Fund (the "Acquiring Fund")
(collectively, the "Funds") with its principal place of business at One Franklin
Parkway, San Mateo, California 94403-1906.

PLAN OF REORGANIZATION

The reorganization described in this Plan will consist of: (i) the
acquisition by the Acquiring Fund of substantially all of the property, assets
and goodwill of the Acquired Fund in exchange solely for Class 1 and Class 2
shares of beneficial interest, par value $0.01 per share, of the Acquiring Fund;
(ii) the distribution to the shareholders of the Acquired Fund of such Class 1
and Class 2 shares of the Acquiring Fund in exchange for and in redemption of
such shareholders' shares of the corresponding Class in the Acquired Fund; and
(iii) the dissolution of the Acquired Fund as soon as practicable after the
closing (as defined in Section 4, hereinafter called the "Closing"), all upon
and subject to the terms and conditions of this Plan hereinafter set forth.

1. Declaration and Payment of Dividends by Acquired Fund.

Prior to the Closing, the Acquired Fund shall calculate, declare and pay
ordinary and capital gain dividends on its Class 1 and Class 2 shares in amounts
sufficient to distribute all of its investment company taxable income and all
capital gains to the close of business on the date of Closing. Such dividends
shall automatically be reinvested in additional shares, of the corresponding
class, of the Acquired Fund.

2. Transfer of Assets, Dissolution of Acquired Fund.

(a) Subject to the terms and conditions of this Plan, the Acquired Fund
shall convey, transfer and deliver to the Acquiring Fund at the Closing all of
the Acquired Fund's then existing assets, free and clear of all liens,
encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in an
estimated amount necessary to: (i) pay the Acquired Fund's allocable portion of
the costs and expenses of carrying out this Plan (including, but not limited to,
fees of counsel and accountants, and expenses of its dissolution contemplated
hereunder), which costs and expenses shall be established on the Acquired Fund's
books as liability reserves; (ii) discharge its unpaid liabilities on its books
at the Closing Date; and (iii) pay such contingent liabilities as the Board of
Trustees shall reasonably deem to exist against the Acquired Fund, if any, at
the Closing Date, for which contingent and other appropriate liability reserves
shall be established on

the Acquired Fund's books (such existing assets, net of the reserves described
in (i), (ii) and (iii), hereinafter referred to as the Acquired Fund's "Net
Assets"). The Acquired Fund shall also retain any and all rights that it may
have over and against any person that may have accrued up to and including the
close of business on the Closing Date, except for such rights as may arise by
reason of the Acquired Fund's status as a holder of a security or other
investment property which is transferred to the Acquiring Fund hereunder.

(b) Subject to the terms and conditions of this Plan, the Acquiring Fund
shall at the Closing deliver to the Acquired Fund the number of its Class 1 and
Class 2 Shares (including any fractional share rounded to the nearest
one-thousandth of a share) determined: (i) in the case of the Acquiring Fund's
Class 1 shares, by dividing the net asset value per share of the Class 1 shares
of the Acquired Fund by the net asset value per share of the Acquiring Fund's
Class 1 shares, and multiplying the result thereof by the number of outstanding
Class 1 Shares of the Acquired Fund, as of the close of trading on the New York
Stock Exchange on the Closing Date; and (ii) in the case of the Acquiring Fund's
Class 2 shares, by dividing the net asset value per share of the Class 2 shares
of the Acquired Fund by the net asset value per share of the Acquiring Fund's
Class 2 shares, and multiplying the result thereof by the number of outstanding
Class 2 shares of the Acquired Fund, as of the close of trading on the New York
Stock Exchange on the Closing Date. All such values shall be determined in the
manner and as of the time set forth in Section 3 hereof.

(c) Immediately following the Closing, the Acquired Fund shall distribute
to each of its shareholders of record as of the close of business on the Closing
Date that number of Class 1 or Class 2 shares of the Acquiring Fund (including
any fractional share rounded to the nearest one-thousandth share) as shall have
an aggregate value equal to the aggregate value of the shares of the same class
of the Acquired Fund which were owned by such shareholder immediately prior to
the Closing, in exchange for and in cancellation of such shareholder's shares of
the Acquired Fund, such values to be determined in the manner and as of the time
set forth in Section 3 hereof. Such distribution shall be accomplished by the
establishment of accounts on the share records of the Acquiring Fund of the type
and in the amounts due such shareholders based on their respective holdings as
of the close of business on the Closing Date.

(d) Following the completion of the distribution described in the
preceding sub-paragraph, the Acquired Fund shall be dissolved.

3. Valuation.

(a) The value of the Acquired Fund's Net Assets to be acquired by
Acquiring Fund hereunder shall be computed as of the close of trading on the New
York Stock Exchange on the Closing Date using the valuation procedures set forth
in the Acquired Fund's currently effective prospectus.

(b) The net asset value of a share of beneficial interest of Acquired Fund
Class 1 and Class 2 shares shall be determined to the nearest full cent as of
the close of

trading on the New York Stock Exchange on the Closing Date using the valuation
procedures set forth in Acquired Fund's currently effective prospectus.

(c) The net asset value of a share of beneficial interest of the Acquiring
Fund's Class 1 and Class 2 shares shall be determined to the nearest full cent
as of the close of trading on the New York Stock Exchange on the Closing Date,
using the valuation procedures set forth in Acquiring Fund's currently effective
prospectus.

4. Closing and Closing Date.

The Closing Date shall be April 30, 2003, or such later date as determined
by the officers of the Trust. The Closing shall take place at the principal
office of the Trust, or at such other place as the officers of the Trust shall
designate, at the close of business on the New York Stock Exchange on the
Closing Date. The Trust on behalf of the Acquired Fund shall have provided for
delivery as of the Closing of those Net Assets of Acquired Fund to be
transferred to the account of the Acquiring Fund at the Trust's Custodian, Bank
of New York, Mutual Funds Division, 90 Washington Street, New York, New York
10286. Also, the Trust on behalf of the Acquired Fund shall have prepared and
have available at the Closing a list of names and addresses of the shareholders
of record of its shares and the number of Class 1 and Class 2 shares of
beneficial interest of the Acquired Fund owned by each such shareholder, all as
of the close of trading on the New York Stock Exchange on the Closing Date,
certified by its transfer agent or by its President to the best of its or his
knowledge and belief. The Trust on behalf of Acquiring Fund shall have prepared
satisfactory evidence that such Acquiring Fund Shares have been registered in an
account on the books of the Acquiring Fund in such manner as the officers of the
Trust on behalf of Acquired Fund shall deem appropriate.

5. Representations and Warranties by the Trust on behalf of Acquiring Fund.

The Trust makes the following representations and warranties about the
Acquiring Fund:

(a) The Acquiring Fund is a series of the Trust, a business trust created
under the laws of The Commonwealth of Massachusetts on May 23, 1988, and is
validly existing under the laws of that Commonwealth. The Trust is duly
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, management investment company and all of the Trust's
Acquiring Fund shares sold were sold pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended (the "1933 Act"),
except for those shares sold pursuant to the private offering exemption for the
purpose of raising the required initial capital.

(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of the Acquiring Fund, par value $0.01 per share, each
outstanding share of which is fully paid, non-assessable, freely transferable
and has full voting rights. The Acquiring Fund is further divided into two
classes of shares, Class 1 and Class 2, and an unlimited number of shares of
beneficial interest, par value $0.01 per share, have been allocated and
designated to the shares of the Acquiring Fund.

(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 2001, audited by
PricewaterhouseCoopers, LLP, and the Semiannual Report to Shareholders for the
six month period ended June 30, 2002, fairly present the financial position of
the Acquiring Fund as of such dates and the results of its operations for the
periods indicated in conformity with generally accepted accounting principles
applied on a consistent basis.

(d) The books and records of the Acquiring Fund accurately summarize the
accounting data represented and contain no material omissions with respect to
the business and operations of the Acquiring Fund.

(e) The Trust has the necessary power and authority to conduct its
business as such business is now being conducted.

(f) The Trust on behalf of the Acquiring Fund is not a party to or
obligated under any provision of its Agreement and Declaration of Trust
("Declaration of Trust") or Amended By-laws ("By-laws"), or any contract or any
other commitment or obligation, and is not subject to any order or decree that
would be violated by its execution of or performance under this Plan.

(g) The Trust has elected to treat the Acquiring Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Acquiring Fund has qualified as a RIC for each taxable year since its
inception, and will qualify as a RIC as of the Closing Date.

6. Representations and Warranties by the Trust on behalf of Acquired Fund.

The Trust makes the following representations and warranties about the
Acquired Fund:

(a) The Acquired Fund is a series of the Trust, a business trust created
under the laws of The Commonwealth of Massachusetts on May 23, 1988, and is
validly existing under the laws of that Commonwealth. The Trust is duly
registered under the 1940 Act as an open-end, management investment company and
all of the Trust's Acquired Fund's shares sold were sold pursuant to an
effective registration statement filed under the 1933 Act, except for those
shares sold pursuant to the private offering exemption for the purpose of
raising the required initial capital.

(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of the Acquired Fund, par value $0.01 per share, each
outstanding share of which is fully paid, non-assessable, freely transferable,
and has full voting rights. The Acquired Fund is further divided into two
classes of shares, Class 1 and Class 2, and an unlimited number of shares of
beneficial interest, par value $0.01 per share, have been allocated and
designated to the shares of the Acquired Fund.

(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 2001, audited by

PricewaterhouseCoopers, LLP, and the Semiannual Report to Shareholders for the
six month period ended June 30, 2002, fairly present the financial position of
the Acquired Fund as of such date and the results of its operations for the
period indicated in conformity with generally accepted accounting principles
applied on a consistent basis.

(d) The Trust has the necessary power and authority to conduct the
Acquired Fund's business as such business is now being conducted.

(e) The Trust on behalf of the Acquired Fund is not a party to or
obligated under any provision of the Trust's Declaration of Trust or By-laws, or
any contract or any other commitment or obligation, and is not subject to any
order or decree, that would be violated by the Trust's execution of or
performance under this Plan.

(f) The Trust has elected to treat the Acquired Fund as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, and the Acquired
Fund has qualified as a RIC for each taxable year since its inception and will
qualify as a RIC as of the Closing Date.

7. Representations and Warranties by the Trust on behalf of the Funds.

The Trust makes the following representations and warranties about both the
Acquiring Fund and the Acquired Fund (collectively, the "Funds"):

(a) The Trust will create a statement of assets and liabilities for each
of the Funds which will be prepared as of the close of trading on the New York
Stock Exchange on the Closing Date for the purpose of determining the number of
Acquiring Fund shares to be issued pursuant to Section 2 of this Plan, will
accurately reflect its Net Assets in the case of the Acquired Fund and its net
assets in the case of the Acquiring Fund, and outstanding shares of beneficial
interest, as of such date, in conformity with generally accepted accounting
principles applied on a consistent basis.

(b) At the Closing, the Funds will have good and marketable title to all
of the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.

(c) Except as disclosed in the Trust's currently effective prospectus
relating to the Funds, there is no material suit, judicial action, or legal or
administrative proceeding pending or threatened against either of the Funds.

(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by either of the Funds.

(e) The execution, delivery, and performance of this Plan have been duly
authorized by all necessary action of the Trust's Board of Trustees, and this
Plan constitutes a valid and binding obligation enforceable in accordance with
its terms.

(f) It anticipates that consummation of this Plan will not cause either of
the Funds to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.

(g) The Trust has the necessary power and authority to conduct the
business of the Funds, as such business is now being conducted.

8. Intentions of the Trust on behalf of the Funds.

(a) The Trust intends that the Acquired Fund will not acquire Acquiring
Fund shares for the purpose of making distributions thereof to anyone other than
the Acquired Fund's shareholders.

(b) The Trust on behalf of the Acquired Fund intends, if this Plan is
consummated, to liquidate and dissolve the Acquired Fund.

(c) The Trust intends that, by the Closing, all of the Funds' Federal and
other tax returns and reports required by law to be filed on or before such date
shall have been filed, and all Federal and other taxes shown as due on said
returns shall have either been paid or adequate liability reserves shall have
been provided for the payment of such taxes.

(d) At the Closing, the Trust on behalf of the Acquired Fund intends to
have available a copy of the shareholder ledger accounts, certified by the
Trust's transfer agent or its President to the best of its or his knowledge and
belief, for all the shareholders of record of the Acquired Fund's shares as of
the close of trading on the New York Stock Exchange on the Closing Date who are
to become shareholders of the Acquiring Fund as a result of the reorganization
that is the subject of this Plan.

(e) The Trust intends to mail to each shareholder of record of the
Acquired Fund entitled to vote at the meeting of its shareholders at which
action on this Plan is to be considered (the "Meeting"), and to request that
shareholders of record mail or otherwise distribute to each owner of a contract
of variable insurance ("Contract Owner") entitled to instruct such shareholder
of record with respect to the voting of shares of the Acquired Fund at such
Meeting, in sufficient time to comply with requirements as to notice thereof, a
combined Prospectus and Proxy Statement that complies in all material respects
with the applicable provisions of Section 14(a) of the Securities Exchange Act
of 1934, as amended, and Section 20(a) of the 1940 Act, and the rules and
regulations, respectively, thereunder.

(f) The Trust intends to file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating to
the shares of the Acquiring Fund issuable hereunder ("Registration Statement"),
and will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will: (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations promulgated
thereunder; and (ii) not contain any untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to

make the statements therein not misleading. At the time the Registration
Statement becomes effective, at the time of the Meeting, and at the Closing
Date, the prospectus and statement of additional information included in the
Registration Statement will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.

9. Conditions Precedent to be Fulfilled by the Trust on behalf of the Funds.

The consummation of this Plan hereunder shall be subject to the following
respective conditions:

(a) That: (i) all the representations and warranties contained herein
shall be true and correct as of the Closing with the same effect as though made
as of and at such date; (ii) the performance of all obligations required by this
Plan to be performed by the Trust on behalf of the Funds shall occur prior to
the Closing; and (iii) the Trust shall execute a certificate signed by officers
of the Trust to the foregoing effect.

(b) That this Plan shall have been adopted and approved by the appropriate
action of the Board of Trustees of the Trust on behalf of each of the Funds.

(c) That the U.S. Securities and Exchange Commission shall not have issued
an unfavorable management report under Section 25(b) of the 1940 Act or
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan under Section 25(c) of the 1940 Act. And, further, no
other legal, administrative or other proceeding shall have been instituted or
threatened that would materially affect the financial condition of the Acquired
Fund or the Acquiring Fund or would prohibit the transactions contemplated
hereby.

(d) That this Plan shall have been adopted and approved by the appropriate
action of the shareholders of the Acquired Fund at the Meeting or any
adjournment thereof.

(e) That there shall be delivered to the Trust an opinion from Messrs.
Jorden Burt LLP, special counsel to the Trust, to the effect that, provided the
acquisition contemplated hereby is carried out in accordance with this Plan and
based upon certificates of the officers of the Trust with regard to matters of
fact:

(1) No gain or loss will be recognized by the Acquiring Fund in
connection with the transactions contemplated herein;

(2) Any gains recognized by the Acquired Fund as a result of the
transactions contemplated herein will be offset by a deduction for dividends
paid to its shareholders; and,

(3) No gain or loss will be recognized by any Contract Owner for whom
shares of either the Acquiring Fund or the Acquired Fund are underlying
investments as a result of the transactions contemplated herein.

(f) That there shall be delivered to the Trust an opinion in form and
substance satisfactory to it from Messrs. Stradley Ronon Stevens & Young, LLP,
counsel to the Trust with respect to the Acquired Fund to the effect that,
subject in all respects to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other laws now or
hereafter affecting generally the enforcement of creditors' rights:

(1) The Acquired Fund is a series of the Trust, a business trust
organized under the laws of The Commonwealth of Massachusetts, and the Trust is
a validly existing business trust and in good standing under the laws of that
Commonwealth;

(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Acquired Fund, par value $0.01 per share. Two classes of
shares of the Acquired Fund have been designated as the Acquired Fund Class 1
shares and the Acquired Fund Class 2 shares, and an unlimited number of shares
of beneficial interest of the Trust have been allocated to the Acquired Fund
Class 1 and Class 2 shares. Assuming that the initial shares of beneficial
interest of Acquired Fund were issued in accord with the 1940 Act and the
Declaration of Trust and By-laws of the Trust, and that all other outstanding
shares of the Acquired Fund were sold, issued and paid for in accordance with
the terms of the Acquired Fund's prospectus in effect at the time of such sales,
each such outstanding share is fully paid, non-assessable, freely transferable
and has full voting rights;

(3) The Acquired Fund is a non-diversified series of the Trust, an
open-end investment company of the management type registered as such under the
1940 Act;

(4) Except as disclosed in the Acquired Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against the Acquired Fund, the
unfavorable outcome of which would materially and adversely affect the Acquired
Fund;

(5) All actions required to be taken by the Trust on behalf of the
Acquired Fund to authorize this Plan and to effect the transactions contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and

(6) Neither the execution, delivery, nor performance of this Plan by
the Trust on behalf of the Acquired Fund violates any provision of its
Declaration of Trust or By-laws, or the provisions of any agreement or other
instrument known to such counsel to which the Trust is a party or by which the
Trust is otherwise bound; this Plan is the legal, valid and binding obligation
of the Trust on behalf of the Acquired Fund and is enforceable against the Trust
on behalf of the Acquired Fund in accordance with its terms.

In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain

certifications and written statements of governmental officials with respect to
the good standing of the Trust.

(g) That there shall be delivered to the Trust an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP,
counsel to the Trust with respect to the Acquiring Fund to the effect that,
subject in all respects to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws now or
hereafter affecting generally the enforcement of creditors' rights:

(1) The Acquiring Fund is a series of the Trust, a business trust
organized under the laws of The Commonwealth of Massachusetts, and is a validly
existing business trust and in good standing under the laws of that
Commonwealth;

(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of the Acquiring Fund, par value $0.01 per share. The
Acquiring Fund is further divided into two classes of shares designated as the
Acquiring Fund's Class 1 and Class 2 shares, and an unlimited number of shares
of beneficial interest, par value $0.01 per share, have been allocated and
designated to the acquiring Fund's Class 1 and Class 2 shares. Assuming that the
initial shares of beneficial interest of the Acquiring Fund were issued in
accord with the 1940 Act, and the Declaration of Trust and By-laws of the Trust,
and that all other outstanding shares of the Acquiring Fund were sold, issued
and paid for in accordance with the terms of the Acquiring Fund's prospectus in
effect at the time of such sales, each such outstanding share of the Acquiring
Fund is fully paid, non-assessable, freely transferable and has full voting
rights;

(3) the Acquiring Fund is a diversified series of the Trust, an
open-end investment company of the management type registered as such under the
1940 Act;

(4) Except as disclosed in the Acquiring Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against the Acquiring Fund, the
unfavorable outcome of which would materially and adversely affect the Acquiring
Fund;

(5) the Acquiring Fund's shares to be issued pursuant to the terms of
this Plan have been duly authorized and, when issued and delivered as provided
in this Plan, will have been validly issued and fully paid and will be
non-assessable by the Trust on behalf of the Acquiring Fund;

(6) All actions required to be taken by the Trust on behalf of the
Acquiring Fund to authorize this Plan and to effect the transactions
contemplated hereby have been duly authorized by all necessary action on the
part of the Trust;

(7) Neither the execution, delivery, nor performance of this Plan by
the Trust on behalf of the Acquiring Fund violates any provision of its
Declaration of Trust or By-laws, or the provisions of any agreement or other
instrument known to such counsel to which the Trust is a party or by which the
Trust is otherwise bound; this Plan is the legal, valid and binding obligation
of the Trust on behalf of the Acquiring Fund and

is enforceable against the Trust on behalf of the Acquiring Fund in accordance
with its terms; and

(8) The registration statement of the Trust, of which the prospectus,
dated May 1, 2002, of the Acquiring Fund is a part (the "Prospectus"), is, at
the time of the signing of this Plan, effective under the 1933 Act, and, to the
best knowledge of such counsel, no stop order suspending the effectiveness of
such registration statement has been issued, and no proceedings for such purpose
have been instituted or are pending before or threatened by the U.S. Securities
and Exchange Commission under the 1933 Act, and nothing has come to counsel's
attention that causes it to believe that, at the time the Prospectus became
effective, or at the time of the signing of this Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the Prospectus
that is not described as required.

In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust.

(h) That the Trust's Registration Statement with respect to the Acquiring
Fund's Class 1 and Class 2 shares to be delivered to the Acquired Fund's
shareholders in accordance with this Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.

(i) That the Acquiring Fund's shares to be delivered hereunder shall be
eligible for sale by the Trust with each state commission or agency with which
such eligibility is required in order to permit the Acquiring Fund's shares
lawfully to be delivered to each holder of the Acquired Fund's shares.

10. Brokerage Fees and Expenses.

(a) The Trust represents and warrants that there are no broker or finders'
fees payable by it in connection with the transactions provided for herein.

(b) The expenses of entering into and carrying out the provisions of this
Plan shall be borne one-quarter by the Acquired Fund, one-quarter by the
Acquiring Fund and one-half by Franklin Advisers, Inc.

11. Termination; Postponement; Waiver; Order.

(a) Anything contained in this Plan to the contrary notwithstanding, this
Plan may be terminated and abandoned at any time (whether before or after
approval thereof by the shareholders of the Acquired Fund) prior to the Closing,
or the Closing may be postponed by the Trust by resolution of the Board of
Trustees, if circumstances develop that, in the opinion of the Board, make
proceeding with the Plan inadvisable.

(b) If the transactions contemplated by this Plan have not been
consummated by September 30, 2003, the Plan shall automatically terminate on
that date, unless a later date is established.

(c) In the event of termination of this Plan pursuant to the provisions
hereof, the same shall become void and have no further effect, and neither the
Trust, the Acquired Fund nor the Acquiring Fund nor the Trust's trustees,
officers, or agents or the shareholders of the Acquired Fund or the Acquiring
Fund shall have any liability in respect of this Plan.

(d) At any time prior to the Closing, any of the terms or conditions of
this Plan may be waived by the Board of Trustees if, in the judgment of such
Board of Trustees, such action or waiver will not have a material adverse effect
on the benefits intended under this Plan to the shareholders of either the
Acquired Fund or the Acquiring Fund.

(e) The respective representations and warranties contained in Sections 5
to 7 hereof shall expire with and be terminated by the Plan of Reorganization,
and neither the Trust nor any of its officers, trustees, agents or shareholders
nor the Funds nor any of their shareholders shall have any liability with
respect to such representations or warranties after the Closing. This provision
shall not protect any officer, trustee, agent or shareholder of either of the
Funds or the Trust against any liability to the entity for which that officer,
trustee, agent or shareholder so acts or to either of the Funds' shareholders to
which that officer, trustee, agent or shareholder would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.

(e) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this Plan shall be issued prior to the Closing and shall impose
any terms or conditions that are determined by action of the Board of Trustees
of the Trust to be acceptable, such terms and conditions shall be binding as if
a part of this Plan without further vote or approval of the shareholders of the
Acquired Fund, unless such terms and conditions shall result in a change in the
method of computing the number of the Acquiring Fund's shares to be issued to
Acquired Fund, in which event, unless such terms and conditions shall have been
included in the proxy solicitation material furnished to the shareholders of the
Acquired Fund prior to the Meeting, this Plan shall not be consummated and shall
terminate unless the Trust shall promptly call a special meeting of the
shareholders of the Acquired Fund at which such conditions so imposed shall be
submitted for approval.

12. Entire Agreement and Amendments.

This Plan embodies the entire agreement between the parties and there are
no agreements, understandings, restrictions, or warranties relating to the
transactions contemplated by this Plan other than those set forth herein or
herein provided for. This Plan may be amended only by the Trust on behalf of the
Funds. Neither this Plan nor any interest herein may be assigned without the
prior written consent of the Trust on behalf of the Funds.

13. Counterparts.

This Plan may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts together shall
constitute but one instrument.

14. Notices.

Any notice, report, or demand required or permitted by any provision of
this Plan shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to the Trust at One
Franklin Parkway, San Mateo, California 94403, Attention: Secretary.

15. Capacity.

A copy of the Trust's Declaration of Trust is on file with the Secretary of
The Commonwealth of Massachusetts, and notice is hereby given that this Plan is
executed on behalf of the Trustees of the Trust as trustees and not
individually, and that the obligations under this instrument are not binding
upon any of the trustees, officers or shareholders of the Trust individually,
but binding only upon the assets and property of the Acquired Fund and the
Acquiring Fund.

16. Governing Law.

This Plan shall be governed by and carried out in accordance with
applicable Federal securities laws and the laws of the State of California,
except that the provisions of Section 15 hereof shall be governed by the laws of
The Commonwealth of Massachusetts.

IN WITNESS WHEREOF, Franklin Templeton Variable Insurance Products Trust,
on behalf of the Funds, has caused this Plan to be executed on their behalf by
its duly authorized officers, all as of the date and year first-above written.

FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST, on behalf of Franklin Technology
Securities Fund
Attest:

_________________________ By:________________________________
Karen L. Skidmore Murray L. Simpson

Assistant Secretary Vice President and Secretary

FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST, on behalf of Franklin Small Cap
Fund Attest:

_________________________ By:___________________________________
Karen L. Skidmore Murray L. Simpson
Assistant Secretary Vice President and Secretary

EXHIBIT B

Prospectus

Franklin Templeton
Variable Insurance
Products Trust

Class 1 Shares

May 1, 2002
------------------------------------------------------------------

Financial(R) Templeton(R) Investments

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

================================================================================

Contents

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST

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

Information about each Fund
you should know before
investing

i Overview

Individual Fund Description

FSC-1 Franklin Small Cap Fund

Additional Information, All Funds

1 Distributions and Taxes

FUND ACCOUNT INFORMATION

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

Information about Fund
account transactions
and services

2 Buying Shares

2 Selling Shares

2 Exchanging Shares

2 Fund Account Policies

3 Questions

FOR MORE INFORMATION

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

Where to learn more about each Fund

Back Cover

Franklin Templeton

Variable Insurance Products Trust

Overview

Franklin Templeton Variable Insurance Products Trust (the Trust) currently
consists of twenty-four (24) separate series (the Fund or Funds), offering a
wide variety of investment choices. Each Fund generally has two classes of
shares, Class 1 and Class 2. The Funds are generally only available as
investment options in variable annuity or variable life insurance contracts. As
not all Funds and classes are available under your contract, please consult the
accompanying contract prospectus to find out which Funds and classes are
available to you.
INVESTMENT CONSIDERATIONS

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

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

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

RISKS

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

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

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

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

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

MANAGEMENT
The Funds' investment managers and their affiliates manage over $266 billion
in assets, as of February 28, 2002. In 1992, Franklin joined forces with
Templeton, a pioneer in international investing. The Mutual Advisers
organization became part of the Franklin Templeton organization four years
later. In 2001, the Fiduciary Trust team, known for providing global investment
management to institutions and high net worth clients worldwide, joined the
organization. Today, Franklin Templeton Investments is one of the largest
mutual fund organizations in the United States, and offers money management
expertise spanning a variety of investment objectives.

Franklin Small Cap Fund

GOAL AND STRATEGIES

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

MAIN INVESTMENTS Under normal market conditions, the Fund will invest at least
80% of its net assets in investments of small capitalization (small cap)
companies. Shareholders will be given at least 60 days' advance notice of any
change to this 80% policy. For this Fund, small-cap companies are those
companies with market capitalization values not exceeding: (i) $1.5 billion; or
(ii) the highest market capitalization value in the Russell 2000 Index;
whichever is greater, at the time of purchase. That index consists of 2,000
small companies that have publicly traded securities. Market capitalization is
defined as share price multiplied by the number of common stock shares
outstanding. The Fund generally expects that the median market capitalization of
its portfolio will significantly exceed that of the Russell 2000 Index. The
manager may continue to hold an investment for further capital growth
opportunities even if the company is no longer small cap. The Fund may invest
substantially in the technology sector (including electronic technology,
technology services, and health technology).

In addition to its main investments, the Fund may invest up to 20% of its
net assets in investments of larger companies. When suitable opportunities are
available, the Fund also may invest in initial public offerings (IPOs) of
securities, and may invest a very small portion of its assets in private or
illiquid securities, such as late stage venture capital financings. An equity
security represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
and preferred stocks, and securities convertible into common stock are examples
of equity securities.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Advantages, such as a particular marketing
or product niche, proven technology, and industry leadership are all factors
the manager believes point to strong long-term growth potential.

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

- --------------------------------------------------------------------------------
The Fund invests primarily in equity securities of small-cap U.S. companies.

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

MAIN RISKS

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

STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or securities markets.

GROWTH STYLE INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks also may be more volatile and expensive
relative to their earnings or assets compared to value or other stocks. Because
the Fund's manager uses an aggressive growth strategy, an investment in the Fund
involves greater risk and more volatility than an investment in a less
aggressive growth fund.

- --------------------------------------------------------------------------------
Because the stocks the Fund holds fluctuate in price with market conditions, the
value of your investments in the Fund will go up and down. This means you could
lose money over short or even extended periods.

FSC-1 Franklin Small Cap Fund - Class 1

SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the short term. Smaller or relatively new companies
can be particularly sensitive to changing economic conditions, including
increases in interest rates because borrowing costs go up and it may be more
difficult for them to obtain credit to expand, and their growth prospects may
be less certain.

For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries, or
their new products or services may not find an established market or may
rapidly become obsolete. Smaller companies' securities may be less liquid which
may adversely affect their price. Investments in these companies may be
considered speculative.

IPOs issued by unseasoned companies with little or no operating history are
risky and their prices are highly volatile, but they can result in very large
gains in their initial trading. Attractive IPOs are often oversubscribed and
may not be available to the Fund, or only in very limited quantities. Thus,
when the Fund's size is smaller, any gains from IPOs will have an exaggerated
impact on the Fund's reported performance than when the Fund is larger.

SECTOR FOCUS By focusing on particular sectors from time to time, the Fund
carries greater risk of adverse developments in a sector than a fund that
always invests in a wide variety of sectors.

Technology Companies. Technology company stocks have been subject to abrupt
or erratic price movements, especially over the short term, due to the rapid
pace of product change and development affecting such companies. Technology
companies are subject to significant competitive pressures, such as new market
entrants, aggressive pricing, and tight profit margins. Prices of technology
company stocks often change collectively without regard to the merits of
individual companies.

Electronic technology and technology services companies also face the risks
that new services, equipment or technologies will not be accepted by consumers
and businesses or will rapidly become obsolete. These factors can affect the
profitability of technology companies and, as a result, their value. In
addition, because many Internet-related companies are in the emerging stage of
development, they are particularly vulnerable to these risks.

Health technology companies may be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. In addition, this
industry is characterized by competition and rapid technological developments
which may make a company's products or services obsolete in a short period of
time.

More detailed information about the Fund, its policies, and risks can be
found in the SAI.

FSC-2 Franklin Small Cap Fund - Class 1

Past Performance

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

Performance reflects all Fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the Fund is an
investment option. If they had been included, performance would be lower.

Franklin Small Cap Fund Class 1 Annual Total Returns

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 2001

Since
Inception
1 Year 5 Years 11/01/95
------------------------------------------------

Franklin Small
Cap Fund - Class 1/1/ -15.02% 10.69% 13.59%
S&P 500 Index/2/ -11.88% 10.70% 13.43%
Russell 2500
Growth Index/2/ -10.83% 6.60% 8.68%

Ongoing stock market volatility can dramatically change the Fund's
short-term performance; current results may differ.
1. All Fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks. The Russell 2500(R) Growth Index is an
unmanaged index of 2,500 companies with small market capitalizations. Indexes
include reinvested dividends and/or interest. One cannot invest directly in an
index, nor is an index representative of the Fund's investments.

FSC-3 Franklin Small Cap Fund - Class 1

Fees and Expenses

FRANKLIN SMALL CAP FUND--CLASS 1

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the Fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.

SHAREHOLDER FEES
(fees paid directly from your investment)

Class 1
--------------------------------------------------------

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from Fund assets)

Class 1
---------------------------------------------

Management fees 0.53%
Other expenses 0.31%
------
Total annual Fund operating expenses 0.84%
------
Management fee reduction/1/ (0.08%)
------
Net annual Fund operating expenses/1/ 0.76%
------

1. The manager has agreed in advance to reduce its fee to reflect reduced
services resulting from the Fund's investment in a Franklin Templeton money
fund. This reduction is required by the Fund's Board of Trustees (Board) and an
order of the Securities and Exchange Commission (SEC).

EXAMPLE

This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:

.. You invest $10,000 for the periods shown;

.. Your investment has a 5% return each year; and

.. The Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
---------------------------------------

Class 1 $78 $243 $422 $942

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

Management
Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo,
California 94403-1906, is the Fund's investment manager.

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

Edward B. Jamieson Mr. Jamieson has been a manager of the Fund since its inception in 1995,
EXECUTIVE VICE PRESIDENT, ADVISERS and has been with Franklin Templeton Investments since 1987.

Michael McCarthy, CFA Mr. McCarthy has been a manager of the Fund since its inception in 1995.
SENIOR VICE PRESIDENT, ADVISERS He joined Franklin Templeton Investments in 1992.

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

The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal
year ended December 31, 2001, the management fee, before any reduction, was
0.53% of the Fund's average daily net assets. Under an agreement by Advisers to
reduce its fees to reflect reduced services resulting from the Fund's
investment in a Franklin Templeton money fund, the Fund paid 0.45% of its
average daily net assets to Advisers for its services. This reduction is
required by the Board and an SEC order.

FSC-4 Franklin Small Cap Fund - Class 1

Financial Highlights

The financial highlights table provides further details to help you
understand the financial performance of Class 1 shares for the past five years
or since the Fund's inception. The table shows certain information on a single
fund share basis (per share performance). It also shows some key Fund
statistics, such as total return (past performance) and expense ratios. Total
return represents the annual change in value of a share assuming reinvestment
of dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, is included in the Fund's Annual Report (available upon
request).

Class 1 Year ended December 31,
- ------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------

Per share data ($)
Net asset value, beginning of year 21.25 26.87 13.72 15.05 13.20
--------------------------------------------
Net investment income (loss)/1/ .09 .11 (.01) .07 .01
Net realized and unrealized gains (losses) (3.28) (3.81) 13.25 (.20) 2.24
--------------------------------------------
Total from investment operations (3.19) (3.70) 13.24 (.13) 2.25
--------------------------------------------
Distributions from net investment income (.09) -- (.08) (.01) (.03)
Distributions from net realized gains -- (1.92) (.01) (1.19) (.37)
--------------------------------------------
Total distributions (.09) (1.92) (.09) (1.20) (.40)
--------------------------------------------
Net asset value, end of year 17.97 21.25 26.87 13.72 15.05
--------------------------------------------
Total return (%)/2/ (15.02) (14.60) 96.94 (.98) 17.42

Ratios/supplemental data
Net assets, end of year ($ x 1,000) 266,694 387,474 488,062 315,460 313,462
Ratios to average net assets: (%)
Expenses .76 .75 .77 .77 .77
Net investment income (loss) .50 .42 (.05) .51 .06
Portfolio turnover rate (%) 37.94 19.49 39.49 53.01 64.07

1. Based on average shares outstanding effective year ended December 31,
1999.
2. Total return does not include any fees, charges or expenses imposed by
the variable annuity and life insurance contracts for which the Fund serves as
an underlying investment vehicle. If they had been included, total return would
be lower. Total return is not annualized for periods less than one year.

FSC-5 Franklin Small Cap Fund - Class 1

Additional Information, All Funds

LOGO

INCOME AND CAPITAL GAINS DISTRIBUTIONS Each Fund will declare as dividends
substantially all of its net investment income. Except for the Franklin Money
Market Fund, each Fund typically pays dividends from net investment income and
net capital gains, if any, at least annually. Dividends or distributions by the
Funds will reduce the per share net asset value (NAV) by the per share amount
paid.

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

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

TAX CONSIDERATIONS The tax consequences for contract owners from their
investment in variable annuity or variable life insurance contracts will depend
on the provisions of these contracts. Contract owners should consult the
accompanying contract prospectus for more information on these tax consequences.

1 Franklin Templeton Variable Insurance Products Trust

Fund Account Information

LOGO

Shares of each Fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts, and for qualified pension and retirement
plans. The Trusts' Board of Trustees (Board) monitors the Funds for the
existence of any material irreconcilable conflicts of interest between the two
different types of contract owners. If there were any such conflicts, the Board
will determine what action, if any, shall be taken in response.

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

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

LOGO

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

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

LOGO

Contract owners may exchange shares of any one class or Fund for shares of
other classes or Funds through a transfer between investment options available
under a variable insurance contract, subject to the terms and any specific
limitations on the exchange (or "transfer") privilege described in the contract
prospectus.

Frequent exchanges or excessive trading can harm performance and interfere
with Fund portfolio management or operations and increase Fund costs. To
protect shareholders, there are limits on the number and amount of Fund
exchanges that may be made (please see "Market Timers" below).

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

LOGO

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

The Funds' assets are generally valued at their market value, except that
the Franklin Money Market Fund's assets are generally valued at their amortized
cost. If market prices are unavailable, or if an event occurs after the close
of the trading market that materially affects the values, assets may be valued
at their fair value. If a Fund holds securities listed primarily on a foreign
exchange that trades on days when the Fund is not open for business, the value
of the shares may change on days that the insurance company shareholders cannot
buy or sell shares.

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

STATEMENTS AND REPORTS Contract owners will receive confirmations and account
statements that show account transactions. Insurance company contract owners
will receive the Funds' financial reports every six months from their insurance
company.

If there is a dealer or other investment representative of record on the
account, he or she will also receive

2 Franklin Templeton Variable Insurance Products Trust

confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.

MARKET TIMERS Market timing--short-term or excessive trading--or other
abusive trading practices may disrupt portfolio management strategies or Fund
operations, increase Fund costs, and harm Fund performance. As a result, the
Funds may restrict or refuse investments by market timers. The following Funds
currently do not allow investments by market timers: Franklin Aggressive Growth
Securities Fund, Franklin Global Communications Securities Fund, Franklin High
Income Fund, Franklin Income Securities Fund, Franklin Large Cap Growth
Securities Fund, Franklin Rising Dividends Securities Fund, Franklin Small Cap
Fund, Franklin Small Cap Value Securities Fund, Franklin Technology Securities
Fund, Mutual Discovery Securities Fund, Mutual Shares Securities Fund,
Templeton Developing Markets Securities Fund, Templeton Foreign Securities
Fund, Templeton Global Asset Allocation Fund and Templeton Growth Securities
Fund.

As of July 1, 2002, the Templeton Global Income Securities Fund also will
not allow investments by market timers.

You may be considered a market timer if you have (i) requested an exchange
or redemption out of the Fund within two weeks of an earlier exchange or
purchase request, or (ii) exchanged or redeemed shares out of the Fund more
than twice in a calendar quarter, or (iii) exchanged or redeemed shares equal
to at least $5 million, or more than 1% of the Fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Accounts under common ownership or
control are combined for these limits.

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

.. Each Fund may refuse any order to buy shares.

. At any time, the Funds may establish or change investment minimums.

. The Funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.

. You may only buy shares of the Funds eligible for sale in your state or
jurisdiction.

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

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

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

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

LOGO

More detailed information about the Trust and the Funds' account policies
can be found in the Funds' Statement of Additional Information. If you have any
questions about the Funds, you can write to us at One Franklin Parkway, P.O.
Box 7777, San Mateo, CA 94403-7777. You can also call us at 1-800/321-8563. For
your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.

3 Franklin Templeton Variable Insurance Products Trust

For More Information

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

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the Funds, their investments, policies, and
risks. 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) Investments
1-800/321-8563

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

Investment Company Act file #811-5479

Prospectus

Franklin Templeton
Variable Insurance
Products Trust

Class 2 Shares
May 1, 2002
-------------------------------------------------------------------------------

Franklin(R) Templeton(R) Investments

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

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

Contents

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST

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

Information about each Fund
you should know before
investing

i Overview

Individual Fund Description

FSC-1 Franklin Small Cap Fund

Additional Information, All Funds

1 Distributions and Taxes

FUND ACCOUNT INFORMATION

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

Information about Fund
account transactions
and services

2 Buying Shares

2 Selling Shares

2 Exchanging Shares

2 Fund Account Policies

3 Questions

FOR MORE INFORMATION

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

Where to learn more about each Fund

Back Cover

Franklin Templeton

Variable Insurance Products Trust

Overview

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

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

RISKS

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

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

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

Franklin Small Cap Fund

Goals and Strategies

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

- --------------------------------------------------------------------------------
The Fund invests primarily in equity securities of small-cap U.S. companies.

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

Main Risks

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

GROWTH STYLE INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks also may be more volatile and
expensive relative to their earnings or assets compared to value or other
stocks. Because the Fund's manager uses an aggressive growth strategy, an
investment in the Fund involves greater risk and more volatility than an
investment in a less aggressive growth fund.

FSC-1 Franklin Small Cap Fund - Class 2

SECTOR FOCUS By focusing on particular sectors from time to time, the Fund
carries greater risk of adverse developments in a sector than a fund that
always invests in a wide variety of sectors.

More detailed information about the Fund, its policies, and risks can be
found in the SAI.

FSC-2 Franklin Small Cap Fund - Class 2

Past Performance

Franklin Small Cap Fund
Class 2 Annual Total Returns 1

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 2001

Since
Inception
1 Year 5 Years 11/01/95
-------------------------------------------------

Franklin Small Cap Fund
- Class 2/1/ -15.25% 10.53% 13.45%
S&P 500 Index/2/ -11.88% 10.70% 13.43%
Russell 2500 Growth
Index/2/ -10.83% 6.60% 8.68%

FSC-3 Franklin Small Cap Fund - Class 2

Fees and Expenses

FRANKLIN SMALL CAP FUND - CLASS 2

SHAREHOLDER FEES
(fees paid directly from your investment)

Class 2
--------------------------------------------------------

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from Fund assets)

Class 2
------------------------------------------------

Management fees 0.53%
Distribution and service (12b-1) fees/1/ 0.25%
Other expenses 0.31%
-------
Total annual Fund operating expenses 1.09%
-------
Management fee reduction/2/ (0.08)%
-------
Net annual Fund operating expenses/2/ 1.01%
-------

1. While the maximum amount payable under the Fund's Class 2 rule 12b-1 plan
is 0.35% per year of the Fund's average daily net assets, the Fund's Board of
Trustees (Board) has set the current rate at 0.25% per year.
2. The manager has agreed in advance to reduce its fee to reflect reduced
services resulting from the Fund's investment in a Franklin Templeton money
fund. This reduction is required by the Board and an order of the Securities
and Exchange Commission (SEC).

EXAMPLE

This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:

.. You invest $10,000 for the periods shown;

.. Your investment has a 5% return each year; and

.. The Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
---------------------------------------

Class 2 $103 $322 $558 $1,236

FSC-4 Franklin Small Cap Fund - Class 2

Management

Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo,
California 94403-1906, is the Fund's investment manager.

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

Edward B. Jamieson Mr. Jamieson has been a manager of the Fund since its inception in 1995,
EXECUTIVE VICE PRESIDENT, ADVISERS and has been with Franklin Templeton Investments since 1987.

Michael McCarthy, CFA Mr. McCarthy has been a manager of the Fund since its inception in 1995.
SENIOR VICE PRESIDENT, ADVISERS He joined Franklin Templeton Investments in 1992.

FSC-5 Franklin Small Cap Fund - Class 2

Financial Highlights

The financial highlights table provides further details to help you understand
the financial performance of Class 2 shares for the past five years or since
the Fund's inception. The table shows certain information on a single Fund
share basis (per share performance). It also shows some key Fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, is included in the Fund's Annual Report (available upon
request).

Class 2 Year ended December 31,
--------------------------------------------------------------------------
2001 2000 1999/3/

------- ------- -------
Per share data ($)
Net asset value, beginning of year 21.14 26.80 14.25
------- ------- -------
Net investment gains (losses)/1/ .03 .12 (.04)
Net realized and unrealized gains (losses) (3.25) (3.86) 12.68
------- ------- -------
Total from investment operations (3.22) (3.74) 12.64
------- ------- -------
Distributions from net investment income (.07) -- (.08)
Distributions from net realized gains -- (1.92) (.01)
------- ------- -------
Total distributions (.07) (1.92) (.09)
------- ------- -------
Net asset value, end of year 17.85 21.14 26.80
------- ------- -------
Total return (%)/2/ (15.25) (14.76) 89.05

Ratios/supplemental data
Net assets, end of year ($ x 1,000) 401,663 301,420 6,156
Ratios to average net assets: (%)
Expenses 1.01 1.00 1.02/4/
Net investment income (loss) .19 .49 (.18)/4/
Portfolio turnover rate (%) 37.94 19.49 39.49

1. Based on average shares outstanding.
2. Total return does not include any fees, charges or expenses imposed by the
variable annuity and life insurance contractions for which the Fund serves as
an underlying investment vehicle. If they had been included, total return
would be lower. Total return is not annualized for periods less than one
year.
3. For the period January 6, 1999 (effective date) to December 31, 1999.
4. Annualized.

FSC-6 Franklin Small Cap Fund - Class 2

Additional Information, All Funds

Distribution and Taxes

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

1 Franklin Templeton Variable Insurance Products Trust

Fund Account Information

Buying Shares

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

Selling Shares

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

Exchanging Shares

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

Fund Account Policies

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

STATEMENTS AND REPORTS Contract owners will receive confirmations and
account statements that show account transactions. Insurance company contract
owners will receive the Funds' financial reports every six months from their
insurance company.

If there is a dealer or other investment representative of record on the
account, he or she will also receive

2 Franklin Templeton Variable Insurance Products Trust

confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.

MARKET TIMERS Market timing--short term or excessive trading or other
abusive trading practices-- may disrupt portfolio management strategies or Fund
operations, increase Fund costs, and harm Fund performance. As a result, the
Funds may restrict or refuse investments by market timers. The following Funds
currently do not allow investments by market timers: Franklin Aggressive Growth
Securities Fund, Franklin Global Communications Securities Fund, Franklin High
Income Fund, Franklin Income Securities Fund, Franklin Large Cap Growth
Securities Fund, Franklin Rising Dividends Securities Fund, Franklin Small Cap
Fund, Franklin Small Cap Value Securities Fund, Franklin Technology Securities
Fund, Mutual Discovery Securities Fund, Mutual Shares Securities Fund,
Templeton Developing Markets Securities Fund, Templeton Foreign Securities
Fund, Templeton Global Asset Allocation Fund and Templeton Growth Securities
Fund.

As of July 1, 2002, the Templeton Global Income Securities Fund also will
not allow investments by market timers.

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

.. Each Fund may refuse any order to buy shares.

. At any time, the Funds may establish or change investment minimums.

. The Funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.

. You may only buy shares of the Funds eligible for sale in your state or
jurisdiction.

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

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

SHARE CLASSES Each Fund generally has two classes of shares, Class 1 and
Class 2. Each class is identical except that Class 2 has a distribution plan or
"rule 12b-1" plan which is described below.

Distribution and service (12b-1) fees. Class 2 has a distribution plan,
sometimes known as a rule 12b-1 plan, that allows the Funds to pay distribution
fees to those who sell and distribute Class 2 shares and provide services to
shareholders and contract owners. Because these fees are paid out of Class 2's
assets on an on-going basis, over time these fees will increase the cost of an
investment, and may cost you more than paying other types of sales charges.
While the maximum amount payable under most Funds' Class 2 rule 12b-1 plan is
0.35% per year of a Fund's average net assets, the Board of Trustees has set
the current rate at 0.25%. However, Franklin S&P 500 Index Fund, Franklin
Strategic Income Securities Fund, Templeton Global Asset Allocation Fund,
Templeton Developing Markets Securities Fund, Templeton Foreign Securities Fund
and Templeton Global Income Securities Fund each have a maximum rule 12b-1 plan
fee of 0.25% per year. A portion of the fees payable to Franklin Templeton
Distributors, Inc. (Distributors) or others under the rule 12b-1 plan may be
retained by Distributors for distribution expenses.

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

Questions

3 Franklin Templeton Variable Insurance Products Trust

For More Information

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the Funds, their investments, policies, and
risks. 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) Investments
1-800/321-8563

Investment Company Act file #811-5479

EXHIBIT C

FRANKLIN TECHNOLOGY SECURITIES FUND
(Franklin Templeton Variable Insurance Products Trust)
SUPPLEMENT DATED NOVEMBER 21, 2002
TO THE PROSPECTUS DATED MAY 1, 2002

The prospectus is amended by adding the following language:

On November 12, 2002, the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust (the Trust) approved a proposal to merge Franklin
Technology Securities Fund (Fund) into Franklin Small Cap Fund, another series
of the Trust (Reorganization). If approved by Fund shareholders, the
Reorganization is expected to be completed around April 30, 2003. It is
anticipated that in January of 2003, Fund contract owners of record on
December 27, 2002, will receive a voting instruction card requesting their
instructions to the insurance company shareholders on the Reorganization. A
proxy statement, which explains the details of the Reorganization, will
accompany the voting instruction card. The Fund will close to new investments,
including exchanges into the Fund, effective after the close of business on
April 23, 2003.

Please keep this supplement for future reference.

FT P1102

Prospectus

Franklin Templeton
Variable Insurance
Products Trust

Class 1 Shares

LOGO

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

================================================================================

May 1, 2002
------------------------------------------------------------------

Contents

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST

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

Information about each Fund
you should know before
investing

i Overview

Individual Fund Description

FT-1 Franklin Technology
Securities Fund

Additional Information, All Funds

1 Distributions and Taxes

FUND ACCOUNT INFORMATION

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

Information about Fund
account transactions
and services

2 Buying Shares

2 Selling Shares

2 Exchanging Shares

2 Fund Account Policies

3 Questions

FOR MORE INFORMATION

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

Where to learn more about each Fund

Back Cover

Franklin Templeton

Variable Insurance Products Trust

Overview

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

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

RISKS

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

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

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

Franklin Technology Securities Fund

Goal and Strategies

GOAL The Fund's investment goal is capital appreciation.

MAIN INVESTMENTS Under normal market conditions, the Fund will invest at least
80% of its net assets in investments of companies expected to benefit from the
development, advancement, and use of technology. Shareholders will be given at
least 60 days' advance notice of any change to this 80% policy. The Fund's
investments may include, for example, companies in the following areas:

. Semiconductors, semiconductor fabrication equipment, and precision
instruments;

. Packaged software;

. Information technology services, including Internet services, data
processing, technology consulting and implementation, and electronics
distributors;

. Computing hardware, peripherals, and electronic components;

. Telecommunications, including communications equipment and services;

. Health technology and biotechnology;

. Aerospace and defense technologies; and

. Media and information services, including cable television, broadcasting,
satellite and media content.

The Fund may invest in companies of any size, and may invest a significant
portion of its assets in smaller companies. The Fund may invest up to 35% of
its total assets in foreign securities, but currently intends to limit these
investments to approximately 10%-15%.

When suitable opportunities are available, the Fund also may invest in
initial public offerings (IPOs) of securities, and may invest a very small
portion of its assets in private or illiquid securities, such as late stage
venture capital financings. An equity security represents a proportionate share
of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions. Common and preferred stocks and securities
convertible into common stock are examples of equity securities.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing
niche, proven technology, strong management, and industry leadership are all
factors the manager believes point to strong growth potential.

- --------------------------------------------------------------------------------
The Fund concentrates in equity securities of technology companies.

FT-1 Franklin Technology Securities Fund - Class 1

Main Risks

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

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

STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short term. These price movements may result from factors affecting individual
companies, industries or securities markets.

GROWTH STYLE INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks also may be more expensive
relative to their earnings or assets compared to value or other stocks. Because
the Fund's manager uses an aggressive growth strategy, an investment in the
Fund involves greater risk and more volatility than an investment in a less
aggressive growth fund.

FOREIGN SECURITIES Investing in foreign securities typically involves more
risks than investing in U.S. securities. These risks can increase the potential
for losses in the Fund and may include, among others, currency risks
(fluctuations on currency exchange rates; devaluations by governments; and the
new euro currency), country risks (political, social and economic instability,
for example, regional conflicts, terrorism and war; currency devaluations and
policies that have the effect of limiting or restricting foreign investment or
the movement of assets), and company risks (different trading practices; less
government supervision; less publicly available information; limited trading
markets and greater volatility).

SMALLER COMPANIES While smaller companies may offer opportunities for
capital growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the short term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because borrowing rates go up
and it may be more difficult for them to obtain credit to expand, and their
growth prospects may be less certain.

- --------------------------------------------------------------------------------
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.

FT-2 Franklin Technology Securities Fund - Class 1

DIVERSIFICATION The Fund is non-diversified as defined by federal
securities laws. As such, it may invest a greater portion of its assets in one
issuer and have a smaller number of issuers than a diversified Fund. Therefore,
the Fund may be more sensitive to economic, business, political or other
changes affecting similar issuers or securities. This may result in greater
fluctuation in the value of the Fund's shares. The Fund intends, however, to
meet certain tax diversification requirements.

PORTFOLIO TURNOVER The Fund's portfolio turnover rate may exceed 100%
annually, which may involve additional expenses to the Fund, including
portfolio transaction costs.

More detailed information about the Fund, its policies, and risks can be
found in the SAI.

FT-3 Franklin Technology Securities Fund - Class 1

Past Performance

Franklin Technology Securities Fund Class 1 Annual Total Return

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 2001

Since
Inception
1 Year 5/1/2000
--------------------------------------------------

Franklin Technology -29.42% -31.26%
Securities Fund - Class 1//1//
S&P 500 Index/2/ -11.88% -12.04%
NASDAQ Composite Index/2/ -20.13% -32.90%
Merrill Lynch 100 Technology
Index/2/ -32.44% -42.89%

Ongoing stock market volatility can dramatically change the Fund's
short-term performance; currents results may differ.
1. All Fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. We are
replacing the S&P 500 Index with the NASDAQ Composite Index as the new index
better reflects the Fund's holdings in technology companies. The NASDAQ
Composite Index is a value weighted index and consists of all NASDAQ domestic
and non-U.S. based common stocks listed on The NASDAQ Stock Market. The Merrill
Lynch 100 Technology Index is an equally weighted index of 100 actively traded
technology stocks and American Depositary Receipts. Indexes include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the Fund's investments.

FT-4 Franklin Technology Securities Fund - Class 1

Fees and Expenses

FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 1

SHAREHOLDER FEES
(fees paid directly from your investment)

Class 1
--------------------------------------------------------

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from Fund assets)

Class 1
---------------------------------------------

Management fees 0.55%
Other expenses 0.51%
------
Total annual Fund operating expenses 1.06%
------
Management fee reduction/1/ (0.03%)
------
Net annual Fund operating expenses/1/ 1.03%
------

1. The manager has agreed in advance to reduce its fees to reflect reduced
services resulting from the Fund's investment in a Franklin Templeton money
fund. This reduction is required by the Fund's Board of Trustees (Board) and an
order of the Securities and Exchange Commission (SEC).

EXAMPLE

This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:

.. You invest $10,000 for the periods shown;

.. Your investment has a 5% return each year; and

.. The Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
---------------------------------------

Class 1 $105 $328 $569 $1,259

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

Management

Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo,
California 94403-1906, is the Fund's investment manager.

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

Ian Link, CFA Mr. Link has been a manager of the Fund since its inception, and has been
VICE PRESIDENT, ADVISERS with Franklin Templeton Investments since 1989.

Robert Dean, CFA Mr. Dean has been a manager of the Fund since September 2000. He joined
PORTFOLIO MANAGER, ADVISERS Franklin Templeton Investments in February 1995.

Conrad Herrmann, CFA Mr. Herrmann has been a manager of the Fund since its inception, and has
SENIOR VICE PRESIDENT, ADVISERS been with Franklin Templeton Investments since 1989.

The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal
year ended December 31, 2001, the management fee, before any reduction, was
0.55% of the Fund's average daily net assets. Under an agreement by Advisers to
reduce its fees to reflect reduced services resulting from the Fund's
investment in a Franklin Templeton money fund, the Fund paid 0.52% of its
average daily net assets to Advisers for its services. This reduction is
required by the Board and an SEC order.

FT-5 Franklin Technology Securities Fund - Class 1

Financial Highlights

The financial highlights table provides further details to help you
understand the financial performance of Class 1 shares for the past five years
or since the Fund's inception. The table shows certain information on a single
fund share basis (per share performance). It also shows some key Fund
statistics, such as total return (past performance) and expense ratios. Total
return represents the annual change in value of a share assuming reinvestment
of dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP. Their report, along with the financial statements,
is included in the Fund's Annual Report (available upon request).

Class 1 Year Ended December 31,
-------------------------------------------------------------
2001 2000/3/
-----------------------

Per share data ($)
Net asset value, beginning of year 7.58 10.00
-----------------------
Net operating loss/1/ (.01) (.02)
Net realized and unrealized losses (2.22) (2.40)
-----------------------
Total from investment operations (2.23) (2.42)
-----------------------
Net asset value, end of year 5.35 7.58
-----------------------
Total return (%)/2/ (29.42) (24.20)

Ratios/supplemental data
Net assets, end of year ($ x 1,000) 5,126 9,066
Ratios to average net assets: (%)
Expenses 1.03 .99/4/
Net operating loss (.17) (.30)/4/
Portfolio turnover rate (%) 179.25 106.77

1. Based on average shares outstanding.
2. Total return does not include any fees, charges or expenses imposed by
the variable annuity and life insurance contracts for which the Fund serves as
an underlying investment vehicle. If they had been included, total return would
be lower. Total return is not annualized for periods less than one year.
3. For the period May 1, 2000 (effective date) to December 31, 2000.
4. Annualized.

FT-6 Franklin Technology Securities Fund - Class 1

Additional Information, All Funds

LOGO

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

1 Franklin Templeton Variable Insurance Products Trust

Fund Account Information

LOGO

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

LOGO

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

LOGO

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

LOGO

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

If there is a dealer or other investment representative of record on the
account, he or she will also receive

2 Franklin Templeton Variable Insurance Products Trust

confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.

As of July 1, 2002, the Templeton Global Income Securities Fund also will
not allow investments by market timers.

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

.. Each Fund may refuse any order to buy shares.

. At any time, the Funds may establish or change investment minimums.

. The Funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.

. You may only buy shares of the Funds eligible for sale in your state or
jurisdiction.

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

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

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

LOGO

3 Franklin Templeton Variable Insurance Products Trust

For More Information

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the Funds, their investments, policies, and
risks. 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) Investments
1-800/321-8563

Investment Company Act file #811-5479

EXHIBIT C

FRANKLIN TECHNOLOGY SECURITIES FUND
(Franklin Templeton Variable Insurance Products Trust)
SUPPLEMENT DATED NOVEMBER 21, 2002
TO THE PROSPECTUS DATED MAY 1, 2002

The prospectus is amended by adding the following language:

Please keep this supplement for future reference.

FT P1102

Prospectus

Franklin Templeton
Variable Insurance
Products Trust

Class 2 Shares
May 1, 2002
-------------------------------------------------------------------------------

Franklin(R) Templeton(R) Investments

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

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

Contents

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST

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

Information about each Fund
you should know before
investing

i Overview

Individual Fund Description

FT-1 Franklin Technology
Securities Fund

Additional Information, All Funds

1 Distributions and Taxes

FUND ACCOUNT INFORMATION

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

Information about Fund
account transactions
and services

2 Buying Shares

2 Selling Shares

2 Exchanging Shares

2 Fund Account Policies

3 Questions

FOR MORE INFORMATION

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

Where to learn more about each Fund

Back Cover

Franklin Templeton

Variable Insurance Products Trust

Overview

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

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

RISKS

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

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

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

Franklin Technology Securities Fund

Goals and Strategies

GOAL The Fund's investment goal is capital appreciation.

. Semiconductors, semiconductor fabrication equipment, and precision
instruments;

. Packaged software;

. Information technology services, including Internet services, data
processing, technology consulting and implementation, and electronics
distributors;

. Computing hardware, peripherals, and electronic components;

. Telecommunications, including communications equipment and services;

. Health technology and biotechnology;

. Aerospace and defense technologies; and

. Media and information services, including cable television, broadcasting,
satellite and media content.

PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing
niche, proven technology, strong management, and industry leadership are all
factors the manager believes point to strong growth potential.

- --------------------------------------------------------------------------------
The Fund concentrates in equity securities of technology companies.

FT-1 Franklin Technology Securities Fund - Class 2

Main Risks

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

STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short term. These price movements may result from factors affecting individual
companies, industries or securities markets.

GROWTH STYLE INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks also may be more expensive
relative to their earnings or assets compared to value or other stocks. Because
the Fund's manager uses an aggressive growth strategy, an investment in the
Fund involves greater risk and more volatility than an investment in a less
aggressive growth fund.

FT-2 Franklin Technology Securities Fund - Class 2

PORTFOLIO TURNOVER The Fund's portfolio turnover rate may exceed 100%
annually, which may involve additional expenses to the Fund, including
portfolio transaction costs.

More detailed information about the Fund, its policies, and risks can be
found in the SAI.

FT-3 Franklin Technology Securities Fund - Class 2

Past Performance

Franklin Technology Securities Fund Class 2 Annual Total Returns 1

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 2001

Since
Inception
1 Year 5/1/2000
------------------------------------------------

Franklin Technology Securities
Fund - Class 2/1/ -29.59% -31.42%
S&P 500 Index/2/ -11.88% -12.04%
NASDAQ Composite Index/2/ -20.13% -32.90%
Merrill Lynch 100 Technology
Index/2/ -32.44% -42.89%

Ongoing stock market volatility can dramatically change the Fund's
short-term performance; current results may differ.
1. All Fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were not offered until 9/1/00, Class 2 Fund performance
for prior periods represents the historical results of Class 1 shares. For
periods beginning on 9/1/00, Class 2's results reflect an additional 12b-1 fee
expense, which also affects future performance.
2. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. We are
replacing the S&P 500 Index with the NASDAQ Composite Index as the new index
better reflects the Fund's holdings in technology companies. The NASDAQ
Composite Index is a value weighted index and consists of all NASDAQ domestic
and non-US based common stocks listed on the NASDAQ Stock Market. The Merrill
Lynch 100 Technology Index is an equally weighted index of 100 actively traded
technology stocks and American Depositary Receipts. Indexes include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the Fund's investments.

FT-4 Franklin Technology Securities Fund - Class 2

Fees and Expenses

FRANKLIN TECHNOLOGY SECURITIES FUND -CLASS 2

SHAREHOLDER FEES
(fees paid directly from your investment)

Class 2
--------------------------------------------------------

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

ANNUAL FUND OPERATING EXPENSES
(expenses deducted from Fund assets)

Class 2
------------------------------------------------

Management fees 0.55%
Distribution and service (12b-1) fees/1/ 0.25%
Other expenses 0.51%
------
Total annual Fund operating expenses 1.31%
------
Management fee reduction/2/ (0.03%)
------
Net annual Fund operating expenses/2/ 1.28%
------

1. While the maximum amount payable under the Fund's Class 2 rule 12b-1 plan
is 0.35% per year of the Fund's average daily net assets, the Fund's Board of
Trustees (Board) has set the current rate at 0.25% per year.
2. The manager has agreed in advance to reduce its fees to reflect reduced
services resulting from the Fund's investment in a Franklin Templeton money
fund. This reduction is required by the Board and an order of the Securities
and Exchange Commission (SEC).

EXAMPLE

This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:

.. You invest $10,000 for the periods shown;

.. Your investment has a 5% return each year; and

.. The Fund's operating expenses remain the same.

Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
---------------------------------------

Class 2 $130 $406 $702 $1,546

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

Management

Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo,
California 94403-1906, is the Fund's investment manager.

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

Ian Link, CFA Mr. Link has been a manager of the Fund since its inception, and has been
VICE PRESIDENT, ADVISERS with Franklin Templeton Investments since 1989.

Robert Dean, CFA Mr. Dean has been a manager of the Fund since September 2000. He joined
PORTFOLIO MANAGER, ADVISERS Franklin Templeton Investments in February 1995.

Conrad Herrmann, CFA Mr. Herrmann has been a manager of the Fund since its inception, and has
SENIOR VICE PRESIDENT, ADVISERS been with Franklin Templeton Investments since 1989.

FT-5 Franklin Technology Securities Fund - Class 2

Financial Highlights

The financial highlights table provides further details to help you
understand the financial performance of Class 2 shares for the past five years
or since the Fund's inception. The table shows certain information on a single
Fund share basis (per share performance). It also shows some key Fund
statistics, such as total return (past performance) and expense ratios. Total
return represents the annual change in value of a share assuming reinvestment
of dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, is included in the Fund's Annual Report (available upon
request).

Year ended
Class 2 December 31,
--------------------------------------------------------
2001 2000/3/
------ ------

Per share data ($)
Net asset value, beginning of year 7.57 13.13
------ ------
Net operating loss/1/ (.03) (.01)
Net realized and unrealized losses (2.21) (5.55)
------ ------
Total from investment operations (2.24) (5.56)
------ ------
Net asset value, end of year 5.33 7.57
------ ------
Total return (%)/2/ (29.59) (42.35)

Ratios/supplemental data
Net assets, end of year ($ x 1,000) 8,740 1,855
Ratios to average net assets: (%)
Expenses 1.28 1.24/4/
Net operating loss (.52) (.29)/4/
Portfolio turnover rate (%) 179.25 106.77

1. Based on average shares outstanding.
2. Total return does not include any fees, charges or expenses imposed by
the variable annuity and life insurance contracts for which the Fund serves as
an underlying investment vehicle. If they had been included, total return would
be lower. Total return is not annualized for periods less than one year.
3. For the period September 1, 2000 (commencement of sales) to December 31,
2000.
4. Annualized.

FT-6 Franklin Technology Securities Fund - Class 2

Additional Information, All Funds

Distribution and Taxes

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

1 Franklin Templeton Variable Insurance Products Trust

Fund Account Information

Buying Shares

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

Selling Shares

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

Exchanging Shares

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

Fund Account Policies

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

STATEMENTS AND REPORTS Contract owners will receive confirmations and
account statements that show account transactions. Insurance company contract
owners will receive the Funds' financial reports every six months from their
insurance company.

If there is a dealer or other investment representative of record on the
account, he or she will also receive

2 Franklin Templeton Variable Insurance Products Trust

confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.

As of July 1, 2002, the Templeton Global Income Securities Fund also will
not allow investments by market timers.

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

.. Each Fund may refuse any order to buy shares.

. At any time, the Funds may establish or change investment minimums.

. The Funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.

. You may only buy shares of the Funds eligible for sale in your state or
jurisdiction.

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

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

SHARE CLASSES Each Fund generally has two classes of shares, Class 1 and
Class 2. Each class is identical except that Class 2 has a distribution plan or
"rule 12b-1" plan which is described below.

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

Questions

3 Franklin Templeton Variable Insurance Products Trust

For More Information

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

ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION

Contains more information about the Funds, their investments, policies, and
risks. 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) Investments
1-800/321-8563

Investment Company Act file #811-5479

EXHIBIT D

Annual

December 31, 2001

Report

FRANKLIN TEMPLETON

VARIABLE INSURANCE

PRODUCTS TRUST

[LOGO OF FRANKLIN TEMPLETON INVESTMENTS]

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ANNUAL REPORT
TABLE OF CONTENTS

Letter to Contract Owners...................... 2
A Word About Risk.............................. 5
Important Notes to Performance Information..... 6
Fund Summary
Franklin Small Cap Fund....................... FS-1
Report of Special Meeting of Shareholders...... R-1
Index Descriptions............................. I-1
Trustees and Officers.......................... TO-1

Thank you for investing with Franklin Templeton Variable Insurance Products
Trust. We encourage our investors to maintain a long-term perspective, and
remember that all securities markets move both up and down, as do fund unit
prices. We appreciate your past support and look forward to serving your
investment needs in the years ahead.

Please Note: Franklin Templeton Variable Insurance Products Trust (FTVIP)
currently consists of 27 separate funds, which generally offer Class 1 and
Class 2 shares. Please consult your contract prospectus for the most current
information on which funds and classes are available in that product.

Please retain this document, including the enclosed prospectus supplements,
with your current prospectus, for reference.

LETTER TO CONTRACT OWNERS

Dear Contract Owners:

This annual report for Franklin Templeton Variable Insurance Products Trust
covers the year ended December 31, 2001. During the 12 months under review,
gross domestic product (GDP) slowed from a respectable 1.3% annualized growth
rate in the first quarter to an estimated 0.2% in the fourth quarter of 2001.
Indeed, the National Bureau of Economic Research signaled that the country had
been in a recession since March 2001. The year 2001 witnessed a series of
developments that contributed to the
national and global economic slowdown. Significant, broad-based and sustained
downward trends in economic activity were largely to blame, with substantial
declines in industrial production, employment opportunities and consumer and
business spending. In the wake of these events, business and consumer
confidence plummeted to multi-year lows. The terrorist attacks of September 11,
which temporarily shut down the U.S. financial system and air transportation
industry, and the ensuing war clearly accelerated the contraction. Before the
year's end, however, figures reflecting controlled inflation, reduced energy
costs and a post-September 11 rally in the equity markets helped shed
positive light on a difficult year.

Eleven interest rate reductions by the Federal Reserve Board (the Fed)
lowered the federal funds target rate from 6.50% at the beginning of the year
to 1.75% by December 31, 2001 -- a low not seen since 1961. As a result, the
increases in the money supply encouraged bank lending. As often happens when
the economy struggles, inflation became less of a threat, principally due to
reduced demand for energy, which caused crude oil prices to slip to a two-year
low in November. Inflation, as measured by the Consumer Price Index, rose just
1.9% for the year, compared with the 3.5% increase in 2000.

The decline in U.S. growth affected Europe's, Asia's and Latin America's
growth rates as these regions' export demand diminished. Euro-zone (the 12
countries comprising the European Monetary Union) GDP growth slowed to a 0.1%
annualized rate in the third quarter of 2001. In response, the European Central
Bank also cut interest rates during the year, although at a slower pace than
the U.S. Fed's. Despite Japan's massive fiscal spending and a return to a zero
interest-rate policy by its central bank, the country's structural problems
remained. Asia's export dependent economies suffered directly from the U.S.
technology

slowdown, as worldwide industrial production declined during the period. One
exception was China; its economy continued robust growth. In Latin America,
Argentina's economic woes worsened despite the government's efforts to control
its debt crisis. During the reporting period, Mexico's economy slowed in tandem
with that of the U.S., although the Mexican equity market was the best
performing Latin American market.

U.S. securities markets struggled for most of 2001 and experienced mixed
results in response to the war on terrorism, the Fed's actions and worsening
corporate and economic data. Following the September 11 attacks, investors'
risk aversion increased and many consumers retrenched owing to increased
uncertainty about personal safety and current income. By the end of 2001's
third quarter, this sentiment caused domestic equity markets to plunge, on a
percentage basis, to their heaviest quarterly losses since the crash of 1987.
In December, however, the equity markets demonstrated some positive signs of
recovery. At the close of the year, the Standard & Poor's 500 Composite
Index (S&P 500(R)), the Dow Jones Industrial Average (the Dow(R)) and the
Nasdaq Composite Index (Nasdaq(R)) were up 19%, 22% and 37%, respectively, from
September 21 lows. For the 12 months under review, the indexes returned
- -11.88%, -5.46% and -20.13%, respectively./1 /Value investments generally
outperformed growth investments, continuing the trend begun in 2000.
Additionally, small companies outperformed large companies during the reporting
period.

In the U.S., bonds generally outperformed the major stock markets, as
falling interest rates resulted in rising prices. Although they experienced
considerable volatility, high yield corporate bonds, under pressure from
slowing corporate growth and rising default rates, did not keep pace with other
fixed income asset classes. International bond markets enjoyed positive returns
in local currency terms, as most major central banks lowered interest rates.
Emerging market bond prices, excluding Argentina's, benefited from relatively
sound economic policies in most countries.

Although the exact timing of the expected economic recovery is difficult to
determine, there are very clear sources of economic stimulus in the pipeline.
Most notably, the fiscal and monetary response has been

1. Source: Standard & Poor's Micropal. Total return for the Dow, calculated
by Wilshire Associates, Inc., includes reinvested dividends. One cannot invest
directly in an index. Please see Index Descriptions following the Fund
Summaries.

powerful. The housing sector remained a stable force as housing starts
continued to climb. Mortgage refinancing rose to an all-time high, as
homeowners rushed to take advantage of historically low mortgage rates. These
conditions and measures should put more money in consumers' pockets. Meanwhile,
corporations with floating rate debt outstanding benefited from sharp interest
rate reductions for their loans. At year-end, announcements of business
inventory reduction and information-technology related productivity growth
increases also contributed to the encouraging news.

It is important to remember, of course, that securities markets always have
been, and always will be, subject to volatility. No one can predict exactly how
they will perform in the future. For this reason, we urge you to focus on your
long-term retirement and investment goals. As always, we appreciate your
support, welcome your questions and comments, and look forward to serving your
investment needs in the years ahead.

Sincerely,

LOGO
Rupert H. Johnson, Jr.
Vice President
Franklin Templeton Variable Insurance Products Trust

A WORD ABOUT RISK

All of the funds are subject to certain risks, which will cause investment
returns and the value of your principal to increase or decrease. Gen-
erally, investments offering the potential for higher returns are
accompanied by a higher degree of risk. Stocks and other equities,
representing an ownership interest in an individual company, his-
torically have outperformed other asset classes over the long term, but tend to
fluctuate more dramatically over the shorter term. Securities of smaller
companies, and companies involved in reorganization or
bankruptcy, may have greater price swings and greater credit and other risks.
The technology sector can be among the most volatile market
sectors.

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

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

IMPORTANT NOTES TO
PERFORMANCE INFORMATION

Total return of the funds is the percentage change in value of a hypothetical
$10,000 investment over the indicated periods and includes reinvestment of
dividends and capital gains. Inception dates of the funds may have preceded the
effective dates of the subaccounts,
contracts, or their availability in all states. Performance data is historical
and cannot predict or guarantee future results. Principal value and
investment return will fluctuate with market conditions, and you may have a
gain or loss when you withdraw your money.

When reviewing the index comparisons, please keep in mind that indexes have
a number of inherent performance differentials over the funds. First, unlike
the funds, which must hold a minimum amount of cash to maintain liquidity,
indexes do not have a cash component. Second, the funds are actively managed
and, thus, are subject to management fees to cover salaries of securities
analysts or portfolio managers in addition to other expenses. Indexes are
unmanaged and do not include any commissions or other expenses typically
associated with investing in securities. Third, indexes often contain a
different mix of securities than the fund to which they are compared.
Additionally, please remember that indexes are simply a measure of performance
and cannot be invested in directly.

FRANKLIN SMALL CAP FUND

- --------------------------------------------------------------------------------
Fund Goal and Primary Investments: Franklin Small Cap Fund seeks long-term
capital growth. The Fund invests primarily in equity securities of U.S.
small-capitalization companies with market capitalization values not exceeding:
(i) $1.5 billion; or (ii) the highest market capitalization value in the
Russell 2000 Index; whichever is greater, at the time of purchase./1/

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

The 12-month period under review was extremely challenging and disappointing
for the global economy and most equity investors. Excessive corporate
investment in the late 1990s contributed to industrial overcapacity, especially
in telecommunications, information technology and transportation. As the
economy began decelerating in 2000, the excess capacity severely depressed
corporate profitability. In an effort to reduce this surplus capacity,
corporations began idling operations and significantly cutting back on
employment. Although most of the capacity reductions were finished by year-end,
the devastating employment declines continued to ripple through all segments of
the economy.

To combat the reductions in output and employment, the Federal Reserve Board
(the Fed) took aggressive and preemptive actions by cutting its key federal
funds target rate from 6.50% at the beginning of the period to 1.75% by
December 31, 2001. Concurrently, energy prices declined appreciably. These
reductions in borrowing costs and energy costs, combined with tax cuts, would
normally act to restart economic growth. However, the terrorist attacks of
September 11 significantly complicated the recovery process. Due to these
events, an economic rebound may be further delayed by the tragic loss of life,
the added costs of domestic security and the distraction of the terrible events
and ensuing war.

The equity markets were extremely volatile during the 12 months under review,
reflecting the economic uncertainty. Although there were powerful growth stock
rallies in January and April, both were followed by declines that left growth
stocks even lower than before. The terrorist attacks prompted the year's
steepest and most profound decline in late September. Throughout 2001,
investors rotated frequently between sectors as they alternatively sought
refuge from risk or exposure to a

1. Source: Standard & Poor's Micropal. Please see Index Descriptions
following the Fund Summaries. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.

Top 10 Sectors/Industries
Franklin Small Cap Fund
12/31/01

% of Total
Net Assets
---------------------------------

Electronic Technology 21.0%...

Technology Services 11.5%...

Finance 8.8%....

Health Technology 6.8%....

Producer Manufacturing 5.5%....

Consumer Services 4.3%....

Industrial Services 3.5%....

Transportation 3.3%....

Communications 2.4%....

Consumer Non-Durables 2.0%....

FS-1

rebounding economy. In aggregate, though, investors retreated to familiar areas
from more arcane ones like technology and biotech-
nology. The small-cap market's best performing sectors were the
slower growth sectors that fulfill consumers everyday needs, namely retailers,
lenders, insurers, homebuilders, alcoholic beverages, food processors,
recreational product suppliers and health care services.

Against the backdrop of an uncertain economy and volatile equity markets,
the Fund performed poorly on absolute and relative bases for the year. The Fund
trailed its benchmark, the Russell 2500 Growth Index, which declined 10.83%./1/
The Fund's negative performance was largely a result of our overweighted
positions in poorly performing sectors such as software, communications
services and telecom-
munications equipment, while being underweighted in the consumer-oriented
and health care sectors. Investments in financials, energy and transportation
benefited the Fund's performance but could not offset the damage done by
technology.

Historically, we have consistently favored investments in sectors that
typically have high long-term growth rates, such as technology and business
services. However, despite these sectors' high long-term growth rates, their
short-term growth rates turned steeply negative in late 2000 as the economy
began tipping into recession and the sectors grappled with their overcapacity.
Although we reduced our exposure to tech-
nology in late 1999 and 2000, we did not decrease it enough. How-
ever, in late September, we invested in select technology stocks in
addition to media, business services and lodging stocks that yielded profitable
returns. Although the September purchases were positive for the Fund, many
similar, earlier investments were unprofitable, hamper-
ing the Fund's performance.

Top 10 Holdings
Franklin Small Cap Fund
12/31/01

Company
Sector/Industry, % of Total
Country Net Assets
------------------------------------

Affiliated Computer
Services Inc., A 2.1%
Technology Services, U.S.

McDATA Corp., A 1.5%
Electronic Technology,
U.S.

Gentex Corp. 1.4%
Producer Manufacturing,
U.S.

Mettler-Toledo
International Inc. 1.3%
Producer Manufacturing,
Switzerland

Expeditors International
of Washington Inc. 1.2%
Transportation, U.S.

Tektronix Inc. 1.1%
Electronic Technology,
U.S.

Micrel Inc. 1.0%
Electronic Technology,
U.S.

Varian Inc. 0.9%
Producer Manufacturing,
U.S.

Hispanic Broadcasting
Corp., A 0.9%
Consumer Services, U.S.

C.H. Robinson
Worldwide Inc. 0.9%
Transportation, U.S.

The dollar value, number of shares or principal value, and complete legal
titles of all portfolio holdings are listed in the Fund's Statement of
Investments.

FS-2

We regret that in 2001 we did not invest enough in defensive sectors but
invested too much and too early in sectors that should benefit from an economic
rebound. Such a strategy clearly resulted in poor absolute and relative
performance throughout the first three quarters of the year. It was only in the
fourth quarter that the Fund was able to benefit from the equity market's
enthusiasm for an economic recovery. We are indeed hopeful that such an
economic recovery is commencing and believe the Fund is positioned to benefit
from economic growth. Although we recognize that equity market volatility will
persist until there is clear evidence of an economic turnaround, we are
confident that the economy will respond favorably to tax cuts, the proactive
Fed policy, lower energy costs and a hoped-for successful end to the Afghan
conflict.

This discussion reflects our views, opinions and portfolio holdings as of
December 31, 2001, the end of the reporting period. These opinions may not be
relied upon as investment advice or an offer for a particular security. The
information provided is not a complete analysis of every aspect of any
country, industry, security or the Fund. Our strategies and the Fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.

Franklin Small Cap Fund buys small cap stocks that the managers believe will
appreciate in value. When our strategy is successful, our small cap holdings
grow to be mid- and sometimes large-cap stocks. For this reason, the Fund's
average market cap has tended to grow as many holdings in excellent small-cap
companies have grown, sometimes dramatically. Given the Fund's strategy, the
managers believe the Fund's average market cap has ranged, and likely will
continue to range, from small to mid cap.

FS-3

PERFORMANCE SUMMARY AS OF 12/31/01

Total return of Class 1 shares represents the cumulative or average annual
change in value, assuming reinvestment of dividends and capital gains. Average
returns smooth out variations in returns, which can be significant; they are
not the same as year-by-year results.

Franklin Small Cap Fund - Class 1
Periods ended 12/31/01

Since
Inception
1-Year 5-Year (11/1/95)
-----------------------------------------------------

Cumulative Total Return -15.02% +66.20% +119.45%
Average Annual Total Return -15.02% +10.69% +13.59%
Value of $10,000 Investment $8,498 $16,620 $21,945

Ongoing stock market volatility can dramatically change the Fund's
short-term performance; current results may differ.

Total Return Index Comparison for $10,000 Investment (11/1/95-12/31/01)

The graph compares the performance of Franklin Small Cap Fund - Class 1, the
Standard & Poor's 500 Index and the Russell 2500 Growth Index. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio. Please see Important Notes to Performance Information preceding the
Fund Summaries.

GRAPHIC MATERIAL (24)
This graph compares the performance of Franklin Small Cap Fund - Class 1 as
tracked by the growth in value of a $10,000 investment to that of the Standard &
Poor's 500 Index* and the Russell 2500 Growth Index* from 11/1/95-12/31/01.

Franklin Small Cap Russell 2500
Fund - Class I S&P 500 Growth Index
- ----------------------------------------------------------------------------

11/01/1995 $10,000 $10,000 $10,000
11/30/1995 -3.00% $ 9,700 4.38% $10,438 4.09% $10,409
12/31/1995 5.46% $10,230 1.93% $10,639 1.33% $10,547
01/31/1996 1.37% $10,370 3.40% $11,001 0.31% $10,580
02/29/1996 4.63% $10,850 0.93% $11,104 4.40% $11,046
03/31/1996 2.67% $11,140 0.96% $11,210 2.17% $11,285
04/30/1996 9.96% $12,249 1.47% $11,375 6.85% $12,058
05/31/1996 4.16% $12,759 2.57% $11,667 3.57% $12,489
06/30/1996 -4.75% $12,153 0.38% $11,712 -5.01% $11,863
07/31/1996 -9.05% $11,053 -4.42% $11,194 -9.94% $10,684
08/31/1996 9.59% $12,113 2.11% $11,430 6.89% $11,420
09/30/1996 4.46% $12,653 5.62% $12,072 5.31% $12,027
10/31/1996 -1.98% $12,402 2.76% $12,406 -3.11% $11,653
11/30/1996 4.52% $12,963 7.55% $13,342 3.67% $12,080
12/31/1996 1.85% $13,203 -1.98% $13,078 0.49% $12,139
01/31/1997 2.20% $13,493 6.24% $13,894 2.99% $12,502
02/28/1997 -4.67% $12,863 0.79% $14,004 -4.38% $11,955
03/31/1997 -7.08% $11,952 -4.10% $13,430 -6.58% $11,168
04/30/1997 0.67% $12,033 5.96% $14,230 0.45% $11,218
05/31/1997 14.21% $13,742 6.08% $15,095 11.99% $12,563
06/30/1997 3.82% $14,267 4.48% $15,772 3.35% $12,984
07/31/1997 6.35% $15,173 7.95% $17,026 6.35% $13,809
08/31/1997 1.02% $15,328 -5.60% $16,072 2.44% $14,146
09/30/1997 9.68% $16,812 5.47% $16,951 7.06% $15,144
10/31/1997 -4.23% $16,101 -3.34% $16,385 -6.24% $14,199
11/30/1997 -2.37% $15,719 4.63% $17,144 -1.53% $13,982
12/31/1997 -1.38% $15,502 1.72% $17,439 -0.36% $13,932
01/31/1998 -0.40% $15,440 1.10% $17,630 -1.31% $13,749
02/28/1998 7.87% $16,655 7.21% $18,902 8.58% $14,929
03/31/1998 3.96% $17,315 5.12% $19,869 3.71% $15,483
04/30/1998 1.43% $17,562 1.01% $20,070 0.91% $15,624
05/31/1998 -7.10% $16,316 -1.72% $19,725 -6.42% $14,621
06/30/1998 0.05% $16,324 4.06% $20,526 0.73% $14,727
07/31/1998 -9.80% $14,724 -1.06% $20,308 -7.45% $13,630
08/31/1998 -23.48% $11,267 -14.44% $17,376 -22.72% $10,533
09/30/1998 9.53% $12,341 6.41% $18,489 8.77% $11,457
10/31/1998 6.53% $13,146 8.13% $19,993 6.75% $12,231
11/30/1998 7.57% $14,142 6.06% $21,204 7.11% $13,100
12/31/1998 8.54% $15,349 5.76% $22,425 9.63% $14,362
01/31/1999 4.23% $15,998 4.18% $23,363 2.89% $14,777
02/28/1999 -8.60% $14,623 -3.11% $22,636 -8.11% $13,578
03/31/1999 5.51% $15,428 4.00% $23,542 4.66% $14,211
04/30/1999 7.83% $16,636 3.87% $24,453 7.98% $15,345
05/31/1999 -0.20% $16,603 -2.36% $23,876 1.03% $15,503
06/30/1999 7.68% $17,878 5.55% $25,201 7.07% $16,599
07/31/1999 -0.01% $17,876 -3.12% $24,414 -2.04% $16,261
08/31/1999 1.38% $18,123 -0.50% $24,292 -2.16% $15,909
09/30/1999 3.60% $18,776 -2.74% $23,627 0.72% $16,024
10/31/1999 11.98% $21,025 6.33% $25,122 4.87% $16,804
11/30/1999 16.64% $24,523 2.03% $25,632 11.81% $18,789
12/31/1999 23.26% $30,228 5.89% $27,142 18.86% $22,333
01/31/2000 -2.94% $29,339 -5.02% $25,780 -0.56% $22,208
02/29/2000 26.04% $36,979 -1.89% $25,292 25.65% $27,904
03/31/2000 -8.34% $33,895 9.78% $27,766 -7.85% $25,713
04/30/2000 -10.87% $30,210 -3.01% $26,930 -9.74% $23,209
05/31/2000 -5.99% $28,401 -2.05% $26,378 -8.90% $21,143
06/30/2000 13.43% $32,215 2.47% $27,030 13.22% $23,938
07/31/2000 -5.43% $30,466 -1.56% $26,608 -8.19% $21,978
08/31/2000 10.57% $33,686 6.21% $28,260 13.03% $24,842
09/30/2000 -3.75% $32,423 -5.28% $26,768 -6.47% $23,234
10/31/2000 -7.38% $30,030 -0.42% $26,656 -6.18% $21,798
11/30/2000 -19.46% $24,186 -7.88% $24,555 -19.05% $17,646
12/31/2000 6.73% $25,814 0.49% $24,676 6.20% $18,740
01/31/2001 4.61% $27,004 3.55% $25,552 6.48% $19,954
02/28/2001 -16.01% $22,680 -9.11% $23,224 -15.43% $16,875
03/31/2001 -9.64% $20,494 -6.33% $21,754 -11.06% $15,009
04/30/2001 12.80% $23,117 7.76% $23,442 15.24% $17,296
05/31/2001 0.05% $23,129 0.67% $23,599 2.90% $17,798
06/30/2001 -0.82% $22,939 -2.43% $23,025 2.26% $18,200
07/31/2001 -4.90% $21,815 -0.98% $22,800 -7.37% $16,859
08/31/2001 -6.16% $20,471 -6.25% $21,375 -6.65% $15,738
09/30/2001 -13.54% $17,700 -8.07% $19,650 -15.66% $13,273
10/31/2001 8.69% $19,238 1.91% $20,025 9.86% $14,582
11/30/2001 9.07% $20,983 7.67% $21,561 8.64% $15,842
12/31/2001 4.54% $21,945 0.88% $21,751 5.48% $16,710

Total Return 119.45% 117.51% 67.10%

* Source: Standard & Poor's Micropal. Please see Index Descriptions
following the Fund Summaries.

Franklin Small Cap Fund - Class 1

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

Since markets can go down as well as up, investment return and the value of
your principal will fluctuate with market conditions, and you may have a gain
or loss when you sell your shares.

FS-4
Past performance does not guarantee future results.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Highlights

Class 1
--------------------------------------------
Year Ended December 31,
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------

Per share operating performance
(For a share outstanding throughout the year)
Net asset value, beginning of year........... $21.25 $26.87 $13.72 $15.05 $13.20
--------------------------------------------
Income from investment operations:
Net investment income (loss)/a/............ .09 .11 (.01) .07 .01
Net realized and unrealized gains (losses). (3.28) (3.81) 13.25 (.20) 2.24
--------------------------------------------
Total from investment operations............. (3.19) (3.70) 13.24 (.13) 2.25
--------------------------------------------
Less distributions from:
Net investment income...................... (.09) -- (.08) (.01) (.03)
Net realized gains......................... -- (1.92) (.01) (1.19) (.37)
--------------------------------------------
Total distributions.......................... (.09) (1.92) (.09) (1.20) (.40)
--------------------------------------------
Net asset value, end of year................. $17.97 $21.25 $26.87 $13.72 $15.05
--------------------------------------------

Total return/b/.............................. (15.02)% (14.60)% 96.94% (.98)% 17.42%

Ratios/supplemental data
Net assets, end of year (000's).............. $266,694 $387,474 $488,062 $315,460 $313,462
Ratios to average net assets:
Expenses................................... .76% .75% .77% .77% .77%
Net investment income (loss)............... .50% .42% (.05)% .51% .06%
Portfolio turnover rate...................... 37.94% 19.49% 39.49% 53.01% 64.07%

/a/Based on average shares outstanding effective year ended December 31, 1999.
/b/Total return does not include any fees, charges or expenses imposed by the
variable annuity and life insurance contracts for which the Franklin
Templeton
Variable Insurance Products Trust serves as an underlying investment vehicle.
Total return is not annualized for periods less than one year.

FS-5

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Highlights (continued)

Class 2
-------------------------
Year Ended December 31,
-------------------------
2001 2000 1999/d/

-------------------------
Per share operating performance
(For a share outstanding throughout the year)
Net asset value, beginning of year........... $21.14 $26.80 $ 14.25
-------------------------
Income from investment operations:
Net investment income (loss)/a/............ .03 .12 (.04)
Net realized and unrealized gains (losses). (3.25) (3.86) 12.68
-------------------------
Total from investment operations............. (3.22) (3.74) 12.64
-------------------------
Less distributions from:
Net investment income...................... (.07) -- (.08)
Net realized gains......................... -- (1.92) (.01)
-------------------------
Total distributions.......................... (.07) (1.92) (.09)
-------------------------
Net asset value, end of year................. $17.85 $21.14 $ 26.80
-------------------------

Total return/b/.............................. (15.25)% (14.76)% 89.05%

Ratios/supplemental data
Net assets, end of year (000's).............. $401,663 $301,420 $6,156
Ratios to average net assets:
Expenses................................... 1.01% 1.00% 1.02%/c/
Net investment income...................... .19% .49% (.18%)/c/
Portfolio turnover rate...................... 37.94% 19.49% 39.49%

/a/Basedon average shares outstanding.
/b/Totalreturn does not include any fees, charges or expenses imposed by the
variable annuity and life insurance contracts for which the Franklin
Templeton Variable Insurance Products Trust serves as an underlying
investment vehicle. Total return is not annualized for periods less
than one year.
/c/Annualized
/d/Forthe period January 6, 1999 (effective date) to December 31, 1999.

FS-6
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001

SHARES VALUE
-----------------------------------------------------------------------

Common Stocks 79.1%
/a /Commercial Services 1.8%
Answerthink Inc................................... 138,900 $ 907,017
Corporate Executive Board Co...................... 29,400 1,078,980
DoubleClick Inc................................... 188,700 2,139,858
Ecometry Corp..................................... 7,400 19,314
Interep National Radio Sales Inc.................. 24,800 116,560
Lamar Advertising Co., A.......................... 32,000 1,354,880
Learning Tree International Inc................... 52,000 1,450,800
Maximus Inc....................................... 20,200 849,612
ProBusiness Services Inc.......................... 103,000 1,936,400
Resources Connection Inc.......................... 71,500 1,882,595
Robert Half International Inc..................... 19,000 507,300
------------
12,243,316
------------
Communications 2.4%
/a/Airgate PCS Inc................................ 58,500 2,664,675
/a/Alamosa Holdings Inc........................... 22,300 266,039
/a/Alaska Communications Systems Holdings Inc..... 86,900 692,593
/a/Allegiance Telecom Inc......................... 26,000 215,540
/a/AT&T Canada Inc., B (Canada)................... 13,600 410,584
CenturyTel Inc.................................... 40,900 1,341,520
/a/Leap Wireless International Inc................ 14,500 304,065
/a/Millicom International Cellular SA (Luxembourg) 39,900 484,785
/a/Rural Cellular Corp., A........................ 88,900 1,978,025
/a/TeleCorp PCS Inc............................... 262,900 3,278,363
/a/UbiquiTel Inc.................................. 214,500 1,598,025
/a/US Unwired Inc., A............................. 37,600 382,768
/a/Western Wireless Corp., A...................... 86,100 2,432,325
------------
16,049,307
------------
Consumer Durables .7%
The Black & Decker Corp........................... 130,000 4,904,900
------------
Consumer Non-Durables 2.0%
Adolph Coors Co., B............................... 81,500 4,352,100
/a/Dean Foods Inc................................. 20,900 1,425,380
/a/Jones Apparel Group Inc........................ 34,200 1,134,414
/a/Timberland Co., A.............................. 90,000 3,337,200
/a/Tommy Hilfiger Corp............................ 144,900 1,992,375
Wolverine World Wide Inc.......................... 84,800 1,276,240
------------
13,517,709
------------
/a /Consumer Services 4.3%
Brinker International Inc......................... 49,000 1,458,240
CEC Entertainment Inc............................. 25,000 1,084,750
Cox Radio Inc., A................................. 20,974 534,418
Cumulus Media Inc., A............................. 71,900 1,163,342
DeVry Inc......................................... 67,800 1,928,910
Entercom Communications Corp...................... 37,300 1,865,000
Entravision Communications Corp................... 285,900 3,416,505
Hispanic Broadcasting Corp., A.................... 248,100 6,326,550
Insight Communications Co. Inc., A................ 90,400 2,184,064
Jack in the Box Inc............................... 72,200 1,988,388
Mediacom Communications Corp., A.................. 184,400 3,367,144

FS-7

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
------------------------------------------------------------------

Common Stocks (cont.)
Consumer Services (cont.)
MeriStar Hotels & Resorts Inc................ 50,800 $ 35,052
Radio One Inc................................ 39,500 729,565
Radio One Inc., D............................ 42,900 772,629
Ticketmaster Inc., B......................... 107,325 1,759,057
------------
28,613,614
------------
Distribution Services 1.0%
Aramark Corp., B............................. 10,000 269,000
Fleming Cos. Inc............................. 200,000 3,700,000
/a/Performance Food Group Co................. 70,000 2,461,900
------------
6,430,900
------------
Electronic Technology 21.0%
/a/Advanced Energy Industries Inc............ 72,500 1,931,400
/a/Advanced Fibre Communications Inc......... 76,500 1,351,755
/a/Aeroflex Inc.............................. 31,500 596,295
/a/Alpha Industries Inc...................... 60,700 1,323,260
/a/Anaren Microwave Inc...................... 240,200 4,160,264
/a/Applied Micro Circuits Corp............... 78,988 894,144
/a,b/Auspex Systems Inc...................... 116,889 210,400
/a/Avocent Corp.............................. 72,349 1,754,463
/a/AXT Inc................................... 9,100 131,313
/a/Caliper Technologies Corp................. 50,000 780,500
/a/Catapult Communications Corp.............. 38,600 1,005,916
/a/Celestica Inc. (Canada)................... 6,900 278,691
/a/Centillium Communications Inc............. 46,800 367,848
/a/Cirrus Logic Inc.......................... 136,000 1,797,920
/a/Coherent Inc.............................. 90,400 2,795,168
/a/Credence Systems Corp..................... 53,600 995,352
/a/DDI Corp.................................. 320,000 3,148,800
/a/DMC Stratex Networks Inc.................. 61,100 475,358
/a/DRS Technologies Inc...................... 106,400 3,793,160
/a/EMCORE Corp............................... 89,200 1,199,740
/a/Flextronics International Ltd. (Singapore) 170,472 4,089,623
/a/FLIR Systems Inc.......................... 51,500 1,952,880
/a/Gemstar-TV Guide International Inc........ 80,000 2,216,000
/a/Harmonic Inc.............................. 28,000 336,560
/a/Integrated Circuit Systems Inc............ 180,500 4,077,495
/a/Intersil Corp............................. 103,800 3,347,550
/a/Ixia...................................... 1,600 20,560
/a/Jabil Circuit Inc......................... 156,600 3,557,952
/a/L-3 Communications Holdings Inc........... 57,200 5,148,000
/a/Lam Research Corp......................... 172,500 4,005,450
/a/Lattice Semiconductor Corp................ 219,000 4,504,830
/a/McDATA Corp., A........................... 415,000 10,167,500
/a/Micrel Inc................................ 247,800 6,499,794
/a/Nanometrics Inc........................... 11,000 213,400
/a/Novellus Systems Inc...................... 128,500 5,069,325
/a/ONI Systems Corp.......................... 79,500 498,465
PerkinElmer Inc.............................. 90,459 3,167,874
/a/Pinnacle Systems Inc...................... 43,000 341,420
/a/PMC-Sierra Inc. (Canada).................. 166,502 3,539,833

FS-8

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
----------------------------------------------------------------------

Common Stocks (cont.)
Electronic Technology (cont.)
/a/Polycom Inc................................... 106,900 $ 3,677,360
/a/Powerwave Technologies Inc.................... 239,200 4,133,376
/a/QLogic Corp................................... 11,400 507,414
/a/Redback Networks Inc.......................... 193,300 763,535
/a/Rudolph Technologies Inc...................... 131,300 4,506,216
/a/Sanmina-Sci Corp.............................. 59,500 1,184,050
/a/Semtech Corp.................................. 108,800 3,883,072
/a/Sierra Wireless Inc. (Canada)................. 24,800 467,480
/a/Silicon Laboratories Inc...................... 39,200 1,321,432
/a/Synopsys Inc.................................. 102,400 6,048,768
/a/Tekelec....................................... 101,000 1,829,110
/a/Tektronix Inc................................. 274,500 7,076,610
/a/Triquint Semiconductor Inc.................... 70,400 863,104
/a/Varian Semiconductor Equipment Associates Inc. 127,800 4,420,602
/a/Veeco Instruments Inc......................... 28,560 1,029,588
/a/Waters Corp................................... 146,600 5,680,750
/a/Western Digital Corp.......................... 104,500 655,215
/a/Western Multiplex Corp........................ 27,200 146,880
------------
139,940,820
------------
Energy Minerals 1.8%
Cabot Oil & Gas Corp., A......................... 21,600 519,480
/a/Chesapeake Energy Corp........................ 101,300 669,593
Devon Energy Corp................................ 14,566 562,976
/a/Forest Oil Corp............................... 44,300 1,249,703
/a/Newfield Exploration Co....................... 86,500 3,071,615
/a/Pure Resources Inc............................ 52,057 1,046,346
/a/Spinnaker Exploration Co...................... 24,700 1,016,652
/a/Stone Energy Corp............................. 16,611 656,135
/a/Swift Energy Co............................... 70,100 1,416,020
/a/Tom Brown Inc................................. 67,800 1,831,278
------------
12,039,798
------------
Finance 8.8%
/a/Affiliated Managers Group Inc................. 18,800 1,325,024
Alexandria Real Estate Equities Inc.............. 14,100 579,510
Allied Capital Corp.............................. 122,400 3,182,400
/a/Arch Capital Group Ltd........................ 49,500 1,274,625
Arden Realty Inc................................. 19,700 522,050
/a/Bank United Corp.............................. 53,200 5,320
Brandywine Realty Trust.......................... 5,700 120,099
City National Corp............................... 21,500 1,007,275
Colonial Properties Trust........................ 15,400 479,710
Commerce Bancorp Inc............................. 24,840 977,206
Duke Realty Corp................................. 41,400 1,007,262
Federated Investors Inc., B...................... 192,900 6,149,652
General Growth Properties Inc.................... 45,100 1,749,880
Glenborough Realty Trust Inc..................... 49,000 950,600
Golden State Bancorp Inc......................... 109,000 2,850,350
Innkeepers USA Trust............................. 46,900 459,620
/a/Instinet Group Inc............................ 126,100 1,267,305
/a/Investment Technology Group Inc............... 44,802 1,750,414

FS-9

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
--------------------------------------------------------------

Common Stocks (cont.)
Finance (cont.)
/a/Knight Trading Group Inc.............. 126,000 $ 1,388,520
/a/Labranche & Co. Inc................... 96,800 3,335,728
Liberty Property Trust................... 2,700 80,595
MeriStar Hospitality Corp................ 77,500 1,100,500
Mutual Risk Management Ltd. (Bermuda).... 26,100 190,530
National Commerce Financial Corp......... 153,000 3,870,900
Radian Group Inc......................... 77,676 3,336,184
Reckson Associates Realty Corp........... 46,200 1,079,232
Reinsurance Group of America Inc......... 73,500 2,446,080
/a/Security Capital Group Inc., B........ 155,800 3,952,646
/a/Silicon Valley Bancshares............. 145,100 3,878,523
SL Green Realty Corp..................... 38,700 1,188,477
TCF Financial Corp....................... 85,000 4,078,300
Waddell & Reed Financial Inc., A......... 81,900 2,637,180
Westamerica Bancorp...................... 200 7,914
Wilmington Trust Corp.................... 9,800 620,438
------------
58,850,049
------------
/a/Health Services 1.8%
Alliance Imaging Inc..................... 57,900 706,380
Beverly Enterprises Inc.................. 146,900 1,263,340
Caremark RX Inc.......................... 51,500 839,965
Community Health Systems Inc............. 40,000 1,020,000
Laboratory Corp. of America Holdings..... 25,600 2,069,760
PAREXEL International Corp............... 52,300 750,505
Pharmaceutical Product Development Inc... 48,200 1,557,342
Renal Care Group Inc..................... 97,350 3,124,935
Triad Hospitals Inc...................... 30,700 901,045
------------
12,233,272
------------
Health Technology 6.8%
/a/Abgenix Inc........................... 74,200 2,496,088
/a/Alexion Pharmaceuticals Inc........... 24,200 591,448
/a/Alkermes Inc.......................... 63,000 1,660,680
Alpharma Inc., A......................... 140,400 3,713,580
/a/American Medical Systems Holdings Ltd. 22,100 457,249
/a/Aviron................................ 115,000 5,718,950
/a/Barr Laboratories Inc................. 12,600 999,936
/a/Celgene Corp.......................... 27,000 861,840
/a/Cephalon Inc.......................... 2,400 181,404
/a/Cerus Corp............................ 13,700 626,775
/a/COR Therapeutics Inc.................. 35,400 847,122
/a/Corixa Corp........................... 57,873 872,146
/a/Cubist Pharmaceuticals Inc............ 3,600 129,456
/a/Epoch Biosciences Inc................. 53,200 133,000
/a/Exelixis Inc.......................... 28,900 480,318
/a/Guilford Pharmaceuticals Inc.......... 11,200 134,400
ICN Pharmaceuticals Inc.................. 26,900 901,150
/a/Illumina Inc.......................... 8,800 103,488
/a/Inhale Therapeutic Systems Inc........ 95,200 1,765,960
/a/Inspire Pharmaceuticals Inc........... 12,800 180,352
/a/Intermune Inc......................... 77,200 3,802,872

FS-10

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
-----------------------------------------------------------------------------

Common Stocks (cont.)
Health Technology (cont.)
/a/Ista Pharmaceuticals Inc............................. 111,000 $ 745,920
/a/Medicines Co......................................... 90,000 1,043,100
/a/Neurocrine Biosciences Inc........................... 21,500 1,103,165
/a/NPS Pharmaceuticals Inc.............................. 62,000 2,374,600
/a/OSI Pharmaceuticals Inc.............................. 106,600 4,875,884
/a/Shire Pharmaceuticals Group PLC, ADR (United Kingdom) 18,200 666,120
/a/SICOR Inc............................................ 35,200 551,936
/a/SuperGen Inc......................................... 11,400 163,248
/a/Texas Biotechnology Corp............................. 22,100 143,650
/a/Titan Pharmaceuticals Inc............................ 39,300 385,533
/a/Varian Medical Systems Inc........................... 64,000 4,560,640
/a/Ventana Medical Systems Inc.......................... 42,700 965,874
/a/Versicor Inc......................................... 15,900 323,565
/a/Visible Genetics Inc. (Canada)....................... 60,800 677,920
------------
45,239,369
------------
/a/Industrial Services 3.5%
Allied Waste Industries Inc............................. 250,000 3,515,000
Atwood Oceanics Inc..................................... 30,500 1,062,925
Casella Waste Systems Inc., A........................... 4,500 66,645
Core Laboratories NV (Netherlands)...................... 100,000 1,402,000
Grey Wolf Inc........................................... 568,800 1,689,336
Hydril Co............................................... 19,600 345,548
Oil States International Inc............................ 169,500 1,542,450
Pride International Inc................................. 163,100 2,462,810
Rowan Cos. Inc.......................................... 106,500 2,062,905
Superior Energy Services Inc............................ 250,000 2,162,500
Trico Marine Services Inc............................... 127,200 960,360
US Liquids Inc.......................................... 52,200 296,496
Varco International Inc................................. 325,645 4,878,162
Waste Connections Inc................................... 39,600 1,227,204
------------
23,674,341
------------
Non-Energy Minerals .6%
Lafarge North America Inc............................... 100,000 3,757,000
Reliance Steel & Aluminum Co............................ 13,500 354,375
------------
4,111,375
------------
Process Industries 1.7%
Bowater Inc............................................. 100,000 4,770,000
Bunge Ltd............................................... 141,600 3,296,448
ChemFirst Inc........................................... 56,100 1,344,717
/a/CUNO Inc............................................. 12,800 390,400
Valspar Corp............................................ 46,500 1,841,400
------------
11,642,965
------------
Producer Manufacturing 5.5%
/a/Active Power Inc..................................... 72,000 489,600
/a/Gentex Corp.......................................... 339,400 9,072,162
Gibraltar Steel Corp.................................... 52,800 925,056
/a/Mettler-Toledo International Inc. (Switzerland)...... 168,300 8,726,355
Oshkosh Truck Corp...................................... 75,000 3,656,250

FS-11

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
--------------------------------------------------------------------

Common Stocks (cont.)
Producer Manufacturing (cont.)
/a/Power-One Inc............................... 294,600 $ 3,066,786
/a/Rayovac Corp................................ 61,200 1,077,120
Roper Industries Inc........................... 62,000 3,069,000
/a/Varian Inc.................................. 195,100 6,329,044
/a/Wilson Greatbatch Technologies Inc.......... 5,600 202,160
------------
36,613,533
------------
/a/Retail Trade .5%
Abercrombie & Fitch Co., A..................... 44,000 1,167,320
Kmart Corp.................................... 245,400 1,339,884
The Men's Wearhouse Inc....................... 29,400 607,110
------------
3,114,314
------------
/a/Technology Services 11.5%
Actuate Corp................................... 122,700 646,629
Affiliated Computer Services Inc., A........... 133,400 14,157,742
Art Technology Group Inc....................... 49,200 171,216
Aspen Technology Inc........................... 27,000 453,600
Brio Software Inc.............................. 93,400 268,992
Check Point Software Technologies Ltd. (Israel) 70,200 2,800,278
CNET Networks Inc.............................. 119,390 1,070,928
Covansys Corp.................................. 85,500 765,225
Cysive Inc..................................... 29,000 81,490
Documentum Inc................................. 58,600 1,272,792
Embarcadero Technologies Inc................... 2,000 48,400
Entrust Inc.................................... 62,200 633,818
H.T.E. Inc..................................... 10,300 20,600
HNC Software Inc............................... 74,500 1,534,700
i2 Technologies Inc............................ 147,300 1,163,670
Informatica Corp............................... 65,800 954,758
Inforte Corp................................... 81,000 1,131,570
Internet Security Systems Inc.................. 8,400 269,304
Interwoven Inc................................. 160,100 1,559,374
Intuit Inc..................................... 67,800 2,899,128
Liberate Technologies Inc...................... 72,900 836,892
Manugistics Group Inc.......................... 125,000 2,635,000
MatrixOne Inc.................................. 27,300 354,627
Mercury Interactive Corp....................... 63,100 2,144,138
Micromuse Inc.................................. 318,260 4,773,900
National Instruments Corp...................... 40,900 1,532,114
Netiq Corp..................................... 50,300 1,773,578
Nuance Communications Inc...................... 58,500 532,350
Openwave Systems Inc........................... 50,026 489,755
Overture Services Inc.......................... 149,600 5,300,328
Precise Software Solutions Ltd. (Israel)....... 126,300 2,609,358
Predictive Systems Inc......................... 84,400 165,424
Quest Software Inc............................. 103,300 2,283,963
Retek Inc...................................... 123,400 3,685,958
RSA Security Inc............................... 140,250 2,448,765
Sapient Corp................................... 202,200 1,560,984
Serena Software Inc............................ 37,400 813,076

FS-12

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, December 31, 2001 (cont.)

SHARES VALUE
- ---------------------------------------------------------------------------------------------

Common Stocks (cont.)
Technology Services (cont.)
SonicWALL Inc..................................................... 74,100 $ 1,440,504
SpeechWorks International Inc..................................... 15,100 169,875
The Bisys Group Inc............................................... 9,800 627,102
VERITAS Software Corp............................................. 32,650 1,463,700
Verity Inc........................................................ 91,400 1,850,850
Vignette Corp..................................................... 91,800 492,966
webMethods Inc.................................................... 146,878 2,461,675
Wind River Systems Inc............................................ 106,330 1,904,368
------------
76,255,464
------------
Transportation 3.3%
/a/Alaska Air Group Inc........................................... 61,100 1,778,010
/a/Atlantic Coast Airlines Holdings Inc........................... 248,000 5,775,920
C.H. Robinson Worldwide Inc....................................... 216,800 6,268,772
Expeditors International of Washington Inc........................ 136,300 7,762,285
SkyWest Inc....................................................... 17,300 440,285
------------
22,025,272
------------
Utilities .1%
/a/NewPower Holdings Inc.......................................... 13,000 9,620
Sierra Pacific Resources.......................................... 54,700 823,235
------------
832,855
------------
Total Common Stocks (Cost $479,037,026)........................... 528,333,173
------------

/a,b/Preferred Stocks
Electronic Technology
3Ware Inc., pfd., D (Cost $229,176)............................... 41,093 31,231
------------
Total Long Term Investments (Cost $479,266,202)................... 528,364,404
------------

Short Term Investments 21.2%
/c/Mutual Fund 21.2%
Franklin Institutional Fiduciary Trust Money Fund Market Portfolio 141,932,020 141,932,020
------------

PRINCIPAL
AMOUNT
------------
Convertible Bonds
/a,b/Electronic Technology
3Ware Inc., cvt., zero cpn., 2/28/02.............................. $ 113,680 113,680
------------
Total Short Term Investments (Cost $142,045,700).................. 142,045,700
------------
Total Investments (Cost $621,311,902) 100.3%...................... 670,410,104
Other Assets, less Liabilities (.3)%.............................. (2,053,274)
------------
Net Assets 100.0%................................................. $668,356,830
------------

/a/Non-income producing
/b/See Note 6 regarding restricted securities.
/c/The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers, Inc.

FS-13
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements

Statement of Assets and Liabilities
December 31, 2001

Assets:
Investments in securities:
Cost............................................... $621,311,902
------------
Value.............................................. 670,410,104
Receivables:
Investment securities sold......................... 1,741,358
Capital shares sold................................ 1,776,297
Dividends.......................................... 140,473
------------
Total assets...................................... 674,068,232
------------
Liabilities:
Payables:
Investment securities purchased.................... 1,088,505
Capital shares redeemed............................ 3,969,392
Affiliates......................................... 540,651
Other liabilities.................................... 112,854
------------
Total liabilities................................. 5,711,402
------------
Net assets, at value............................ $668,356,830
------------
Net assets consist of:
Undistributed net investment income.................. $ 2,200,458
Net unrealized appreciation.......................... 49,098,202
Accumulated net realized loss........................ (46,782,802)
Capital shares....................................... 663,840,972
------------
Net assets, at value............................ $668,356,830
------------
Class 1:
Net assets, at value................................. $266,693,879
------------
Shares outstanding................................... 14,844,628
------------
Net asset value and maximum offering price per share. $ 17.97
------------
Class 2:
Net assets, at value................................. $401,662,951
------------
Shares outstanding................................... 22,504,648
------------
Net asset value and maximum offering price per share. $17.85
------------

FS-14
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements (continued)

Statement of Operations
for the year ended December 31, 2001

Investment income:
Dividends......................................... $ 7,635,116
Interest.......................................... 44,609
-------------
Total investment income......................... 7,679,725
-------------
Expenses:
Management fees (Note 3).......................... 2,848,023
Administrative fees (Note 3)...................... 1,555,535
Distribution fees - Class 2 (Note 3).............. 825,042
Transfer agent fees............................... 28,630
Custodian fees.................................... 4,696
Reports to shareholders........................... 272,498
Professional fees................................. 41,390
Trustees' fees and expenses....................... 6,248
Other............................................. 1,382
-------------
Total expenses.................................. 5,583,444
-------------
Net investment income........................ 2,096,281
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments..................................... (28,388,342)
Foreign currency transactions................... 80
-------------
Net realized loss.............................. (28,388,262)
Net unrealized depreciation on investments........ (80,822,391)
-------------
Net realized and unrealized loss.................... (109,210,653)
-------------
Net decrease in net assets resulting from operations $(107,114,372)
-------------

FS-15
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements (continued)

Statements of Changes in Net Assets
for the years ended December 31, 2001 and 2000

2001 2000
------------- -------------

Increase (decrease) in net assets:
Operations:
Net investment income.................................................................. $ 2,096,281 $ 2,866,175
Net realized loss from investments and foreign currency transactions................... (28,388,262) (18,283,852)
Net unrealized depreciation on investments and translation of assets and liabilities
denominated in foreign currencies..................................................... (80,822,391) (103,604,482)
----------------------------
Net decrease in net assets resulting from operations.................................. (107,114,372) (119,022,159)
Distributions to shareholders from:
Net investment income:
Class 1............................................................................... (1,494,401) --
Class 2............................................................................... (1,228,650) --
Net realized gains:
Class 1............................................................................... -- (34,605,737)
Class 2............................................................................... -- (1,438,764)
----------------------------
Total distributions to shareholders...................................................... (2,723,051) (36,044,501)
Capital share transactions: (Note 2)
Class 1............................................................................... (60,969,661) 1,285,055
Class 2............................................................................... 150,270,069 348,456,588
----------------------------
Total capital share transactions......................................................... 89,300,408 349,741,643
Net increase (decrease) in net assets................................................. (20,537,015) 194,674,983
Net assets :
Beginning of year........................................................................ 688,893,845 494,218,862
----------------------------
End of year.............................................................................. $ 668,356,830 $ 688,893,845
----------------------------
Undistributed net investment income included in net assets:
End of year.............................................................................. $ 2,200,458 $ 2,827,148
----------------------------

FS-16
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Templeton Variable Insurance Products Trust (the Trust) is registered
under the Investment Company Act of 1940 as an open-end investment company,
consisting of twenty-seven series (the Funds). Franklin Small Cap Fund (the
Fund) included in this report is diversified. Shares of the Fund are sold only
to insurance company separate accounts to fund the benefits of variable life
insurance policies or variable annuity contracts. The Fund's investment
objective is capital growth.

On November 20, 2001, the Board of Trustees for the Franklin Templeton Variable
Insurance Products Trust approved a proposal to merge Franklin Global Health
Care Securities Fund into Franklin Small Cap Fund, subject to shareholder
approval.

The following summarizes the Fund's significant accounting policies.

a. Security Valuation

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

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales
of securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.

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

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

c. Income Taxes

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

d. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and
losses on security transactions are determined on a specific identification
basis. Interest income and estimated expenses are accrued daily. Dividend
income and distributions to shareholders are recorded on the ex-dividend date.

Distributions received by the Fund from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.

FS-17

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)

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

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

e. Accounting Estimates

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

2. SHARES OF BENEFICIAL INTEREST

The Fund offers two classes of shares: Class 1 and 2. Each class of shares
differs by its distribution fees, voting rights on matters affecting a single
class and its exchange privilege.

At December 31, 2001, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:

Year Ended Year Ended
-------------------------- --------------------------
December 31, 2001 December 31, 2000
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ------------- ---------- -------------

----------- ------------- ---------- -------------
Share Sold.................................... 5,216,738 $ 93,510,478 6,428,608 $ 169,558,240
Shares issued in merger/a/.................... -- -- 162,686 4,046,010
Shares issued in reinvestment of distributions 81,975 1,494,401 1,438,908 34,605,736
Shares redeemed............................... (8,687,695) (155,974,540) (7,961,607) (206,924,931)
----------- ------------- ---------- -------------
Net increase (decrease)....................... (3,388,982) $ (60,969,661) 68,595 $ 1,285,055
-----------------------------------------------------
Class 2 Shares:
Share Sold.................................... 24,732,130 $ 440,412,015 13,915,400 $ 348,439,686
Shares issued in merger/a/.................... -- -- 5,283,033 130,913,570
Shares issued in reinvestment of distributions 67,732 1,228,650 60,049 1,438,764
Shares redeemed............................... (16,555,130) (291,370,596) (5,228,278) (132,335,432)
----------- ------------- ---------- -------------
Net increase.................................. 8,244,732 $ 150,270,069 14,030,204 $ 348,456,588
-----------------------------------------------------

/a/On May 1, 2000, the Franklin Small Cap Fund acquired the net assets of the
Templeton Variable Products Series Fund (TVP) - Franklin Small Cap
Investments Fund in a tax free exchange pursuant to a plan of reorganization
approved by the TVP - Franklin Small Cap Investments Fund's shareholders.

3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Trust are also officers and/or directors
of the following entities:

Entity Affiliation
- ------------------------------------------------------------------------------------

Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin/Templeton Investor Services, LLC (Investor Services) Transfer agent

FS-18

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES (cont.)

The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund) which is managed by Advisers. The Fund earned
dividend income of $5,644,580 from the investment in the Sweep Money Fund.

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

Annualized Fee Rate Daily Net Assets

---------------------------------------------------------------------
.55% First $500 million
.45% Over $500 million, up to and including $1 billion
.40% Over $1 billion, up to and including $1.5 billion

Fees are further reduced on net assets over $1.5 billion.

The Fund pays an administration fee to FT Services of .25% per year of the
average daily net assets of the Fund.

Management fees were reduced on assets invested in the Sweep Money Fund.

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

Investor Services, under terms of an agreement, performs shareholder servicing
for the Fund and is not paid by the Fund for the services.

4. INCOME TAXES

At December 31, 2001, the Fund had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:

Capital loss carryovers expiring in:
2008................................ $11,665,898
2009................................ 23,892,226
-----------
$35,558,124
-----------

At December 31, 2001, the Fund has deferred capital losses occurring subsequent
to October 31, 2001 of $10,945,756. For tax purposes, such losses will be
reflected in the year ending December 31, 2002.

Net investment income differs for financial statement and tax purposes
primarily due to differing treatments for foreign currency transactions.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.

At December 31, 2001, the cost of investment, net unrealized appreciation,
undistributed ordinary income and undistributed long term capital gains for
income tax purposes were as follows:

Cost of investments.................. $621,575,736
------------
Unrealized appreciation.............. $142,142,999
Unrealized depreciation.............. (93,308,631)
------------
Net unrealized appreciation.......... $ 48,834,368
------------

Undistributed ordinary income........ $ 2,200,459
Undistributed long-term capital gains --
------------
Distributable earnings............... $ 2,200,459
------------

FS-19

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (continued)

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 2001 aggregated $277,304,768 and $188,334,702,
respectively.

6. RESTRICTED SECURITIES

The Fund may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
At December 31, 2001, the Fund held restricted securities as follows:

Principal
Amount/ Acquisition
Shares Issuer Date Cost Value

- -----------------------------------------------------------------------------------
41,093 3 Ware Inc., pfd.,D 7/28/00 $229,176 $ 31,231
$113,680 3 Ware Inc., cvt., zero cpn., 2/28/02 10/18/01-12/03/01 113,680 113,680
116,889 Auspex Systems, Inc. 9/22/00 930,729 210,400
--------
Total Restricted Securities (.05% of net assets) $355,311
--------

FS-20

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Independent Auditors' Report

To the Board of Trustees and Shareholders of
Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin Small Cap Fund (the
Fund), one of the funds constituting the Franklin Templeton Variable Insurance
Products Trust, at December 31, 2001, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 2001 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California
February 5, 2002

FS-21

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Tax Designation

Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designate
41.83% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 2001.

FS-22

INDEX DESCRIPTIONS

- --------------------------------------------------------------------------------
Consumer Price Index is a measure of the average change in prices for a
fixed basket of goods and services regularly bought by consumers in the United
States; published by the Bureau of Labor Statistics.
- --------------------------------------------------------------------------------
Credit Suisse First Boston High Yield (CSFB HY) Index is an unmanaged,
trader-priced portfolio constructed to mirror the high yield debt market.
- --------------------------------------------------------------------------------
Dow Jones Industrial Average is price-weighted based on the average market
price of 30 blue chip stocks. The average is found by adding the prices of the
30 stocks and dividing by a denominator that has been adjusted for stock
splits, stock dividends and substitutions of stocks.
- --------------------------------------------------------------------------------
J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) tracks total
returns for U.S. dollar-denominated debt instruments issued by emerging market
sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local
market instruments. Countries covered are Algeria, Argentina, Brazil, Bulgaria,
Chile, China, Colombia, Cote d'Ivoire, Croatia, Dominican Republic, Ecuador,
Egypt, Hungary, Lebanon, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Panama,
Peru, the Philippines, Poland, Russia, South Africa, South Korea, Thailand,
Turkey, Ukraine, Uruguay and Venezuela.
- --------------------------------------------------------------------------------
J.P. Morgan EMU Government Bond Index is a euro-aggregated index weighted by
market capitalization. The index includes only liquid bullet euro-denominated
fixed-rate debt, which has been issued by participating governments. No
callable, puttable or convertible features are allowed. Bonds must have at
least 12 months remaining maturity. The EMU bond index is fully invested. All
coupons received are immediately invested back into the entire index until the
next index rebalancing.
- --------------------------------------------------------------------------------
J.P. Morgan Global Government Bond Index tracks total returns of government
bonds in developed countries globally. The bonds included in the index are
weighted according to their market capitalization. The index is unhedged and
expressed in terms of $US.
- --------------------------------------------------------------------------------
J.P. Morgan U.S. Government Bond Total Return Index includes only actively
traded fixed-rate bonds with a remaining maturity of one year or longer.

I-1

- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P or Fitch, in that order. All issues
have at least one year to maturity and an outstanding par value of at least
$100 million for U.S. government issues and $50 million for all others. All
returns are market value-weighted inclusive of accrued interest. The index is a
composite of the Government/Corporate Index and the Mortgage-Backed Securities
Index. Total return includes price appreciation/depreciation and income as a
percentage of the original investment. The index is rebalanced monthly by
market capitalization.
- --------------------------------------------------------------------------------
Lehman Brothers Government/Credit Index includes securities in the Lehman
Brothers Government and Corporate Bond indexes. These securities are fixed rate
debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that
order. All issues have at least one year to maturity and an outstanding par
value of at least $50 million for corporate securities and $100 million for
government securities. The index includes all public, fixed-rate,
non-convertible investment grade domestic corporate debt rated at least Baa by
Moody's or BBB by S&P, and issues of the U.S. government or any agency thereof.
The non-convertible, publicly issued, domestic debt is guaranteed by the U.S.
government. Total return includes price appreciation/depreciation and income as
a percentage of the original investment. The index is rebalanced monthly by
market capitalization.
- --------------------------------------------------------------------------------
Lehman Brothers Intermediate Government Bond Index includes fixed rate debt
issues rated investment grade or higher by Moody's, S&P or Fitch, in that
order. All issues have at least one year to maturity and an outstanding par
value of at least $100 million for U.S. government issues. All returns are
market value-weighted inclusive of accrued interest. The Government Bond Index
includes issues of the U.S. government or any agency thereof. It includes only
issues with a remaining term to maturity of less than ten years. Total return
includes price appreciation/depreciation and income as a percentage of the
original investment. The total return index is rebalanced monthly by market
capitalization.

I-2

- --------------------------------------------------------------------------------
Lipper Science & Technology Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper
Science & Technology Funds Prospective Investment Objective Classification in
the Lipper underlying funds universe. Lipper Science & Technology Funds are
defined as all mutual funds that invest at least 65% of their assets in science
and technology stocks. As of 12/31/01, there were 381 funds in this category.
Lipper calculations do not include contract fees, expenses or sales charges.
Fund performance relative to the average might have differed if such charges
had been considered.
- --------------------------------------------------------------------------------
Lipper VIP Growth & Income Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper
Growth & Income Funds Prospective Investment Objective Classification in the
Lipper VIP underlying funds universe. Lipper Growth & Income Funds are defined
as all mutual funds that combine a growth-of-earnings orientation and an income
requirement for level and/or rising dividends. As of 12/31/01, there were 253
funds in this category. Lipper calculations do not include contract fees,
expenses or sales charges. Fund performance relative to the average might have
differed if such charges had been considered.
- --------------------------------------------------------------------------------
Lipper VIP Income Funds Objective Average is an equally weighted average
calculation of performance figures for all funds within the Lipper Income Funds
Prospective Investment Objective Classification in the Lipper VIP underlying
funds universe. Lipper Income Funds are defined as all mutual funds that
normally seek a high level of current income through investing in
income-producing stocks, bonds and money market instruments. As of 12/31/01,
there were 10 funds in this category. Lipper calculations do not include
contract fees, expenses or sales charges. Fund performance relative to the
average might have differed if such charges had been considered.

I-3

- --------------------------------------------------------------------------------
Lipper VIP U.S. Government Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper U.S.
Government Funds Prospective Investment Objective Classification in the Lipper
VIP underlying funds universe. Lipper U.S. Government Funds are defined as all
funds that invest at least 65% of their assets in securities issued or
guaranteed by the U.S. government, its agencies or its instrumentalities. As of
12/31/01, there were 43 funds in this category. Lipper calculations do not
include contract fees, expenses or sales charges. Fund performance relative to
the average might have differed if such charges had been considered.
- --------------------------------------------------------------------------------
Merrill Lynch Treasury Zero Coupon 5- and 10-Year Bond Total Return Indexes
include zero coupon bonds that pay no interest and are issued at a discount
from redemption price.
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) All Country World Free Index
measures the total return (gross dividends are reinvested) of equity securities
available to foreign (non-local) investors in the developed and emerging
markets globally. Securities included are weighted according to their market
capitalization (outstanding shares times price).
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) Emerging Markets Free Index
measures the total return (gross dividends are reinvested) of equity securities
in emerging markets globally. Only securities available to foreign (non-local)
investors are included. Securities included are weighted according to their
market capitalization (outstanding shares times price).
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) Europe Australasia Far East
(EAFE) Index measures the total returns (gross dividends are reinvested) of
equity securities in the developed markets in Europe, Australasia and the Far
East. Securities included are weighted according to their market capitalization
(outstanding shares times price).
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) World Index measures the total
returns (gross dividends are reinvested) of equity securities in the developed
markets globally. Securities included are weighted according to their market
capitalization (outstanding shares times price).

I-4

- --------------------------------------------------------------------------------
Nasdaq Telecommunications Index contains all types of telecommunications
companies, including point-to-point communication services and radio and
television broadcast, and companies that manufacture communication equipment
and accessories. On November 1, 1993, the Nasdaq Utility Index was renamed the
Nasdaq Telecommunications Index.
- --------------------------------------------------------------------------------
National Association of Securities Dealers Automated Quotations (Nasdaq)
Composite Index measures all Nasdaq National Market common stocks. The index is
market value-weighted.
- --------------------------------------------------------------------------------
Russell 2000 Index measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which represent approximately 8% of the total market
capitalization of the Russell 3000 Index. The index has been reconstituted
annually since 1989.
- --------------------------------------------------------------------------------
Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
- --------------------------------------------------------------------------------
Russell 2500 Growth Index measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth values.
- --------------------------------------------------------------------------------
Russell 3000 Growth Index measures the performance of those Russell 3000
companies with higher price-to-book ratios and higher forecasted growth values.
The stocks in this index are also members of either the Russell 1000 Growth or
the Russell 2000 Growth Indexes.
- --------------------------------------------------------------------------------
Russell 3000 Value Index measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value Indexes.
- --------------------------------------------------------------------------------
Russell Midcap Value Index measures the performance of those Russell Midcap
companies with lower price-to-book ratios and lower forecasted growth values.
The stocks are also members of the Russell 1000 Value Index.

I-5

- --------------------------------------------------------------------------------
S&P/International Finance Corporation (IFC) Investable Composite Index
measures the total return with dividends reinvested of equity securities in
emerging markets globally. Securities' weights are adjusted to reflect only the
portion of the market capitalization available to foreign (non-local)
investors. Securities included are weighted according to their adjusted market
capitalization (outstanding investable shares times price).
- --------------------------------------------------------------------------------
Salomon Smith Barney Global Ex-U.S. less than $2 Billion Index measures the
small stock component of the Salomon Global Equity Index that includes
developed and emerging markets countries globally excluding the U.S. Within
each country, those stocks falling under two billion dollar market cap of the
available market capital in each country forms the universe. The unmanaged
index measures the total returns (gross dividends are reinvested) of small
capitalization equity securities. The securities in the index are weighted
according to their market capitalization (shares outstanding times price).
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index (S&P 500) consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P 500
is one of the most widely used benchmarks of U.S. equity performance.
- --------------------------------------------------------------------------------
Standard & Poor's Health Care Composite Index is a capitalization-weighted
index of all of the stocks in the S&P 500 that are involved in the business of
health care-related products or services. The index was developed with a base
of 100 as of January 14, 1987.
- --------------------------------------------------------------------------------
Standard & Poor's Small Cap 600 Index consists of 600 domestic stocks chosen
for market size, liquidity (bid-ask spread ownership, share turnover and number
of no trade days) and industry group representation. Each stock's weight in the
index is proportionate to its market value.
- --------------------------------------------------------------------------------
Wilshire Real Estate Securities Index is a broad measure of the performance
of publicly traded real estate securities, such as real estate investment
trusts (REITs) and real estate operating companies (REOCs). It is rebalanced
monthly, and returns are calculated on a buy-and-hold basis. The index is
capitalization-weighted and includes reinvested dividends.
- --------------------------------------------------------------------------------

I-6

Trustees and Officers

The name, age and address of the members of the Trust's Board of Trustees,
as well as their affiliations, positions held with the Trust, principal
occupations during the past five years and number of portfolios overseen in the
Franklin Templeton Investments fund complex are shown below. Each trustee will
serve until that person's successor is elected and qualified.

Independent Trustees

Number of
Portfolios in Fund
Length of Complex Overseen
Name, Age and Address Position Time Served by Trustee* Other Directorships Held
- ------------------------------------------------------------------------------------------------

FRANK H. ABBOTT, III (80) Trustee Since 1988 108 Formerly, Director,
One Franklin Parkway, MotherLode Gold Mines
San Mateo, CA 94403-1906 Consolidated (gold mining)
(until 1996) and Vacu-Dry Co.
(food processing) (until
1996).

Principal Occupation During Past 5 Years:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (69) Trustee Since 1988 139 Director, RBC Holdings, Inc.
One Franklin Parkway, (bank holding company) and
San Mateo, CA 94403-1906 Bar-S Foods (meat packing
company).

Principal Occupation During Past 5 Years:
Formerly , President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------
ROBERT F. CARLSON (73) Trustee Since 1998 44 Formerly, member and Chairman
One Franklin Parkway, of the Board, Sutter
San Mateo, CA 94403-1906 Community Hospitals; member,
Corporate Board, Blue Shield
of California; and Chief
Counsel, California
Department of Transportation.

Principal Occupation During Past 5 Years:
Vice President and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS).
- ------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (69) Trustee Since 1989 140 None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Member of the law firm of Pitney, Hardin, Kipp & Szuch.
- ------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (72) Trustee Since 1988 108 Director, The California
One Franklin Parkway, Center for Land Recycling
San Mateo, CA 94403-1906 (redevelopment).

Principal Occupation During Past 5 Years:
President, Las Olas L.P. (Asset Management) and formerly, Chairman, Peregrine Venture
Management Company (venture capital); General Partner, Miller &LaHaye and Peregrine Associates,
the general partners of Peregrine Venture funds.
- ------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (73) Trustee Since 1993 139 Director, Martek Biosciences
One Franklin Parkway, Corporation, WorldCom, Inc.
San Mateo, CA 94403-1906 (communications services),
MedImmune, Inc.
(biotechnology),
Overstock.com (Internet
services), and Spacehab, Inc.
(aerospace services); and
formerly, Chairman, White
River Corporation (financial
services) (until 1998) and
Hambrecht & Quist Group
(investment banking) (until
1992).

Principal Occupation During Past 5 Years:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and formerly
President, National Association of Securities Dealers, Inc.(until 1987).
- ------------------------------------------------------------------------------------------------

TO-1

Interested Trustees and Fund Officers

**CHARLES B. JOHNSON (68) Director and Director and 139 None
One Franklin Parkway, Trustee Trustee since
San Mateo, CA 94403-1906 1988

Principal Occupation During Past 5 Years:
Chairman of the Board, Chief Executive Officer, Member--Office of the Chairman
and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------

**CHARLES E. JOHNSON (45) President and President 38 None
One Franklin Parkway, Trustee and Trustee
San Mateo, CA 94403-1906 since 1988

Principal Occupation During Past 5 Years:
President, Member--Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.; Chairman of
the Board, President and Director, Franklin Investment Advisory Services, Inc.;
and officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------

**RUPERT H. JOHNSON, JR. (61) Vice President Vice 120 None
One Franklin Parkway, and Trustee President
San Mateo, CA 94403-1906 and Trustee
since 1988

Principal Occupation During Past 5 Years:
Vice Chairman, Member--Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
dir or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------

***CHRISTOPHER H. PINKERTON (43) Trustee Since 2001 27 None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
President, USAllianz Investor Services, LLC and USAllianz Advisors; Senior Vice
President, Variable Products Division, Allianz Life Insurance Company of North
America; fellow, Life Management Institute; and formerly, Vice President of
Marketing, Nationwide Financial Services (until 1999).
- -----------------------------------------------------------------------------------------------------------------------------------

HARMON E. BURNS (56) Vice President Since 1988 None None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Vice Chairman, Member--Office of the Chairman and Director, Franklin Resources,
Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc.; and officer and/or director or trustee, as the case may
most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the
investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------

MARTIN L. FLANAGAN (41) Vice President Vice None None
One Franklin Parkway, and Chief President
San Mateo, CA 94403-1906 Financial and Chief
Officer Financial
Officer since
1995

Principal Occupation During Past 5 Years:
President, Member--Office of the President, Chief Financial Officer and Chief
Operating Officer, Franklin Resources, Inc.; Senior Vice President and Chief
Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President,
Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC;
Executive Vice President and Director, Franklin Advisers, Inc.; Executive Vice
President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services,
LLC; Chairman, Franklin Templeton Services, LLC; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc. ; and officer and/or
director o trustee, as the case may be, of 52 of the investment companies in
Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------

TO-2

Number of
Portfolios in Fund
Length of Complex Overseen Other
Name, Age and Address Position Time Served by Trustee* Directorships Held
- ------------------------------------------------------------------------------------------------------------------------------------

DAVID P. GOSS (54) Vice President Since 2000 None None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director, Property Resources, Inc. and
Franklin Properties, Inc.; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; officer of 53 of
the investment companies in Franklin Templeton Investments; and formerly, President, Chief Executive Officer and Director, Franklin
Real Estate Income Fund and Franklin Advantage Real Estate Income Fund (until 1996), Property Resources Equity Trust (until 1999)
and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (54) Vice President Since 2000 None None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton Worldwide, Inc.; officer
of 53 of the investment companies in Franklin Templeton Investments; 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 (until 1986), and Judicial Clerk, U.S. District Court
(District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARD V. MCVEY (64) Vice President Since 1988 None None
One Franklin Parkway,
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Senior Vice President, Franklin Templeton Distributors, Inc.; and officer of one of the other subsidiaries of Franklin Resources,
Inc. and of 29 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
KIMBERLEY MONASTERIO (38) Treasurer and Since 1995 None None
One Franklin Parkway, Principal
San Mateo, CA 94403-1906 Accounting
Officer

Principal Occupation During Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC.; and officer of 34 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (64) Vice President Since 2000 None None
One Franklin Parkway, and Secretary
San Mateo, CA 94403-1906

Principal Occupation During Past 5 Years:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of
Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; and formerly, Chief Executive
Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000) and Director, Templeton Asset
Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------

*We base the number of portfolios on each separate series of the registered
investment companies comprising the Franklin Templeton Investments fund
complex. These portfolios have a common investment adviser or affiliated
investment advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested
persons of the Trust under the federal securities laws due to their positions
as officers and directors and major shareholders of Franklin Resources, Inc.,
which is the parent company of the Trust's adviser and distributor. Charles
E. Johnson's status as an interested person results from his position as an
officer of Franklin Resources, Inc.
***Mr. Pinkerton is considered an "interested person" of the Trust because of
the share ownership of Allianz Life in the Trust.

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

The Trust's Statement of Additional Information (SAI) includes additional
information about the Trust's trustees and is available, without charge, upon
request. Contract owners may call 1-800 321-8563 or their insurance companies
to request the Trust's SAI.

TO-38

[LOGO OF FRANKLIN TEMPLETON INVESTMENTS] One Franklin Parkway
San Mateo, CA 94403-1906

Annual Report

Franklin Templeton Variable Insurance Products Trust

Investment Managers
Franklin Advisers, Inc.
Franklin Advisory Services, LLC
Franklin Mutual Advisers, LLC
Templeton Asset Management, Ltd., Singapore
Templeton Global Advisors Limited
Templeton Investment Counsel, Inc.

Distributor
Franklin Templeton Distributors, Inc.

Franklin Templeton Variable Insurance Products Trust (VIP) shares are
generally sold only to insurance company separate accounts ("Separate Account")
to serve as the investment vehicles for both variable annuity and variable life
insurance contracts. This report must be preceded or accompanied by the current
prospectus for the applicable contract, which includes the Separate Account and
the VIP prospectuses, which contain more detailed information, including sales
charges, risks and advantages. Please read the prospectuses carefully before
investing or sending money. These reports and prospectuses do not constitute an
offering in any jurisdiction in which such offering may not lawfully be made.

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

VIP18 A01 02/02 [RECYCLE LOGO] Printed on recycled paper

EXHIBIT E

Semi Annual Report

[Graphic Appears Here]
June 30, 2002

FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST

[Logo Franklin Templeton Investments]

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST SEMIANNUAL REPORT
TABLE OF CONTENTS

Letter to Contract Owners............................ 2
A Word About Risk.................................... 6
Important Notes to Performance Information........... 7
Fund Summary
Franklin Small Cap Fund............................. FSC-1
Index Descriptions................................... I-1

Please Note: Franklin Templeton Variable Insurance Products Trust (FTVIP)
currently consists of 24 separate funds, which generally offer Class 1 and
Class 2 shares. Please consult your contract prospectus for the most current
information on which funds and classes are available in that product.

LETTER TO CONTRACT OWNERS

Dear Contract Owners:

This semiannual report for Franklin Templeton Variable Insurance Products
Trust covers the period ended June 30, 2002. The six months under review was a
time of flux, with signs of improvement and uncertainty within the world's
economies and markets.

The U.S. economy expanded at a healthy pace as it pulled away from 2001's
recession. Gross domestic product (GDP) growth rose at a 5.0% annualized rate
in 2002's first quarter, due largely to resilient consumer demand bolstered by
very low interest rates, relatively benign inflation and falling energy prices.
Consequently, home and retail sales were robust but industrial production,
employment and personal income grew only in fits and starts. Most corporations
enacted stringent cost-containment measures, while at the same time reducing
large inventories left over from 2001. The manufacturing and industrial sectors
showed some of the strongest gains after a prolonged rout, a typical precursor
to an economic recovery. By June, however, the rebound turned weaker than the
government had anticipated, and second quarter 2002 GDP growth was estimated at
just 1.1%.

Manufacturing and temporary jobs were on the rise but employment
opportunities in most areas, especially the moribund services sector, remained
weak despite a significant spike in employee productivity nationwide. Wavering
consumer confidence levels, though higher than the 16-year average, reflected
the uncertain economy and made little headway by June 2002. Consumers faced
renewed terrorism worries, corporate scandals, the sluggish job market and
record household debt loads. Even though corporate earnings improved,
businesses began adopting a much leaner attitude and had yet to invest much
capital toward plant and equipment purchases or upgrades. Noting the recovery's
spotty nature, the Federal Reserve Board kept interest rates steady at 40-year
lows throughout the reporting period, and in late June said that the U.S.
economy had expanded at a "modest but uneven" pace since the first quarter's
strong growth. At period-end the U.S. had a growing deficit coupled with rising
government expenditures, much of which stemmed from the recent recession and
newly enacted anti-terrorism measures. Also, the U.S. dollar's weakness became
a concern. Its depreciation versus certain other currencies reflected falling
demand for U.S. securities.

Globally, data releases portrayed an economic recovery that was uneven and
struggling to gather momentum. With the U.S. as the world's leading
market-based economy, others are compelled to follow, as happened during the
reporting period. Trade to the U.S. increased, but globally the demand for
international trade diminished somewhat. Higher unemployment and reduced
personal consumption patterns across Europe hindered consumer and business
confidence there. Asia and Latin America also suffered from reduced external
demand for their goods and services. One bright spot was Japan, where the Bank
of Japan announced that there were signs that its economy was stabilizing after
years of turmoil. Japanese exports had their biggest quarterly increase in 21
years in first quarter 2002. However, the bank tempered its optimism by adding
that it expected gains to slow. Rising exports and a pick-up in production
typically assist in improving corporate profits and stimulating consumer
demand. So with a world economy's nascent rebound being fueled by stronger
exports, largely into the U.S., the lower U.S. dollar stood to undermine a key
source of growth for Canada, Mexico, the U.K., the eurozone and Japan at
period-end.

Economic uncertainty, war on terrorism, violence in the Middle East and a
spate of negative corporate earnings news helped drive domestic equity markets
lower throughout most of 2002's first half, continuing a two-year trend. But it
was investors' sense of trust, or lack thereof, that most considered the
greatest cloud hanging over the stock markets. Specifically, business practices
came under scrutiny due to many corporations' deteriorating credit quality and
well-publicized accounting scandals, mostly notably at Enron and WorldCom. For
the six months ended June 30, 2002, the blue chips of the Dow Jones Industrial
Average fared best in this difficult environment, posting a -6.91% total return
based largely on the relative strength of manufacturing stocks. Meanwhile the
broader Standard & Poor's 500 Composite Index (S&P 500) and the
technology-heavy Nasdaq Composite Index slid quite a bit further, returning
- -13.15% and -24.78% during the same time. Technology-, communication- and
drug-related stocks hurt the S&P 500 and Nasdaq indexes most. Value stocks
generally outperformed growth stocks, which include volatile technology-related
stocks, and the Russell 3000(R) Value Index returned -3.90% compared with the
Russell 3000 Growth Index's -20.54% plunge for the six-month period./1/
Throughout the reporting period, scores of investors had exited the equities
markets, many of whom shifted their assets into cash, bonds and real estate.

World equity markets generally followed those of the U.S., a potential
consequence of the closely linked global economy. Thus, most foreign equity
markets declined through January, gained some momentum in late February and
March, then resumed their downhill trend toward 2002 lows at period-end.
Returns were mixed for world stock markets in local currency terms, but due to
the weakening U.S. dollar these returns were higher in U.S. dollar terms. While
negative corporate earnings outlooks sent major European stock indexes to
nine-month lows in June, strong performance was seen in Russia and several
Asian markets. However, growing political and fiscal problems in Latin America
dampened markets there just as demand from its major trading partners, namely
the U.S., fell substantially.

Domestic debt securities generally outperformed equities. As leading economic
indicators gradually weakened in the latter half of the reporting period,
increased stock market volatility set off a renewed flight to quality as
investors sought the relative safety of bonds. Treasury and municipal bonds, in
particular, seemed to catch most of the repositioned assets from growing risk
aversion. High yield corporate bonds, under continued pressure from slowing
corporate growth and rising default rates, did not keep pace with other bond
asset classes. Foreign bond markets generally posted positive returns in local
currency terms. The European Central Bank and most other central banks made no
additional interest rate reductions in 2002 following widespread monetary
easing in 2001, tempering bond price gains.

Overall, we think an improving investment climate will depend on sustainable
investor confidence, based on supportable increases in corporate profits. The
volatility of these past six months demonstrated the challenges of finding
legitimate earnings reports. While the persistently weak labor markets,
terrorism alerts and violent conflicts in the Middle East may keep affecting
investors' confidence, and other geopolitical risks are notable, we believe
positive economic data exists and contributes to our outlook for continued
recovery in the latter half of 2002. For example, consumer spending is largely
unchanged from a year ago,

1. Source: Standard & Poor's Micropal. Please see Index Descriptions
following the Fund Summaries.

home sales are reported to be generally robust, and we are seeing rising new
orders and shipments across many industries, except telecommunications. Until
the economy and markets find solid direction, however, there are looming
concerns about the potential for a "double-dip" recession.

Sincerely,

/s/ Rupert N. Johnson, Jr.
Rupert H. Johnson, Jr.
Vice President
Franklin Templeton Variable Insurance Products Trust

A WORD ABOUT RISK

All of the funds are subject to certain risks, which will cause investment
returns and the value of your principal to increase or decrease. Generally,
investments offering the potential for higher returns are accompanied by a
higher degree of risk. Stocks and other equities, representing an ownership
interest in an individual company, historically have outperformed other asset
classes over the long term, but tend to fluctuate more dramatically over the
shorter term. Securities of smaller companies, and companies involved in
reorganization or bankruptcy, may have greater price swings and greater credit
and other risks. By having significant investments in particular sectors from
time to time, some funds could carry greater risks of adverse developments in
those sectors than a fund that always invests in a wider variety of sectors.
The technology sector can be among the most volatile market sectors.

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

IMPORTANT NOTES TO
PERFORMANCE INFORMATION

Total return of the funds is the percentage change in value of a
hypothetical $10,000 investment over the indicated periods and includes
reinvestment of dividends and capital gains. Inception dates of the funds may
have preceded the effective dates of the subaccounts, contracts, or their
availability in all states. Performance data is historical and cannot predict
or guarantee future results. Principal value and investment return will
fluctuate with market conditions, and you may have a gain or loss when you
withdraw your money.

FRANKLIN SMALL CAP FUND

- --------------------------------------------------------------------------------
Fund Goal and Primary Investments: Franklin Small Cap Fund seeks long-term
capital growth. The Fund invests primarily in equity securities of U.S.
small-capitalization companies with market capitalization values not exceeding:
(i) $1.5 billion; or (ii) the highest market capitalization value in the
Russell 2000(R) Index; whichever is greater, at the time of purchase./1/

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

The six months ended June 30, 2002, offered investors encouraging evidence of
an improving domestic economy. Economic surveys showed that export orders rose,
inventories fell, layoff announcements declined and manufacturing activity
expanded at a moderate pace. However, declining consumer confidence and
weaker-than-expected vehicle sales seemed to signify that the economic
expansion would not be smooth, uniform or robust. Indeed, concern mounted that
consumer spending, which has so far been resilient, would not be strong enough
to sustain the economy's fragile momentum. Investors looked to enterprise
spending for staffing, equipment and services to restart before consumer
spending faltered. However, by mid-May, enterprise spending was still sluggish
while consumer spending had clearly decelerated. Additionally, investors feared
that the fragile economic recovery could be unsettled by Middle East tensions,
mounting federal government deficits, a weaker dollar and what the federal
government classified as the inevitability of another terrorist attack.

Eroding confidence in corporate governance and domestic capital markets
compounded economic concerns. High-profile corporate misconduct cast doubt on
many corporate executives' honesty and on the domestic capital markets'
transparency. Investors grew doubtful of the economic rebound and suspicious of
the quality and predictability of corporate earnings. Furthermore, the
weakening dollar increased the probability that foreign investors might sell
their dollar-denominated equities.

During the first half of 2002, nearly every sector experienced steep price
declines except the interest rate-sensitive home building, real estate and
finance sectors. Within this challenging environment, Franklin Small Cap Fund
performed poorly on an absolute basis. However, it outperformed its benchmark
index, the Russell 2500(TM) Growth Index, which declined 19.09%./1 /

Fund performance was hurt most by its exposure to early cyclical sectors. Since
the fall of 2001, we had positioned the Fund to benefit

1. Source: Standard & Poor's Micropal. One cannot invest directly in an
index, nor is an index representative of the Fund's portfolio. Please see Index
Descriptions following the Fund Summaries.

[GRAPHIC]
(Bar chart with data as follows)

Portfolio Breakdown
Franklin Small Cap Fund
Based on Total Net Assets
6/30/02

Electronic Technology 20.1%
Technology Services 11.5%
Finance 8.6%
Producer Manufacturing 6.8%
Health Technology 6.3%
Process Industries 5.9%
Industrial Services 5.6%
Energy Minerals 4.5%
Transportation 4.2%
Consumer Services 4.0%
Commercial Services 3.9%
Health Services 2.4%
Consumer Non-Durables 1.8%
Retail Trade 1.3%
Distribution Services 1.1%
Consumer Durables 1.0%
Other 1.6%
Short-Term Investments
& Other Net Assets 9.4%

FSC-1

from the early stages of an economic recovery. Many of our investments in early
cyclicals such as specialty chemicals, transportation, technology, media and
commercial services performed well in the first quarter of 2002. However, in
the second quarter, virtually all of these sectors performed poorly as
investors grew skeptical that the nascent economic recovery could be sustained.

We were very surprised by the swift onset of economic concern and capital
markets suspicion. Thus, the Fund suffered from its corresponding underweighted
exposure in the aforementioned interest rate-sensitive sectors relative to the
index. During the reporting period, the relatively defensive sectors of
minerals, retail, consumer durables, health services and energy services
outperformed the markets. With the exception of energy services, we were
underweighted in all of these leading sectors. The Fund was also hampered by
its exposure to small-cap stocks, which underperformed mid-cap stocks.

Against an uncertain economic backdrop, however, we found some high-quality,
small-cap growth stocks selling at what we believed were attractive valuations.
Many small-cap growth issues were available at prices below their
post-September 11 lows despite a healthier economy and lowered cost structures.
Thus, we selected many of what we considered quality growth stocks across all
sectors.

Looking forward, we cannot precisely predict when enterprise spending will
recover or when confidence in the capital markets will return. However, despite
the uncertainty and suspicion that exist today, we believe this country has a
strong foundation for economic growth and an effective system of capital
markets regulation that, for all its faults, is still unrivaled in the world.
As fear and skepticism continue to drive equity prices lower, we will actively
seek, evaluate and invest in what we believe to be superior, small-cap growth
companies with honest management teams whose businesses have the potential to
grow as the economy recovers.

This discussion reflects our views, opinions and portfolio holdings as of June
30, 2002, the end of the reporting period. These opinions may not be relied
upon as investment advice or an offer for a particular security. The
information provided is not a complete analysis of every aspect of any
country, industry, security or the Fund. Our strategies and the Fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.

Franklin Small Cap Fund buys small-cap stocks that the managers believe will
appreciate in value. When our strategy is successful, our small-cap holdings
grow to be mid- and sometimes large-cap stocks. For this reason, the Fund's
average market cap has tended to grow as many holdings in excellent small-cap
companies have grown, sometimes dramatically. Given the Fund's strategy, the
managers believe the Fund's average market cap has ranged, and likely will
continue to range, from small to mid cap.

Top 10 Holdings
Franklin Small Cap Fund
6/30/02

Company % of Total
Sector/Industry Net Assets
---------------------------------------

Integrated Circuit
Systems Inc. 1.8%
Electronic Technology

Affiliated Computer Services
Inc., A 1.8%
Technology Services

Gentex Corp. 1.5%
Producer Manufacturing

Expeditors International of
Washington Inc. 1.4%
Transportation

Newfield Exploration Co. 1.4%
Energy Minerals

Varco International Inc. 1.3%
Industrial Services

Nova Chemicals Corp. 1.3%
Process Industries

Micrel Inc. 1.3%
Electronic Technology

Mettler-Toledo
International Inc. 1.2%
Producer Manufacturing

C.H. Robinson
Worldwide Inc. 1.2%
Transportation

The dollar value, number of shares or principal value, and complete legal
titles of all portfolio holdings are listed in the Fund's Statement of
Investments.

FSC-2

PERFORMANCE SUMMARY AS OF 6/30/02

Franklin Small Cap Fund - Class 1 delivered a -17.56% cumulative total
return for the six-month period ended 6/30/02. Total return of Class 1 shares
represents the cumulative or average annual change in value, assuming
reinvestment of dividends and capital gains. Average returns smooth out
variations in returns, which can be significant; they are not the same as
year-by-year results.

Franklin Small Cap Fund - Class 1
Periods ended 6/30/02
Since
Inception
1-Year 5-Year (11/1/95)
-------------------------------------------------------------

Cumulative Total Return -21.16% +26.78% +80.90%
Average Annual Total Return -21.16% +4.86% +9.30%
Value of $10,000 Investment $ 7,884 $ 12,678 $ 18,090

Ongoing stock market volatility can dramatically change the Fund's
short-term performance; current results may differ.

Franklin Small Cap Fund - Class 1

Since markets can go down as well as up, investment return and the value of
your principal will fluctuate with market conditions, and you may have a gain
or loss when you sell your shares.

FSC-3
Past perfomance does not guarantee future results.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Highlights

Class 1
-------------------------------------------------------------------
Six Months Ended Year Ended December 31,
June 30, 2002 --------------------------------------------------
(unaudited) 2001 2000 1999 1998 1997
---------------- --------- --------- -------- -------- --------

Per share operating performance
(For a share outstanding throughout the period)
Net asset value, beginning of period........... $ 17.97 $ 21.25 $ 26.87 $ 13.72 $ 15.05 $ 13.20
---------------- --------- --------- -------- -------- --------
Income from investment operations:
Net investment income (loss)/a/.............. (.01) .09 .11 (.01) .07 .01
Net realized and unrealized gains (losses)... (3.14) (3.28) (3.81) 13.25 (.20) 2.24
---------------- --------- --------- -------- -------- --------
Total from investment operations............... (3.15) (3.19) (3.70) 13.24 (.13) 2.25
---------------- --------- --------- -------- -------- --------
Less distributions from:
Net investment income........................ (.07) (.09) -- (.08) (.01) (.03)
Net realized gains........................... -- -- (1.92) (.01) (1.19) (.37)
---------------- --------- --------- -------- -------- --------
Total distributions............................ (.07) (.09) (1.92) (.09) (1.20) (.40)
---------------- --------- --------- -------- -------- --------
Net asset value, end of period................. $ 14.75 $ 17.97 $ 21.25 $ 26.87 $ 13.72 $ 15.05
---------------- --------- --------- -------- -------- --------

Total return/b/................................ (17.56)% (15.02)% (14.60)% 96.94% (.98)% 17.42%

Ratios/supplemental data
Net assets, end of period (000's).............. $ 214,593 $ 266,694 $ 387,474 $488,062 $315,460 $313,462
Ratios to average net assets:
Expenses..................................... 1.07%/c/ .76% .75% .77% .77% .77%
Net investment income (loss)................. (.10)%/c/ .50% .42% (.05)% .51% .06%
Portfolio turnover rate........................ 14.82% 37.94% 19.49% 39.49% 53.01% 64.07%

/a/Based on average shares outstanding effective year ended December 31, 1999.
/b/Total return does not include any fees, charges or expenses imposed by the
variable annuity and life insurance contracts for which the Franklin
Templeton Variable Insurance Products Trust serves as an underlying
investment vehicle. Total return is not annualized for periods less than one
year.
/c/Annualized

FSC-4

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Highlights (continued)

Class 2
---------------------------------------------
Six Months Ended Year Ended December 31,
June 30, 2002 ----------------------------
(unaudited) 2001 2000 1999/d/
---------------------------------------------

Per share operating performance
(For a share outstanding throughout the period)
Net asset value, beginning of period........... $ 17.85 $ 21.14 $ 26.80 $14.25
---------------------------------------------
Income from investment operations:
Net investment income (loss)/a/.............. (.03) .03 .12 (.04)
Net realized and unrealized gains (losses)... (3.11) (3.25) (3.86) 12.68
---------------------------------------------
Total from investment operations............... (3.14) (3.22) (3.74) 12.64
---------------------------------------------
Less distributions from:
Net investment income........................ (.04) (.07) -- (.08)
Net realized gains........................... -- -- (1.92) (.01)
---------------------------------------------
Total distributions............................ (.04) (.07) (1.92) (.09)
---------------------------------------------
Net asset value, end of period................. $ 14.67 $ 17.85 $ 21.14 $26.80
---------------------------------------------
Total return/b/................................ (17.62)% (15.25)% (14.76)% 89.05%

Ratios/supplemental data
Net assets, end of period (000's).............. $ 407,250 $401,663 $ 301,420 $6,156
Ratios to average net assets:
Expenses..................................... 1.32%/c/ 1.01% 1.00% 1.02%/c/
Net investment income (loss)................. (1.35)%/c/ .19% .49% (.18)%/c/
Portfolio turnover rate........................ 14.82% 37.94% 19.49% 39.49%

/a/Based on average shares outstanding.
/b/Total return does not include any fees, charges or expenses imposed by the
variable annuity and life insurance contracts for which the Franklin
Templeton Variable Insurance Products Trust serves as an underlying
investment vehicle. Total return is not annualized for periods less than one
year.
/c/Annualized
/d/For the period January 6, 1999 (effective date) to December 31, 1999.

FSC-5
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited)

SHARES VALUE
------------------------------------------------------------------

Common Stocks 90.6%
/a/Commercial Services 3.9%
Administaff Inc............................... 215,000 $ 2,150,000
Answerthink Inc............................... 138,900 526,430
Corporate Executive Board Co.................. 110,000 3,767,500
DoubleClick Inc............................... 188,700 1,400,154
Lamar Advertising Co., A...................... 32,000 1,190,720
Learning Tree International Inc............... 52,000 964,080
Maximus Inc................................... 225,000 7,132,500
Pittston Brinks Group......................... 134,400 3,225,600
ProBusiness Services Inc...................... 103,000 1,500,607
Resources Connection Inc...................... 74,600 2,013,454
Robert Half International Inc................. 19,000 442,700
-----------
24,313,745
-----------
Communications .5%
/a/Alaska Communications Systems Holdings Inc. 86,900 412,688
/a/AT&T Wireless Services Inc................. 236,610 1,384,169
CenturyTel Inc................................ 40,900 1,206,550
-----------
3,003,407
-----------
Consumer Durables 1.0%
The Black & Decker Corp....................... 130,000 6,266,000
-----------
Consumer Non-Durables 1.8%
Adolph Coors Co., B........................... 65,000 4,049,500
/a/Dean Foods Inc............................. 41,800 1,559,140
/a/Jones Apparel Group Inc.................... 34,200 1,282,500
/a/Timberland Co., A.......................... 70,000 2,507,400
Wolverine World Wide Inc...................... 84,800 1,479,760
-----------
10,878,300
-----------
/a/Consumer Services 4.0%
Brinker International Inc..................... 36,800 1,168,400
CEC Entertainment Inc......................... 25,000 1,032,500
DeVry Inc..................................... 135,000 3,083,400
Entercom Communications Corp.................. 62,000 2,845,800
Entravision Communications Corp............... 285,900 3,502,275
Hispanic Broadcasting Corp., A................ 226,100 5,901,210
Insight Communications Co. Inc., A............ 90,400 1,100,168
Jack in the Box Inc........................... 72,200 2,295,960
Mediacom Communications Corp., A.............. 220,000 1,713,800
Radio One Inc................................. 39,500 587,365
Radio One Inc., D............................. 42,900 637,923
Ticketmaster Inc., B.......................... 50,000 935,500
-----------
24,804,301
-----------
Distribution Services 1.1%
/a/Andrx Group................................ 14,500 391,065
/a/Aramark Corp., B........................... 10,000 250,000
Fleming Cos. Inc.............................. 200,000 3,630,000
/a/Performance Food Group Co.................. 70,300 2,380,358
-----------
6,651,423
-----------

FSC-6

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited) (cont.)

SHARES VALUE
----------------------------------------------------------------------

Common Stocks (cont.)
Electronic Technology 20.1%
/a/Advanced Energy Industries Inc................ 175,000 $ 3,881,500
/a/Advanced Fibre Communications Inc............. 175,000 2,894,500
/a/Aeroflex Inc.................................. 31,500 218,925
/a/Anaren Microwave Inc.......................... 240,200 2,075,328
/a/Avocent Corp.................................. 140,000 2,228,800
/a/Caliper Technologies Corp..................... 25,000 208,750
/a/Catapult Communications Corp.................. 38,600 844,220
/a/CIENA Corp.................................... 252,973 1,059,959
/a/Cirrus Logic Inc.............................. 425,000 3,183,250
/a/Coherent Inc.................................. 90,400 2,670,326
/a/Credence Systems Corp......................... 403,600 7,171,972
/a/DDI Corp...................................... 722,000 721,278
/a/DMC Stratex Networks Inc...................... 61,100 122,810
/a/DRS Technologies Inc.......................... 106,400 4,548,600
/a/EMCORE Corp................................... 89,200 535,200
/a/Integrated Circuit Systems Inc................ 550,000 11,104,500
/a/Intersil Corp................................. 116,500 2,490,770
/a/Kronos Inc.................................... 50,000 1,524,450
/a/L-3 Communications Holdings Inc............... 114,400 6,177,600
/a/Lam Research Corp............................. 400,000 7,192,000
/a/Lattice Semiconductor Corp.................... 119,000 1,040,060
/a/McDATA Corp., A............................... 415,000 3,656,150
/a/Micrel Inc.................................... 548,300 7,884,554
/a/Novellus Systems Inc.......................... 128,500 4,369,000
/a/Oak Technology Inc............................ 243,000 1,100,790
PerkinElmer Inc.................................. 450,000 4,972,500
/a/PLX Technology Inc............................ 200,000 850,000
/a/PMC-Sierra Inc. (Canada)...................... 166,502 1,543,474
/a/Polycom Inc................................... 140,300 1,682,197
/a/Powerwave Technologies Inc.................... 210,400 1,927,264
/a/QLogic Corp................................... 11,400 434,340
/a/Rudolph Technologies Inc...................... 126,500 3,153,645
/a/Semtech Corp.................................. 250,000 6,675,000
/a/Sierra Wireless Inc. (Canada)................. 11,900 40,103
/a/Silicon Laboratories Inc...................... 39,200 1,060,752
/a/Skyworks Solutions Inc........................ 60,700 336,885
/a/Synopsys Inc.................................. 102,400 5,612,544
/a/Tekelec....................................... 101,000 811,030
/a/Tektronix Inc................................. 375,000 7,016,250
/a/Varian Semiconductor Equipment Associates Inc. 200,000 6,786,000
/a/Veeco Instruments Inc......................... 28,560 660,022
/a/Waters Corp................................... 100,000 2,670,000
------------
125,137,298
------------
Energy Minerals 4.5%
Cabot Oil & Gas Corp., A......................... 165,000 3,770,250
/a/Chesapeake Energy Corp........................ 331,900 2,389,680
/a/Forest Oil Corp............................... 70,000 1,990,100
/a/Newfield Exploration Co....................... 230,000 8,549,100
/a/Pure Resources Inc............................ 52,057 1,082,786

FSC-7

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited) (cont.)

SHARES VALUE
-------------------------------------------------------------

Common Stocks (cont.)
Energy Minerals (cont.)
/a/Spinnaker Exploration Co.............. 90,000 $ 3,241,800
/a/Stone Energy Corp..................... 66,611 2,681,093
/a/Swift Energy Co....................... 100,000 1,579,000
/a/Tom Brown Inc......................... 100,000 2,835,000
-----------
28,118,809
-----------
Finance 8.6%
/a/Affiliated Managers Group Inc......... 28,000 1,722,000
Alexandria Real Estate Equities Inc...... 21,000 1,036,140
Allied Capital Corp...................... 150,000 3,397,500
American Capital Strategies Ltd.......... 35,000 961,450
/a/Bank United Corp...................... 53,200 4,788
City National Corp....................... 21,500 1,155,625
Commerce Bancorp Inc..................... 24,840 1,097,928
Federated Investors Inc., B.............. 192,900 6,668,553
General Growth Properties Inc............ 52,000 2,652,000
Glenborough Realty Trust Inc............. 49,000 1,161,300
Golden State Bancorp Inc................. 109,000 3,951,250
/a/Investment Technology Group Inc....... 55,000 1,798,500
/a/Knight Trading Group Inc.............. 126,000 660,240
/a/Labranche & Co. Inc................... 125,000 2,862,500
MeriStar Hospitality Corp................ 100,000 1,525,000
National Commerce Financial Corp......... 153,000 4,023,900
Radian Group Inc......................... 77,676 3,794,473
Reinsurance Group of America Inc......... 84,600 2,607,372
/a/Silicon Valley Bancshares............. 145,100 3,824,836
SL Green Realty Corp..................... 38,700 1,379,655
TCF Financial Corp....................... 85,000 4,173,500
Waddell & Reed Financial Inc., A......... 110,000 2,521,200
Wilmington Trust Corp.................... 19,600 597,800
-----------
53,577,510
-----------
/a/Health Services 2.4%
AdvancePCS............................... 15,200 363,888
Alliance Imaging Inc..................... 57,900 781,650
Caremark RX Inc.......................... 84,900 1,400,850
Community Health Systems Inc............. 40,000 1,072,000
Laboratory Corp. of America Holdings..... 58,000 2,647,700
PDI Inc.................................. 74,700 1,157,103
Pharmaceutical Product Development Inc... 75,000 1,975,500
Renal Care Group Inc..................... 97,350 3,032,453
Triad Hospitals Inc...................... 61,100 2,589,418
-----------
15,020,562
-----------
Health Technology 6.3%
/a/Abgenix Inc........................... 50,800 502,412
/a/Alkermes Inc.......................... 52,800 845,328
Alpharma Inc., A......................... 140,400 2,383,992
/a/American Medical Systems Holdings Ltd. 22,100 443,326
/a/Barr Laboratories Inc................. 12,600 800,478
/a/Cerus Corp............................ 31,600 1,070,608
/a/Enzon Inc............................. 27,900 686,619

FSC-8

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited) (cont.)

SHARES VALUE
----------------------------------------------------------------------------

Common Stocks (cont.)
Health Technology (cont.)
/a/Epoch Biosciences Inc................................ 50,900 $ 92,638
/a/First Horizon Pharmaceutical Corp.................... 72,500 1,500,025
Galen Holdings PLC, ADR (United Kingdom)................ 50,600 1,416,076
/a/Genta Inc............................................ 9,600 79,584
ICN Pharmaceuticals Inc................................. 147,200 3,563,712
/a/Integra LifeSciences Holdings Corp................... 85,900 1,868,325
/a/Intermune Inc........................................ 97,700 2,061,470
/a/Medimmune Inc........................................ 70,000 1,848,000
/a/Millennium Pharmaceuticals Inc....................... 101,292 1,230,698
/a/Neurocrine Biosciences Inc........................... 21,500 615,975
/a/NPS Pharmaceuticals Inc.............................. 155,000 2,374,600
/a/OSI Pharmaceuticals Inc.............................. 114,000 2,738,280
/a/Shire Pharmaceuticals Group PLC, ADR (United Kingdom) 44,300 1,143,383
/a/SICOR Inc............................................ 51,700 958,518
/a/Thoratec Corp........................................ 420,800 3,782,992
/a/Varian Medical Systems Inc........................... 133,400 5,409,370
/a/Ventana Medical Systems Inc.......................... 42,700 937,265
/a/Versicor Inc......................................... 22,600 303,970
/a/Visible Genetics Inc. (Canada)....................... 98,400 187,944
-----------
38,845,588
-----------
Industrial Services 5.6%
/a/Allied Waste Industries Inc.......................... 250,000 2,400,000
/a/Atwood Oceanics Inc.................................. 59,200 2,220,000
/a/Core Laboratories NV (Netherlands)................... 100,000 1,202,000
/a/Grey Wolf Inc........................................ 568,800 2,309,328
/a/Hydril Co............................................ 29,314 785,615
/a/Oil States International Inc......................... 200,000 2,380,000
/a/Pride International Inc.............................. 270,000 4,228,200
Rowan Cos. Inc.......................................... 300,000 6,435,000
/a/Superior Energy Services Inc......................... 285,000 2,892,750
/a/Trico Marine Services Inc............................ 127,200 863,688
/a/Varco International Inc.............................. 475,000 8,331,500
/a/Waste Connections Inc................................ 16,600 518,584
-----------
34,566,665
-----------
Non-Energy Minerals .6%
Lafarge North America Inc............................... 100,000 3,515,000
Reliance Steel & Aluminum Co............................ 13,500 411,750
-----------
3,926,750
-----------
Process Industries 5.9%
Bowater Inc............................................. 100,000 5,437,000
Bunge Ltd............................................... 237,300 5,007,030
ChemFirst Inc........................................... 50,000 1,432,500
/a/CUNO Inc............................................. 12,800 463,104
FMC Corp................................................ 150,000 4,525,500
Minerals Technologies Inc............................... 50,000 2,466,000
Nova Chemicals Corp. (Canada)........................... 350,000 7,889,000
Olin Corp............................................... 275,500 6,102,325
Valspar Corp............................................ 70,300 3,173,342
-----------
36,495,801
-----------

FSC-9

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited) (cont.)

SHARES VALUE
----------------------------------------------------------------------

Common Stocks (cont.)
Producer Manufacturing 6.8%
CNH Global NV (Netherlands)....................... 650,000 $ 2,619,500
Cummins Inc....................................... 25,000 827,500
/a/Gentex Corp.................................... 339,400 9,323,318
Gibraltar Steel Corp.............................. 52,800 1,171,632
/a/Mettler-Toledo International Inc. (Switzerland) 200,000 7,374,000
Milacron Inc...................................... 239,500 2,430,925
Oshkosh Truck Corp................................ 65,000 3,842,150
/a/Power-One Inc.................................. 294,600 1,832,412
Roper Industries Inc.............................. 62,000 2,312,600
/a/Varian Inc..................................... 195,100 6,428,545
Wilson Greatbatch Technologies Inc................ 150,000 3,822,000
-----------
41,984,582
-----------
Retail Trade 1.3%
/a/Abercrombie & Fitch Co., A..................... 44,000 1,061,280
/a/Barnes & Noble Inc............................. 121,000 3,198,030
Fred's Inc........................................ 55,000 2,022,900
/a/The Men's Wearhouse Inc........................ 42,000 1,071,000
/a/Tuesday Morning Corp........................... 50,000 928,000
-----------
8,281,210
-----------
/a/Technology Services 11.5%
Actuate Corp...................................... 122,700 552,150
Affiliated Computer Services Inc., A.............. 231,800 11,005,864
Aspen Technology Inc.............................. 475,000 3,961,500
Borland Software Corp............................. 545,000 5,613,500
Brio Software Inc................................. 93,400 107,410
Check Point Software Technologies Ltd. (Israel)... 70,200 951,912
CNET Networks Inc................................. 119,390 237,586
Documentum Inc.................................... 58,600 703,200
Entrust Inc....................................... 750,000 2,040,000
HNC Software Inc.................................. 145,000 2,421,500
Informatica Corp.................................. 500,000 3,545,000
Inforte Corp...................................... 81,000 803,520
Internet Security Systems Inc..................... 8,400 110,208
Interwoven Inc.................................... 300,000 915,000
Intuit Inc........................................ 67,800 3,371,016
Liberate Technologies Inc......................... 64,900 171,270
Manugistics Group Inc............................. 125,000 763,750
MatrixOne Inc..................................... 27,300 164,073
Mercury Interactive Corp.......................... 63,100 1,448,776
Micromuse Inc..................................... 370,000 1,646,500
National Instruments Corp......................... 191,200 6,225,472
Netiq Corp........................................ 250,000 5,657,500
Nuance Communications Inc......................... 58,500 244,530
Openwave Systems Inc.............................. 425,026 2,384,396
Precise Software Solutions Ltd. (Israel).......... 200,000 1,910,000
Predictive Systems Inc............................ 65,000 20,150
Quest Software Inc................................ 103,300 1,500,949
Retek Inc......................................... 175,000 4,252,500
RSA Security Inc.................................. 200,000 962,000
Sapient Corp...................................... 202,200 214,332

FSC-10

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Statement of Investments, June 30, 2002 (unaudited) (cont.)

SHARES VALUE
- ------------------------------------------------------------------------------------------

Common Stocks (cont.)
/a/Technology Services (cont.)
Serena Software Inc............................................. 37,400 $ 512,279
SonicWALL Inc................................................... 175,000 878,500
SpeechWorks International Inc................................... 15,100 55,553
VERITAS Software Corp........................................... 32,650 646,144
Verity Inc...................................................... 150,000 1,663,500
webMethods Inc.................................................. 355,000 3,514,500
Wind River Systems Inc.......................................... 75,000 375,750
------------
71,551,790
------------
Transportation 4.2%
/a/Alaska Air Group Inc......................................... 61,100 1,594,710
/a/Atlantic Coast Airlines Holdings Inc......................... 248,000 5,381,600
C.H. Robinson Worldwide Inc..................................... 216,800 7,269,304
Expeditors International of Washington Inc...................... 272,600 9,039,415
SkyWest Inc..................................................... 120,000 2,806,800
UTI Worldwide Inc............................................... 14,100 278,757
------------
26,370,586
------------
Utilities .5%
Atmos Energy Corp............................................... 75,000 1,758,000
Energen Corp.................................................... 44,100 1,212,750
/a/Sierra Pacific Resources..................................... 54,700 426,660
------------
3,397,410
------------
Total Common Stocks (Cost $618,011,674)......................... 563,191,737
------------
/a,b/Preferred Stock
Electronic Technology
3Ware Inc., pfd., D (Cost $229,176)............................. 41,093 --
------------
Total Long Term Investments (Cost $618,240,850)................. 563,191,737
------------
Short Term Investments 9.9%
Mutual Fund 9.9%
/c/Franklin Institutional Fiduciary Trust Money Market Portfolio 61,372,943 61,372,943
------------

PRINCIPAL
AMOUNT
-----------
Convertible Bonds
/b/Electronic Technology
3Ware Inc., cvt., zero cpn., 9/04/02............................ $ 124,480 124,480
------------
Total Short Term Investments (Cost $61,497,423)................. 61,497,423
------------
Total Investments (Cost $679,738,273) 100.5%.................... 624,689,160
Other Assets, less Liabilities (.5)%............................ (2,846,769)
------------
Net Assets 100.0%............................................... $621,842,391
------------

/a/Non-income producing
/b/See Note 6 regarding restricted securities.
/c/The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed
by Franklin Advisers Inc.

FSC-11
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements

Statement of Assets and Liabilities
June 30, 2002 (unaudited)

Assets:
Investments in securities:
Cost............................................... $679,738,273
------------
Value.............................................. 624,689,160
Receivables:
Investment securities sold......................... 1,412,156
Capital shares sold................................ 370,717
Dividends.......................................... 112,323
------------
Total assets...................................... 626,584,356
------------
Liabilities:
Payables:
Investment securities purchased.................... 2,275,938
Capital shares redeemed............................ 1,748,867
Affiliates......................................... 564,173
Funds advanced by custodian........................ 7,919
Other liabilities.................................... 145,068
------------
Total liabilities................................. 4,741,965
------------
Net assets, at value............................ $621,842,391
------------
Net assets consist of:
Undistributed net investment loss.................... $ (628,339)
Net unrealized depreciation.......................... (55,049,113)
Accumulated net realized loss........................ (71,109,741)
Capital shares....................................... 748,629,584
------------
Net assets, at value............................ $621,842,391
------------
Class 1:
Net assets, at value................................. $214,592,850
------------
Shares outstanding................................... 14,546,112
------------
Net asset value and maximum offering price per share. $ 14.75
------------
Class 2:
Net assets, at value................................. $407,249,541
------------
Shares outstanding................................... 27,767,555
------------
Net asset value and maximum offering price per share. $ 14.67
------------

FSC-12
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements (continued)

Statement of Operations
for the six months ended June 30, 2002 (unaudited)

Investment income:
Dividends......................................... $ 2,165,169
-------------
Expenses:
Management fees (Note 3).......................... 1,531,616
Administrative fees (Note 3)...................... 828,669
Distribution fees - Class 2 (Note 3).............. 524,186
Reports to shareholders........................... 110,226
Other............................................. 37,112
-------------
Total expenses.................................. 3,031,809
-------------
Net investment loss.......................... (866,640)
-------------
Realized and unrealized gains (losses):
Net realized loss from investments................ (24,326,939)
Net unrealized depreciation on investments........ (104,147,315)
-------------
Net realized and unrealized loss.................... (128,474,254)
-------------
Net decrease in net assets resulting from operations $(129,340,894)
-------------

FSC-13
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Financial Statements (continued)

Statements of Changes in Net Assets
for the six months ended June 30, 2002 (unaudited) and the year ended December
31, 2001

Six Months Year
Ended Ended
June 30, 2002 December 31, 2001
------------- -----------------

Increase (decrease) in net assets:
Operations:
Net investment income.................................................. $ (866,640) $ 2,096,281
Net realized loss from investments and foreign currency transactions... (24,326,939) (28,388,262)
Net unrealized depreciation on investments............................. (104,147,315) (80,822,391)
-------------------------------
Net decrease in net assets resulting from operations.................. (129,340,894) (107,114,372)
Distributions to shareholders from:
Net investment income:
Class 1............................................................... (968,152) (1,494,401)
Class 2............................................................... (994,005) (1,228,650)
-------------------------------
Total distributions to shareholders...................................... (1,962,157) (2,723,051)
Capital share transactions: (Note 2)
Class 1............................................................... (4,571,109) (60,969,661)
Class 2............................................................... 89,359,721 150,270,069
-------------------------------
Total capital share transactions......................................... 84,788,612 89,300,408
Net decrease in net assets............................................ (46,514,439) (20,537,015)
Net assets :
Beginning of period...................................................... 668,356,830 688,893,845
-------------------------------
End of period............................................................ $ 621,842,391 $ 668,356,830
-------------------------------
Undistributed net investment income (loss) included in net assets:
End of period............................................................ $ (628,339) $ 2,200,458
-------------------------------

FSC-14
See notes to financial statements.

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (unaudited)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Templeton Variable Insurance Products Trust (the Trust) is registered
under the Investment Company Act of 1940 as an open-end investment company,
consisting of twenty-four series (the Funds). Franklin Small Cap Fund (the
Fund) included in this report is diversified. Shares of the Fund are sold only
to insurance company separate accounts to fund the benefits of variable life
insurance policies or variable annuity contracts. The Fund's investment
objective is capital growth.

The following summarizes the Fund's significant accounting policies.

a. Security Valuation

b. Foreign Currency Translation

c. Income Taxes

d. Security Transactions, Investment Income, Expenses and Distributions

FSC-15

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (unaudited) (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)

e. Accounting Estimates

2. SHARES OF BENEFICIAL INTEREST

The Fund offers two classes of shares: Class 1 and 2. Each class of shares
differs by its distribution fees, voting rights on matters affecting a single
class and its exchange privilege.

At June 30, 2002, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Fund's shares were as follows:

Six Months Ended Year Ended
June 30, 2002 December 31, 2001
------------------------ ---------------------------
Shares Amount Shares Amount
Class 1 Shares: ---------- ------------ ----------- -------------

Share Sold.................................... 769,411 $ 13,263,801 5,216,738 $ 93,510,478
Shares issued on merger (Note 7).............. 1,202,758 20,098,091 -- --
Shares issued in reinvestment of distributions 63,569 968,152 81,975 1,494,401
Shares redeemed............................... (2,334,254) (38,901,153) (8,687,695) (155,974,540)
----------------------------------------------------
Net decrease.................................. (298,516) $ (4,571,109) (3,388,982) $ (60,969,661)
----------------------------------------------------
Class 2 Shares:
Share Sold.................................... 8,943,072 $150,506,404 24,732,130 $ 440,412,015
Shares issued on merger (Note 7).............. 36,720 609,184 -- --
Shares issued in reinvestment of distributions 65,654 994,005 67,732 1,228,650
Shares redeemed............................... (3,782,539) (62,749,872) (16,555,130) (291,370,596)
----------------------------------------------------
Net increase.................................. 5,262,907 $ 89,359,721 8,244,732 $ 150,270,069
----------------------------------------------------

3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Trust are also officers and/or directors
of the following entities:

Entity Affiliation
- ------------------------------------------------------------------------------------

The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund) which is managed by Advisers. The Fund earned
dividend income of $1,116,470 from the investment in the Sweep Money Fund.

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

Annualized Fee Rate Daily Net Assets
---------------------------------------------------------------------

.55% First $500 million
.45% Over $500 million, up to and including $1 billion
.40% Over $1 billion, up to and including $1.5 billion

Fees are further reduced on net assets over $1.5 billion.

The Fund pays an administration fee to FT Services of .25% per year of the
average daily net assets of the Fund.

FSC-16

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (unaudited) (continued)

3. TRANSACTIONS WITH AFFILIATES (cont.)

Management fees were reduced on assets invested in the Sweep Money Fund.

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

Investor Services, under terms of an agreement, performs shareholder servicing
for the Fund and is not paid by the Fund for the services.

4. INCOME TAXES

At December 31, 2001, the Fund had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:

Capital loss carryovers expiring in:
2008.............................. $11,665,898
2009.............................. 23,892,226
-----------
$35,558,124
-----------

Net investment income differs for financial statement and tax purposes
primarily due to differing treatments for foreign currency transactions.

Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.

At June 30, 2002, the net unrealized depreciation based on the cost of
investments for income tax purposes of $680,134,070 was as follows:

Unrealized appreciation.... $ 87,808,687
Unrealized depreciation.... (143,253,597)
-------------
Net unrealized depreciation $ (55,444,910)
-------------

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 2002 aggregated $246,201,423 and $81,873,654,
respectively.

FSC-17

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FRANKLIN SMALL CAP FUND

Notes to Financial Statements (unaudited) (continued)

6. RESTRICTED SECURITIES

The Fund may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
At June 30, 2002, the Fund held restricted securities as follows:

Principal/ Acquisition
Shares Issuer Date Cost Value
- -------------------------------------------------------------------------------------

41,093 3 Ware Inc., pfd., D 7/28/00 $229,176 $ --
$124,480 3 Ware Inc., cvt., zero cpn., 9/04/02 10/18/01 - 5/07/02 124,480 124,480
--------
Total Restricted Securities (.02% of net assets) $124,480
--------

7. MERGER OF FRANKLIN GLOBAL HEALTH CARE SECURITIES FUND

On May 1, 2002, the Franklin Templeton Variable Insurance Products Trust
(FTVIPT) - Franklin Small Cap Growth Fund (Small Cap) acquired the net assets
of the FTVIPT - Franklin Global Health Care Securities Fund (Health Care)
pursuant to a plan of reorganization. The merger was accomplished by a taxable
exchange, and accounted for as a purchase.

The selected financial information and shares outstanding immediately before
and after the acquisition were as follows.

Class 1 Class 2
------------------------------ ------------------------------
Net Assets NAV Shares Net Assets NAV Shares
Fund Name ------------ ------ ---------- ------------ ------ ----------

Health Care............ $ 20,098,091 $11.53 1,743,180 $ 609,184 $11.46 53,527
Small Cap.............. $233,620,637 $16.71 13,979,515 $438,722,582 $16.59 6,447,283
Small Cap - post merger $253,718,728 $16.71 15,182,273 $439,331,766 $16.59 26,447,283

Fund Level
------------------------------
Net Assets Shares
Fund Name ------------ ------ ----------
Health Care............ $ 20,707,275 1,796,707
Small Cap.............. $672,343,219 40,426,798
Small Cap - post merger $693,050,494 41,666,276

FSC-18

INDEX DESCRIPTIONS

The indexes are unmanaged and include reinvested distributions.
- --------------------------------------------------------------------------------
Credit Suisse First Boston High Yield (CSFB HY) Index is a trader-priced
portfolio constructed to mirror the high yield debt market.
- --------------------------------------------------------------------------------
Dow Jones Industrial Average is price-weighted based on the average market
price of 30 blue chip stocks of companies that are generally industry leaders.
Total return for the Dow is calculated by Wilshire Associates, Inc.
- --------------------------------------------------------------------------------
J.P. Morgan Emerging Markets Bond Index Global (EMBIG) tracks total returns
for U.S. dollar-denominated debt instruments issued by emerging markets
sovereign and quasi-sovereign entities: Brady bonds, loans and Eurobonds.
- --------------------------------------------------------------------------------
J.P. Morgan Global Government Bond Index tracks total returns of government
bonds in developed countries globally. The bonds included in the index are
weighted according to their market capitalization. The index is unhedged and
expressed in terms of $U.S.
- --------------------------------------------------------------------------------
J.P. Morgan U.S. Government Bond Total Return Index includes only actively
traded fixed-rate bonds with a remaining maturity of one year or longer.
- --------------------------------------------------------------------------------
Lipper VIP Equity Income Funds Objective Average is an equally weighted average
calculation of performance figures for all funds within the Lipper Equity
Income Funds Classification in the Lipper VIP underlying funds universe. Lipper
Equity Income Funds are defined as a fund that seeks relatively high current
income and growth of income through investing at least 65% of its portfolio in
dividend paying equity securities. As of 6/30/02, there were 49 funds in this
category. Lipper calculations do not include fees or expenses. Fund performance
relative to the average might have differed if such charges had been considered.

I-1

- --------------------------------------------------------------------------------
Lipper VIP High Current Yield Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper High
Current Yield Funds Classification in the Lipper VIP underlying funds universe.
Lipper High Current Yield Funds are defined as a fund that aims at high
(relative) current yield from fixed income securities, has no quality or
maturity restrictions, and tends to invest in lower grade debt issues. As of
6/30/02, there were 79 funds in this category. Lipper calculations do not
include fees or expenses. Fund performance relative to the average might have
differed if such charges had been considered.
- --------------------------------------------------------------------------------
Lipper VIP Multi-Cap Value Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper
Multi-Cap Value Funds Classification in the Lipper VIP underlying funds
universe. Lipper Multi-Cap Value Funds are defined as funds that invest in a
variety of market capitalization ranges without concentrating 75% of their
equity assets in any one market capitaliza- tion range over an extended period
of time. As of 6/30/02, there were 94 funds in this category. Lipper
calculations do not include fees or expenses. Fund performance relative to the
average might have differed if such charges had been considered.
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) All Country (AC) World Free
Index is market capitalization-weighted and measures the total returns of
equity securities available to foreign (non-local) inves-
tors in the developed and emerging markets globally.
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) Europe Australasia Far East (EAFE)
Index is market capitalization-weighted and measures the total returns of
equity securities in the developed markets in Europe, Australasia and the Far
East.
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) World Index is market
capitalization-weighted and measures the total returns of equity securities in
the developed markets globally.
- --------------------------------------------------------------------------------
National Association of Securities Dealers Automated Quotations (Nasdaq)
Composite Index measures all domestic and international common stocks listed on
the Nasdaq Stock Market. The index is market value-weighted and includes over
4,000 companies.

I-2

- --------------------------------------------------------------------------------
Russell 1000(R) Index is market capitalization-weighted and measures the
performance of the 1,000 largest companies in the Russell 3000 Index, which
represented approximately 92% of the total market capitalization of the Russell
3000 Index, as of June 30, 2002.
- --------------------------------------------------------------------------------
Russell 2000(R) Index is market capitalization-weighted and measures the
performance of the 2,000 smallest companies in the Russell 3000 Index, which
represented approximately 8% of the total market capitalization of the Russell
3000 Index, as of June 30, 2002.
- --------------------------------------------------------------------------------
Russell 2000 Value Index is market capitalization-weighted and measures the
performance of those Russell 2000 companies with lower price-to-book ratios and
lower forecasted growth values.
- --------------------------------------------------------------------------------
Russell 2500(TM) Growth Index is market capitalization-weighted and measures
the performance of those Russell 2500 companies with higher price-to-book
ratios and higher forecasted growth values.
- --------------------------------------------------------------------------------
Russell 3000(R) Index is market capitalization-weighted and measures the
performance of the 3,000 largest U.S. companies based on total market
capitalization, which represented approximately 98% of the investable U.S.
equity market, as of June 30, 2002.
- --------------------------------------------------------------------------------
Russell 3000 Growth Index is market capitalization-weighted and measures the
performance of those Russell 3000 Index companies with higher price-to-book
ratios and higher forecasted growth values.
- --------------------------------------------------------------------------------
Russell 3000 Value Index is market capitalization-weighted and that measures
the performance of those Russell 3000 Index companies with lower price-to-book
ratios and lower forecasted growth values.
- --------------------------------------------------------------------------------
Russell Midcap(R) Value Index is market capitalization-weighted and measures
the performance of those Russell Midcap companies with lower price-to-book
ratios and lower forecasted growth values.
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index (S&P 500) consists of 500 stocks
chosen for market size, liquidity and industry group representa- tion. Each
stock's weight in the index is proportionate to its market value. The S&P 500
is one of the most widely used benchmarks of U.S. equity performance.
- --------------------------------------------------------------------------------
Wilshire Real Estate Securities Index is a broad measure of the performance of
publicly traded real estate securities, such as real estate investment trusts
(REITs) and real estate operating companies (REOCs). The index is
capitalization-weighted and rebalanced monthly, and returns are calculated on a
buy-and-hold basis.
- --------------------------------------------------------------------------------

I-3

[Logo Franklin Templeton Investments] One Franklin Parkway
San Mateo, CA 94403-1906

Semiannual Report
Franklin Templeton Variable Insurance Products Trust

Distributor
Franklin Templeton Distributors, Inc.

Franklin Templeton Variable Insurance Products Trust (FTVIP) shares are sold
only to insurance company separate accounts ("Separate Account") to serve as the
investment vehicles for both variable annuity and variable life insurance
contracts. This report must be preceded or accompanied by the current prospectus
for the applicable contract, which includes the Separate Account and the FTVIP
prospectuses, which contain more detailed information, including sales charges,
risks and advantages. Please read the prospectuses carefully before investing or
sending money. These reports and prospectuses do not constitute an offering in
any jurisdiction in which such offering may not lawfully be made.

FTVIP S2002 08/02 [Logo] Printed on recycled paper

Please fold and detach card at perforation before mailing.

PROXY CARD
Franklin Technology Securities Fund
Special Meeting of Shareholders To Be Held On
February 26, 2003

By signing and dating the lower portion of this card you authorize the proxies
to vote your shares as marked on the reverse side.

This proxy is solicited by the Board of Trustees of Franklin Templeton Variable
Insurance Products Trust (the Trust), on behalf of its series Franklin
Technology Securities Fund (Technology). The undersigned appoints Murray L.
Simpson, Harmon E. Burns, Karen L. Skidmore and Joan E. Boros, with full power
of substitution, to vote all the shares of Technology attributable to him or her
at the special meeting of shareholders (Meeting) to be held at One Franklin
Parkway at 11:00 a.m. Pacific time on February 26, 2003, or an adjournment of
the Meeting, as indicated on the reverse side of this card:

THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS VOTING IN FAVOR OF THE PROPOSAL
AND GRANTING AUTHORITY TO THE PROXY HOLDERS TO VOTE ON OTHER BUSINESS.

Date: _________________________

_____________________________________

_____________________________________
Signature(s):

PLEASE DATE, SIGN AND RETURN THIS
PROXY IN THE ENCLOSED ENVELOPE PROMPTLY.

Please fold and detach card at perforation before mailing

Please fill in box(es) as shown using black or blue ink or number 2 pencil. [X]
PLEASE DO NOT USE FINE POINT PENS.

Proposal 1. FOR AGAINST ABSTAIN
[_] [_] [_]

To approve a Plan of Reorganization involving Technology and Franklin Small Cap
Fund (Small Cap), another series of the Trust, under which the following will
occur:

. The acquisition of the assets of Technology by Small Cap in exchange for
shares of Small Cap.
. The distribution of such shares to the shareholders of Technology.
. The liquidation and dissolution of Technology.

This is described more fully in the Prospectus and Proxy Statement.

Other Business GRANT WITHHOLD ABSTAIN
[_] [_] [_]

To vote upon any other business which may be legally
presented at the Meeting or any adjournment.

STATEMENT OF ADDITIONAL INFORMATION
OF
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Dated January xx, 2003

Acquisition of the Assets of
FRANKLIN TECHNOLOGY SECURITIES FUND
By and in Exchange for Shares of
FRANKLIN SMALL CAP FUND

(Both funds (Funds) are series of Franklin Templeton Variable Insurance Products
Trust (Trust) an open-end management investment company.)

This Statement of Additional Information (SAI) is not a prospectus and
should be read in conjunction with the Prospectus and Proxy Statement dated
January XX, 2003 for the special meeting (Meeting) of the holders of beneficial
interest of $0.01 par value shares of Franklin Technology Securities Fund
(Technology), a non-diversified series of the Trust. The Meeting is to be held
on February 26, 2003.

The Prospectus and Proxy Statement describes certain transactions
contemplated by the proposed combination of Technology with Franklin Small Cap
Fund (Small Cap) pursuant to the terms of the Plan of Reorganization (Plan).
Under the Plan, Small Cap will acquire all the assets and assume all the
liabilities of Technology and issue in exchange Class 1 or Class 2 shares of
Small Cap equal in value to the Class 1 or Class 2 shares of Technology.
Technology would immediately redeem all of its outstanding shares by
distributing the Small Cap shares to the insurance company separate accounts
which hold its shares, and thereafter be dissolved. As a result, the separate
accounts will cease to own shares of Technology and will instead own shares of
Class 1 or Class 2 of Small Cap having an aggregate net asset value equal to all
Class 1 and Class 2 shares of Technology at the time of the Transaction.
Technology and Small Cap have each agreed to pay one-fourth of the total
expenses incurred in connection with the Plan and Franklin Advisers, Inc., the
investment adviser of both Funds, has agreed to pay one-half of such expenses.

FINANCIAL STATEMENTS

A. The following audited historical financial statements and footnotes thereto
of Technology and Small Cap, together with the report of independent
auditors thereon, are incorporated herein by reference from the Trust's
Annual Report to Shareholders for the year ended December 30, 2001:

(1) Financial Highlights for each of the Funds;
(2) Statement of Investments for each of the Funds as of December 31,
2001;
(3) Statement of Assets and Liabilities for each of the Funds as of
December 31, 2001;
(4) Statement of Operations for each of the Funds as of December 31,
(5) Statement of Changes in Net Assets for each of the Funds for the years
ended December 31, 2001 and 2000; 2001; and
(6) Notes to Financial Statements.

B. The following unaudited historical financial statements and footnotes
thereto of Technology and Small Cap are incorporated herein by
reference from the Trust's Semi- Annual Report to Shareholders for the
period ended June 30, 2002:

(1) Financial Highlights for each of the Funds (unaudited);
(2) Statement of Investments for each of the Funds as of June 30, 2002
(unaudited);
(3) Statement of Assets and Liabilities for each of the Funds as of June
30, 2002 (unaudited);
(4) Statement of Operations for each of the Funds for the six months ended
June 30, 2002 (unaudited);
(5) Statement of Changes in Net Assets for each of the Funds for the six
months ended June 30, 2002 (unaudited) and for the fiscal year ended
December 31, 2001; and
(6) Notes to Financial Statements.

OTHER INFORMATION

The information otherwise required to be set forth in this SAI is
included in the Funds' prospectuses, both dated May 1, 2002, and Statement
of Additional Information of the Trust, dated May 1, 2002, and in the
Funds' Annual Reports to Shareholders for the year ended December 31, 2001,
and Semi-Annual Reports to Shareholders for the period ended June 30, 2002,
all of which are incorporated herein by reference.

FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST

CLASS 1 & 2

STATEMENT OF ADDITIONAL INFORMATION

May 1, 2002

[insert FT logo]

One Franklin Parkway, San Mateo CA 94403-1906 1/800-342-3863
- --------------------------------------------------------------------------------

Franklin Templeton Variable Insurance Products Trust (Trust) consists of 24
series (Fund or Funds). Each Fund offers Class 1 and Class 2 shares, which are
generally available only to insurance companies for use as investment options in
variable annuity or variable life insurance contracts.

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the Funds' prospectuses. The
Funds' prospectuses, dated May 1, 2002, which we may amend from time to time,
contain the basic information you should know before investing in the Funds. You
should read this SAI together with the Funds' prospectuses.

The audited financial statements and auditor's report in the Franklin Templeton
Variable Insurance Products Trust Annual Report to Shareholders, for the fiscal
year ended December 31, 2001 are incorporated by reference (are legally a part
of this SAI).

To obtain a free additional copy of a prospectus for Class 1 or Class 2, or an
annual report, please call Franklin Templeton at 1-800/342-3863, or your
insurance company.

- --------------------------------------------------------------------------------
Mutual funds, annuities, and other investment products:
.. are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency of the U.S. government;
.. are not deposits or obligations of, or guaranteed or endorsed by, any bank;
.. are subject to investment risks, including the possible loss of principal.
- --------------------------------------------------------------------------------

Contents

Introduction...................................................................
Fundamental Investment Policies................................................
Non-Fundamental Investment Policies............................................
The Funds - Goals, Strategies and Risks .......................................
Franklin Aggressive Growth Securities Fund................................
Franklin Global Communications Securities Fund............................
Franklin Growth and Income Securities Fund................................
Franklin High Income Fund.................................................
Franklin Income Securities Fund...........................................
Franklin Large Cap Growth Securities Fund.................................
Franklin Money Market Fund................................................
Franklin Real Estate Fund.................................................
Franklin Rising Dividends Securities Fund.................................
Franklin S&P 500 Index Fund...............................................
Franklin Small Cap Fund...................................................
Franklin Small Cap Value Securities Fund
(formerly Franklin Value Securities Fund)................................
Franklin Strategic Income Securities Fund.................................
Franklin Technology Securities Fund.......................................
Franklin U.S. Government Fund.............................................
Franklin Zero Coupon Funds maturing in 2005 and 2010......................
Mutual Discovery Securities Fund..........................................
Mutual Shares Securities Fund.............................................
Templeton Developing Markets Securities Fund...............................
Templeton Foreign Securities Fund
(formerly Templeton International Securities Fund.........................
Templeton Global Asset Allocation Fund
(formerly Templeton Asset Strategy Fund)..................................
Templeton Global Income Securities Fund...................................
Templeton Growth Securities Fund..........................................
Glossary of Securities, Investment Techniques and their Risks
Common to More Than One Fund..................................................
Officers and Trustees..........................................................
Management and Other Services..................................................
Portfolio Transactions.........................................................
Distributions and Taxes........................................................
Organization, Voting Rights and Principal Holders..............................
Pricing Shares.................................................................
The Underwriter................................................................
Performance....................................................................
Miscellaneous Information......................................................
Description of Ratings for Bonds, Short-Term
Debt and Commercial Paper.....................................................

Introduction
- --------------------------------------------------------------------------------

The information provided with respect to each Fund is in addition to that set
out in the Fund's prospectus.

In addition to the investments and strategies primarily undertaken by each Fund
as described in the prospectuses, the Funds may, to a lesser extent, also invest
in other types of securities and engage in and pursue other investment
strategies, which are described in this SAI. Each type of investment and
investment strategy mentioned with respect to each Fund is discussed in greater
detail in the Section entitled "Securities, Investment Techniques and their
Risks Common to More than One Fund," which appears after "The Funds - Goals and
Strategies" Section.

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

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

Each Fund is also subject to various Fundamental Investment Policies which are
described in further detail in the Section entitled "Fundamental Investment
Policies." Fundamental Investment Policies may only be changed with the approval
of the lesser of (1) more than 50% of the Fund's outstanding shares or (2) 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.

Fundamental Investment Policies

Each Fund has adopted several of 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. In the discussion of each Fund under "The Funds - Goals and
Strategies", the fundamental restrictions applicable to that Fund have been set
out using the numerical designations below.

A Fund with this restriction will not:

Diversification

1. With respect to 75% of its total assets, purchase the securities of any
one issuer (other than cash, cash items and obligations of the U.S.
government) if immediately thereafter, and as a result of the purchase,
the Fund would (a) have more than 5% of the value of its total assets
invested in the securities of such issuer or (b) hold more than 10% of
any or all classes of the securities of any one issuer.

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

Borrowing

2. Borrow money in an amount in excess of 5% of the value of its total
assets, except from banks for temporary or emergency purposes, and not
for direct investment in securities.

2.1. Borrow money from banks in an amount exceeding 33 1/3% of the value of
the Fund's total assets including the amount borrowed. A Fund may also
pledge, mortgage or hypothecate its assets to secure borrowings to an
extent not greater than 15% of the Fund's total assets. Arrangements
with respect to margin for futures contracts, forward contracts and
related options are not deemed to be a pledge of assets.

2.2. Borrow money, except that the Fund may borrow money from banks or
affiliated investment companies to the extent permitted (a) by the 1940
Act, or (b) any exemptions therefrom which may be granted by the SEC,
or (c) for temporary or emergency purposes and then in an amount not
exceeding 33 1/3% of the value of the Fund's total assets (including
the amount borrowed).

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

2.4. Borrow money, except that the Fund may borrow money from banks to the
extent permitted by the 1940 Act, or any exemptions therefrom which may
be granted by the SEC, or from any person for temporary or emergency
purposes and then in an amount not exceeding 33 1/3% of the value of
the Fund's total assets (including the amount borrowed).

Lending

3. Lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of any type customarily purchased by
institutional investors, or through loans of portfolio securities, or to
the extent the entry into a repurchase agreement may be deemed a loan.

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

Underwriting

4. Underwrite securities of other issuers, except as noted in number 6 below
and except insofar as a Fund may be technically deemed an underwriter under
the federal securities laws in connection with the disposition of portfolio
securities.

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

Restricted Securities

5. Invest more than 10% of its assets in illiquid securities which include
securities with legal or contractual restrictions on resale, illiquid
securities which at the time of acquisition could be disposed of publicly
by the Funds only after registration under the Securities Act of 1933,
repurchase agreements of more than seven days duration, over-the-counter
options and assets used to cover such options, and other securities which
are not readily marketable, as more fully described in the prospectus and
this SAI.

5.1. Purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by the Funds only after
registration under the Securities Act of 1933, if as a result more than 15%
of their net assets would be invested in such illiquid securities.

Exercising Control

6. Invest in securities for the purpose of exercising management or control of
the issuer.

Concentration

7. Invest more than 25% of its assets (measured at the time of the most recent
investment) in any single industry.

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

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

Unseasoned companies

8. Invest in companies which have a record of less than three years of
continuous operation, including the operations of any predecessor
companies.

8.1. Invest up to 5% of their total net assets invest in companies which have a
record of less than three years of continuous operation, including the
operations of any predecessor.

8.2. Invest up to 10% of its total net assets in companies which have a record
of less than three years of continuous operation, including the operations
of any predecessor companies.

Margin

9. Maintain a margin account with a securities dealer or effect short sales.

9.1. Maintain a margin account with a securities dealer or effect short sales,
except if the Fund owns securities equivalent in kind and amount to those
sold.

9.2. Maintain a margin account with a securities dealer or effect short sales,
except that a Fund may engage in short sales to the extent described in the
prospectus and this SAI and may make initial deposits and pay variation
margin in connection with futures contracts.

9.3. Maintain a margin account with a securities dealer or effect short sales,
except that a Fund may make initial deposits and pay variation margin in
connection with futures contracts.

Commodities and real estate

10. Invest in commodities or commodity pools, except that certain Funds may
purchase and sell Forward Contracts in amounts necessary to effect
transactions in foreign securities. Securities or other instruments backed
by commodities are not considered commodities or commodity contracts for
the purpose of this restriction.

10.1. Invest in commodities or commodity pools, except that the Fund may enter
into Futures Contracts and may invest in foreign currency. Securities or
other instruments backed by commodities are not considered commodities or
commodity contracts for the purpose of this restriction.

10.2. Invest in commodities or commodity pools, except that the Fund may invest
in commodities and commodity futures contracts with respect to commodities
related to the natural resources sector as defined in the prospectus.
Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for the purpose of this restriction.

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

REITS

11. Invest directly in real estate, although certain Funds may invest in real
estate investment trusts or other publicly traded securities engaged in
the real estate industry. First mortgage loans or other direct obligations
secured by real estate are not considered real estate for purposes of this
restriction.

Other investment companies

12. Invest in the securities of other open-end investment companies (except
that securities of another open-end investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or
acquisition).

Assessable securities

13. Invest in assessable securities or securities involving unlimited
liability on the part of the Fund.

Ownership by officers and directors

14. Purchase or retain any security if any officer, director or security
holder of the issuer is at the same time an officer, trustee or employee
of the Trust or of the Fund's Manager and such person owns beneficially
more than one-half of 1% of

the securities and all such persons owning more than one-half of 1% own
more than 5% of the outstanding securities of the issuer.

Section 817(h) of the Internal Revenue Code

15. Invest its assets in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Code.

Warrants

16. Invest more than 5% of its assets in warrants, whether or not listed on the
New York or American 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 the Fund in units or attached to securities
are not included in this restriction.

Foreign issuers

17. Invest more than 15% of its assets in securities of foreign issuers that
are not listed on a recognized U.S. or foreign securities exchange,
including no more than 10% in illiquid investments.

Senior securities

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

Non-Fundamental Investment Policies
- --------------------------------------------------------------------------------

It is the present policy of each Fund, except the Mutual Discovery Fund and
Mutual Shares Fund, (which may be changed without the approval of a majority of
its outstanding shares) not to pledge, mortgage or hypothecate its assets as
security for loans (except to the extent of allowable temporary loans), nor to
engage in joint or joint and several trading accounts in securities, except that
the Funds (including the Mutual Discovery Fund and Mutual Shares Fund) may
participate with other investment companies in Franklin Templeton Investments in
a joint account to engage in certain large repurchase transactions and may
combine orders to purchase or sell securities with orders from other persons to
obtain lower brokerage commissions. It is not any Fund's policy to invest in
interests (other than publicly traded equity securities) in oil, gas or other
mineral exploration or development programs.

The Funds - Goals and Strategies
- --------------------------------------------------------------------------------

Each Fund's investment goal or goals are fundamental, which means they may not
be changed without that Fund's shareholder approval.

Franklin Aggressive Growth Securities Fund

(Aggressive Growth Fund)

The Fund's investment goal is capital appreciation.
Other Investments and Strategies

.. Convertible securities Although the Fund may invest in convertible
securities without limit, it currently intends to limit these
investments to no more than 5% of its net assets. The Fund intends to
invest in liquid convertible securities but there can be no assurance
that it will always be able to do so.

.. Foreign securities Although the Fund may invest in foreign securities,
it intends to limit such investments to 10% of its total assets.

.. The Fund also may:

. write covered put and call options, and purchase put and call options,
on securities or financial indices. The Fund will only buy options if
the premiums paid for such options total 5% or less of its net assets;

. purchase and sell futures contracts or related options with respect to
securities, indices, and currencies. The Fund will not enter into a
futures contract if the amounts paid for its open contracts, including
required initial deposits, would exceed 5% of its net assets;

. invest in illiquid securities up to 15% of its net assets;

. lend its portfolio securities up to 33 1/3% of the value of its total
assets;

. borrow up to 33 1/3% of the value of its assets; and

. enter into repurchase and reverse repurchase agreements.

The Fund is subject to Fundamental Investment Policies 1.1, 2.3, 3.1, 4.1, 7.1,
10.3 and 18.

Franklin Global Communications Securities Fund
(Global Communications Fund)

The Fund's investment goals are capital appreciation and current income.
The Fund expects to invest in common stocks that the manager expects to pay
dividends. At the present time, however, many of the securities of the global
communications companies in which the Fund invests do not pay dividends.

Other Investments and Strategies

.. Utilities companies Utility companies in the U.S. and in non-U.S. countries
have generally been subject to substantial government regulation. Major
changes in government policies, ranging from increased regulation or
expropriation to deregulation, privatization or increased competition, may
dramatically increase or reduce opportunities for these companies. For
example, while certain companies may develop more profitable opportunities,
others may be forced to defend their core businesses and may be less
profitable. Utility company stocks often pay relatively high dividends, so
they are particularly sensitive to interest rate movements. Therefore, like
bonds, their stock prices may rise as interest rates fall or fall as
interest rates rise.

.. Foreign securities The Fund will normally invest at least 65% of its assets
in issuers located in at least three different countries. As a
non-fundamental policy, the Fund will limit its investments in securities
of Russian issuers to 5% of assets.

.. Debt securities The Fund may invest up to 10% of its assets in debt
securities, including convertible bonds, but may invest no more than 5% of
its assets in debt securities rated Ba or lower by Moody's Investors
Service (Moody's) or BB or lower by Standard & Poor's Corporation
(S&P/(R)/) or unrated securities that the manager determines are of
comparable quality.

.. Convertible securities The Fund currently intends to invest no more than
10% of its assets in preferred stocks or convertible preferred stocks.
Subject to these limits, the Fund may invest up to 5% of its assets in
enhanced convertible securities.

.. The Fund also may:

. write covered call options;
. lend its portfolio securities up to 33 1/3% of its assets;
. borrow up to 33 1/3% of the value of its total assets.
. enter into repurchase transactions.

The Fund is subject to Fundamental Investment Policies 1.1, 2.4, 3.1, 4.1, 10.3
and 18.

Franklin Growth and Income Securities Fund
(Growth and Income Fund)

The Fund's principal investment goal is capital appreciation. Its secondary goal
is current income

Other Investments and Strategies

.. Foreign Securities. The Fund may invest up to 30% of its total assets in
foreign securities, including those in emerging markets, but currently
intends to limit such investments to 10%.

.. The Fund also may:

. purchase enhanced convertible securities;
. purchase American Depositary Receipts;
. write covered call and put options;
. purchase call and put options on securities and indices of securities,
including "forward conversion" transactions;
. lend its portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities; and
. enter into repurchase transactions.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8.1,
9.1, 10, 11, 12, 13, 14 and 15.

Franklin High Income Fund
(High Income Fund)

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

Other Considerations

The Fund does not intend to invest more than 5%, at the time of purchase, in
securities in the lowest rating categories, i.e., rated below Caa by Moody's or
CCC by S&P/(R)/ or unrated securities that the manager determines are of
comparable quality. The Fund also may buy lower-rated zero-coupon, deferred
interest and pay-in-kind securities. The Fund may occasionally participate on
creditors' committees for issuers of defaulted debt. If it does, the Fund is
generally restricted from selling those securities to anyone other than another
member of the creditors' committee, which restricts the liquidity of the
holding.

Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis at
the time of the rating. Credit quality in the high yield debt market, however,
can change suddenly and unexpectedly, and credit ratings may not reflect the
issuer's current financial condition. For these reasons, the manager does not
rely principally on the ratings assigned by rating agencies, but performs its
own independent investment analysis of securities being considered for the
Fund's portfolio.

Other Investments and Strategies

.. The Fund also may:

. acquire loan participations;
. purchase debt securities on a "when-issued" basis;
. write covered call options;
. lend its portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities; and
. enter into repurchase agreements and forward currency exchange
contracts, participate in interest rate swaps, invest in restricted
securities, and invest in trade claims.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8,
9, 10, 11, 12, 13, 14 and 15.

Franklin Income Securities Fund
(Income Securities Fund)

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

Other Considerations

The Fund's investments may include zero coupon, deferred interest or pay-in-kind
bonds, or preferred stocks. Because the manager has the discretion to choose the
percentage of assets that can be invested in a particular type of security as
market conditions change, the Fund's portfolio may be entirely invested in debt
securities or, conversely, in common stocks.

Other Investments and Strategies

Other Debt Securities The Fund currently does not intend to invest in defaulted
debt securities, or more than 5% of its assets in loan participations and other
related direct or indirect bank securities. The Fund may invest up to 5% of its
assets in trade claims. Both loan participations and trade claims carry a high
degree of risk. The Fund does not intend to invest more than 5% of its assets in
enhanced convertible securities.

The Fund also may:

. lend its portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities;
. enter into repurchase transactions;
. purchase securities on a "when-issued" or "delayed-delivery" basis;
. write covered call options on securities; and
. enter into covered mortgage dollar rolls.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8,
9.1, 10, 11, 12, 13, 14 and 15.

Franklin Large Cap Growth Securities Fund
(Large Cap Fund)

The Fund's investment goal is capital appreciation. Current income is only a
secondary consideration in selecting portfolio securities.

Other Considerations

Some of the Fund's investments in large-cap companies may yield little or no
current income. The Fund's assets may be invested in shares of common stock
traded on any national securities exchange or over-the-counter, and in
convertible securities including convertible preferred stocks.

Health care companies The Fund may, at times, have significant investments in
securities of health care companies. Because the activities of health care
companies may be heavily dependent on federal and state government funding, the
profitability of these companies could be adversely affected if that funding is
reduced or discontinued. Stocks of these companies also may be affected by
government policies on health care reimbursements, regulatory approval for new
drugs and medical instruments, or legislative reform of the health care system.
Health care companies are also subject to the risks of product liability
lawsuits and the risk that their products and services may become obsolete.

Financial services companies The Fund also may invest in financial services
companies. Financial services companies are subject to extensive government
regulation of the amount and types of loans and other financial commitments they
can make, and of the interest rates and fees they can charge. These limitations
can have a significant impact on a financial services company's profitability
because its profitability is affected by its ability to make financial
commitments such as loans. In addition, changing regulations, continuing
consolidations, and development of new products and structures are all likely to
have a significant impact on the financial services industry.

Other Investments and Strategies

. Debt securities including lower rated securities To the extent the
Fund invests in debt securities and convertible debt securities, it
does not intend to invest more than 5% in those rated Ba or lower by
Moody's or BB or lower by S&P/(R)/ or unrated securities that the
manager determines are of comparable quality.

. Foreign securities The Fund may invest up to 25% of it total assets in
foreign securities, including those in emerging markets. The Fund will
limit its investments in emerging markets to less than 5% of its total
assets.

. The Fund also may:

. write covered call options;
. purchase put options on securities;
. lend its portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities;
. enter into repurchase transactions; and
. invest in restricted or illiquid securities.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8.1,
9, 10, 11, 13, 14 and 15.

Franklin Money Market Fund
(Money Fund)

The Fund's investment goal is high current income, consistent with liquidity and
capital preservation. While not a fundamental goal, the Fund also seeks to
maintain a stable share price of $1.00.

Other Considerations

If the disposition of a portfolio security results in a dollar-weighted average
portfolio maturity in excess of 90 days, the Fund will invest its available
assets so that it reduces its dollar-weighted average portfolio maturity to 90
days or less as soon as is reasonably practicable.

Although the Fund may invest up to 5% of assets in securities rated in the
second highest category (or unrated securities the manager determines are
comparable), it generally invests in securities rated in the highest category.
The Fund may, at times, hold a small portion of its assets in asset-backed
securities, typically commercial paper backed by loans or accounts receivable of
an entity or number of different entities, such as banks or credit card
companies.

The Fund may invest in obligations of U.S. branches of foreign banks, which are
considered domestic banks. The Fund will only make these investments if the
branches have a federal or state charter to do business in the U.S. and are
subject to U.S. regulatory authorities. The Fund also may invest in time
deposits, which are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. The Fund may invest up
to 10% of its assets in time deposits with maturities in excess of seven
calendar days.

Loss of Investment Although the Fund seeks to maintain a $1 share price, there
is no guarantee that it will be able to do so; you could lose money by investing
in the Fund. When-issued and delayed delivery transactions Securities purchased
on a when-issued or delayed delivery basis are subject to market fluctuations
and their value at delivery may be higher or lower than the purchase price.

Other Investments

. obligations, with fixed, floating or variable interest rates, issued
or guaranteed by U.S. banks with assets of at least one billion
dollars, bank notes, loan participation interests and time deposits;
. obligations of foreign branches of foreign banks, U.S. branches of
foreign banks (Yankee Dollar Investments), and foreign branches of
U.S. banks (Eurodollar Investments), all of which include certificates
of deposit, bank notes, loan participation interests, commercial
paper, unsecured promissory notes, time deposits, and bankers'
acceptances, where the parent bank has more than five billion dollars
in total assets at the time of purchase;
. taxable municipal securities, up to 10% of the Fund's assets; and
. unrated notes, paper, securities or other instruments that the manager
determines to be of comparable high quality.

Other Investment Strategies The Fund may not invest more than 5% of its total
assets in securities of a single issuer, other than U.S. government securities,
although it may invest more than 5% of its total assets in securities of a
single issuer that are rated in the highest rating category for a period of up
to three business days after purchase. The Fund also may not invest more than
(a) the greater of 1% of its total assets or $1 million in securities issued by
a single issuer that are rated in the second highest rating category; and (b) 5%
of its total assets in securities rated in the second highest rating category.

.. The Fund also may:

. buy U.S. government securities on a when-issued or delayed delivery
basis;
. lend portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities; and
. enter into repurchase agreements.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8,
9, 10, 11, 12, 13, 14 and 15.

Franklin Real Estate Fund
(Real Estate Fund)

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

Other Considerations

As used by the Fund, "real estate securities" will include equity, debt and
convertible securities of companies having the following characteristics and
limitations:

.. Companies qualifying as a REIT for federal income tax purposes. In order to
qualify as a REIT, a company must derive annually at least 75% of its gross
income from real estate sources (rents, mortgage interest, gains form the
sale of real estate assets), and at least 95% from real estate sources,
plus dividends, interest and gains from the sale of securities. Real
property, mortgage loans, cash and certain securities must comprise 75% of
a company's assets at each quarter end. In order to qualify as a REIT, a
company must also make distributions to shareholders aggregating annually
at least 90% of its REIT taxable income.

.. Companies that have at least 50% of their assets or revenues attributable
to the ownership, construction, management or other services, or sale of
residential, commercial or industrial real estate. These companies would
include real estate operating companies, real estate services and
homebuilders.

The Fund will generally invest in real estate securities listed on a securities
exchange or traded over-the-counter. The Fund also may invest in mortgage REITs,
which specialize in lending money to developers, and hybrid REITs, which have a
mix of equity and debt instruments. Mortgage REITs pass interest income on to
shareholders. Mortgage REITs can be affected by the quality of any credit
extended. Hybrid REITs can be affected by both the quality of any credit
extended and, like equity REITs, by changes in the value of their holdings.

In addition to its investments in real estate securities, the Fund also may
invest a portion of its assets in debt and equity securities of issuers whose
products and services are closely related to the real estate industry and that
are publicly traded on an exchange or in the over-the-counter market. These
issuers may include, for example, manufacturers and distributors of building
supplies, and financial institutions that issue or service mortgages, such as
savings and loan associations or mortgage bankers. Also, the Fund may invest in
companies whose principal business is unrelated to the real estate industry but
who have at least 50% of their assets in real estate holdings.

Other Investments and Strategies

.. Debt and convertible securities including enhanced and convertible
securities As an operating policy, the Fund will not invest more than 10%
of its net assets in debt securities, including convertible debt
securities, rated Ba or lower by Moody's or unrated securities that the
manager determines are of comparable quality. Generally, however, the Fund
will not acquire any securities rated lower than B by Moody's or unrated
securities that the manager determines are of comparable quality.

.. Foreign securities The Fund may invest up to 10% in foreign securities,
including those in emerging markets.

.. The Fund also may:

. write covered call options;

. lend its portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its assets for any purpose other than
direct investments in securities, and up to 33 1/3% of the value of
its total assets from banks for temporary or emergency purposes; and
. engage in repurchase transactions.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 8.1, 9,
10, 11, 12, 13, 14 and 15.

Franklin Rising Dividends Securities Fund
(Rising Dividends Fund)

The Fund's investment goal is long-term capital appreciation. Preservation of
capital, while not a goal, is also an important consideration.

The Fund's policy of investing at least 65% of its net assets in financially
sound companies that have paid consistently rising dividends is fundamental.

Other Investments and Strategies

.. Foreign securities The Fund may invest up to 10% of its net assets in
foreign securities, including those in emerging markets.

.. The Fund also may:

. invest in illiquid securities up to 15% of its net assets;
. lend its portfolio securities up to 33 1/3% of its assets;
. borrow up to 33 1/3% of the value of its total assets;
. enter into repurchase transactions; and
. write covered call options.

The Fund is subject to Fundamental Investment Policies 1.1, 2.3, 3.1, 4.1, 7.2,
10.3 and 18.

Franklin S&P 500 Index Fund
(S&P 500 Index Fund)

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

Other Investments and Strategies

.. Options, futures and options on financial futures The Fund may buy and sell
financial futures contracts, options on such contracts, and options on
securities and securities indices. The Fund may only sell covered options.
The Fund may not commit more

than 5% of its total assets to initial margin deposits on futures and
related options contracts and premiums paid for related options.

.. The Fund also may:

. invest in illiquid securities up to 15% of its net assets;
. lend its portfolio securities up to 33 1/3% of the value of the its
total assets; and
. borrow up to 33 1/3% of the value of its total assets.

The Fund is subject to Fundamental Investment Policies 1.1, 2.2, 3.1, 4.1, 7.1,
10.3 and 18.

Franklin Small Cap Fund
(Small Cap Fund)

The Fund's investment objective is long-term capital growth.
Other Considerations

Although the Fund purchases securities of small cap companies, it may, at times,
have a significant percentage of its assets in mid- and large-cap companies.
This is, in part, because the Fund will not dispose of securities of companies
whose successes lead them into the mid- and large-cap range. This also may be a
result of the Fund's purchases of securities of larger companies. The Fund may
invest up to 20% of its net assets in securities other than those of small cap
companies, including equity securities of larger companies. This may cause its
performance to vary from that of the small capitalization equity markets. The
Fund may invest in equity securities of larger companies that the Fund's manager
believes have strong growth potential, or in equity securities of relatively
well-known, larger companies in mature industries that the manager believes have
the potential for appreciation.

Equity securities of small-cap companies may consist of common stock, preferred
stock, warrants for the purchase of common stock, and convertible securities.
The Fund currently does not intend to invest more than 10% of its assets in
convertible securities.

The Fund may purchase securities in private placements, particularly late stage
private placements. Late stage private placements are sales of securities made
in non-public, unregistered transactions shortly before a company expects to go
public. The Fund may do this in order to invest in securities of companies whose
initial public offerings are expected to be "hot" issues. If the Fund were to
wait for the initial public offerings for some of these companies, its small cap
restriction might preclude it from buying these securities. This is because, by
the time the companies go public, the price at which the offering is finally
sold may put some companies into the mid-cap range or the amount that might be
allocated to the Fund would be much less than it desires to buy. There is no
public market for shares sold in these private placements and it is possible
that an initial public offering will never be completed. Moreover, even after an
initial public offering,

there may be a limited trading market for the securities or the Fund may be
subject to contractual limitations on its ability to sell the shares.

Other Investments and Strategies

.. Foreign securities Although the Fund may invest up to 25% of its assets in
foreign securities, including those in emerging markets, it does not intend
to invest more than 10% in foreign securities, generally, nor more than 5%
in emerging markets securities, specifically.

.. Debt securities The Fund also may invest in debt securities that the
manager believes have the potential for capital appreciation as a result of
improvement in the creditworthiness of the issuer. The receipt of income is
incidental to the Fund's goal of capital growth. The Fund may invest in
debt securities rated B or above by Moody's or S&P/(R)/, or in unrated
securities the manager determines are of comparable quality. Currently,
however, the Fund does not intend to invest more than 5% of its assets in
debt securities (including convertible debt securities) rated lower than
BBB by S&P/(R)/ or Baa by Moody's or, if unrated, that the manager
determines to be of comparable quality.

.. REITs The Fund currently does not intend to invest more than 10% of its
assets in real estate investment trusts (REITs), including small company
REITs.

.. Loans of portfolio securities The Fund intends to take full advantage of
its authority to lend its portfolio securities up to 20% of its total
assets in order to generate additional income.

.. The Fund also may:

. write covered put and call options on securities or financial indices;
. purchase put and call options on securities or financial indices;
. purchase and sell futures contracts or related options with respect to
securities, indices and currencies;
. invest in illiquid or restricted securities up to 15% of its net
assets;
. borrow up to 33 1/3% of the value of its total assets; and
. enter into repurchase or reverse repurchase agreements.

The Fund is subject to Fundamental Investment Policies 1.1, 2.3, 3.1, 4.1, 7.2,
10.3 and 18.

Franklin Small Cap Value Securities Fund
(Small Cap Value Fund)
Before May 1, 2002, the Fund's name was Franklin Value Securities Fund.

The Fund's investment goal is long-term total return.
Other Considerations

The Fund may invest in preferred stocks, securities convertible into common
stocks, warrants, secured and unsecured debt securities, and notes.

Control The Fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, if the
manager perceives that the Fund may benefit, the manager may, but is not
obligated to, seek to influence or control management.

Companies emerging from bankruptcy The Fund may, from time to time, buy
securities of companies emerging from bankruptcy, which have special risks.
Companies emerging from bankruptcy may have difficulty retaining customers and
suppliers. These companies may have relatively weak balance sheets and during
economic downturns, they may have insufficient cash flow to pay their debt
obligations and difficulty finding additional financing.

Other Investments and Strategies

.. Foreign securities The Fund may invest up to 25% of its total assets in
foreign securities, but currently intends to limit its investments in
foreign securities generally to less than 10% and in emerging markets
securities to less than 5%.

.. Convertible securities The Fund may invest in convertible securities,
enhanced convertible securities and synthetic convertibles. The Fund
applies the same rating criteria and investment policies to convertible
debt securities as its investments in debt securities.

.. Lower-rated securities The Fund may invest up to 25% of its assets in debt
securities rated below BBB by S&P(R) or Baa by Moody's, or in unrated debt
securities that the manager determines to be comparable. Such securities,
sometimes called "junk bonds," are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal
in accordance with the terms of the obligation. Therefore, these securities
involve special risks. Debt securities rated D by S&P(R) are in default and
may be considered speculative.

.. The Fund also may:

. sell short securities it does not own, up to 5% of its assets;
. sell securities "short against the box" without limit;
. lend its portfolio securities up to 33 1/3% of its assets;
. borrow up to 33 1/3% of the value of its total assets from banks;
. invest in zero coupon securities, pay-in-kind bonds, structured notes,
mortgage-backed and asset-backed securities;
. purchase loan participations and trade claims, both of which carry a
high degree of risk;

. purchase and sell exchange-listed and over-the-counter put and call
options on securities and financial indices;
. purchase and sell futures contracts or related options with respect to
securities and indices; and
. invest in restricted or illiquid securities.

The Fund is subject to Fundamental Investment Policies 2.1, 3, 4, 5.1, 7, 9.2,
10.1, 11, 13 and 15.

Franklin Strategic Income Securities Fund
(Strategic Income Fund)

The Fund's principal goal is to earn a high level of current income. Its
secondary goal is long-term capital appreciation.
Other Considerations

The Fund may invest up to 35% of its total assets in common stocks.

Debt ratings The Fund may invest in debt securities in any rating category.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis at
the time of the rating. The Fund also may buy defaulted debt securities if, in
the opinion of the manager, it appears the issuer may resume interest payments
or other advantageous developments appear likely in the intermediate future.

Other Investments and Strategies

.. Portfolio turnover The manager's rebalancing of the portfolio when seeking
to keep interest rate risk, market and country allocations, and bond
maturities at desired levels may cause the Fund's portfolio turnover rate
to be high. High turnover generally increases the Fund's transaction costs.
Moreover, in shifting assets strategically from one sector to another,
there is no guarantee that the manager will consistently select the sectors
that are the most advantageous.

.. Indebtedness and participations The Fund may invest in secured or unsecured
corporate indebtedness, including loan participations and trade claims.

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

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

.. Stripped securities The Fund may purchase stripped securities such as U.S.
Treasury Strips, which are extremely sensitive to changes in interest rates
(and prepayments) and their prices will fluctuate more than the prices of
other interest-paying bonds or notes.

.. Mortgage-backed securities The Fund may invest in mortgage-backed
securities issued by private entities, which are supported by the credit of
the issuer.

.. The Fund also may:

.. invest in illiquid securities up to 15% of its net assets;
.. lend its portfolio securities up to 33 1/3% of the value of its total
assets;

.. borrow up to 33 1/3% of the value of its total assets;
.. enter into repurchase or reverse repurchase agreements; and
.. enter into covered mortgage dollar rolls.

The Fund is subject to Fundamental Investment Policies 2.3, 3.1, 4.1, 7.1, 10.3
and 18.

Franklin Technology Securities Fund
(Technology Fund)

The Fund's investment goal is capital appreciation. Other Considerations

The Fund may invest in companies of any size. Small-cap companies generally have
market capitalizations of up to $1.5 billion, at the time of purchase. Mid-cap
companies generally have market capitalizations of $1.5 to $8 billion at the
time of the Fund's investment. Market capitalization is the total market value
of a company's outstanding stock.

The Fund may invest up to 5% of its assets in private placements, particularly
late stage private placements. Late stage private placements are sales of
securities made in non-public, unregistered transactions shortly before a
company expects to go public. The Fund may do this in order to participate in
companies whose initial public offerings are expected to be "hot" issues. There
is no public market for shares sold in these private placements and it is
possible that an initial public offering will never be completed. Moreover, even
after an initial public offering, there may be a limited trading market for the
securities or the Fund may be subject to contractual limitations on its ability
to sell the shares.

Other Investments and Strategies

.. Foreign securities The Fund may invest up to 35% of its total assets in
foreign securities, including those in emerging markets. The Fund may buy
securities that are traded in the U.S. or directly in foreign markets. For
this Fund, emerging market countries include those generally considered low
or middle income countries by the International Bank for Reconstruction and
Development (commonly known as the World Bank) and the International
Finance Corporation.

.. Convertible securities The Fund may invest in convertible securities up to
20% of its assets, principally in preferred stocks.

.. Debt securities The Fund will invest less than 5% of its net assets debt
securities. The Fund may buy rated and unrated debt securities. Independent
rating agencies rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates
higher risk.

.. The Fund also may:

. engage in repurchase agreements;
. invest in illiquid securities up to 15% of its net assets;
. lend its portfolio securities up to 33 1/3% of the value of its total
assets;
. borrow up to 33 1/3% of the value of its total assets;
. invest its assets in securities issued by companies engaged in
securities related businesses;
. buy equity securities on a "when-issued" or "delayed delivery" basis;
. buy equity securities under a standby commitment agreement;
. buy and sell options on securities and securities indices (provided
the premiums paid for such options total 5% or less of the Fund's net
assets);
. buy and sell futures contracts for securities and currencies;
. buy and sell securities index futures and options on securities index
futures; and
. buy or write covered put and call options on securities listed on a
national securities exchange and in the over-the-counter (OTC) market
and on securities indices.

The Fund is subject to Fundamental Investment Policies 2.3, 3.1, 4.1, 10.3 and
18.

Franklin U.S. Government Fund
(Government Fund)

The Fund's investment goal is income.

Other Considerations

Government National Mortgage Association (GNMA) obligations (Ginnie Maes)
Payments to holders of Ginnie Maes consist of the monthly distributions of
interest and principal less GNMA's and issuers' fees. The Fund will reinvest the
return of principal in

securities that may have different interest rates than the Ginnie Mae on which
the principal was returned.

Unscheduled principal payments are passed through to the Ginnie Mae holders,
such as the Fund, when mortgages in the pool underlying a Ginnie Mae are prepaid
by borrowers (because a home is sold and the mortgage is paid off, or the
mortgage is refinanced) or as a result of foreclosure. Accordingly, a Ginnie
Mae's life is likely to be shorter than the stated maturity of the mortgages in
the underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular Ginnie Mae.

Other Investments and Strategies

.. Other mortgage securities The Fund also may invest in fixed-rate
mortgage-backed securities, adjustable-rate mortgage-backed securities
(ARMS), or a hybrid of the two. In addition to ARMS, the Fund also may
invest in adjustable rate U.S. government securities, which may include
securities backed by other types of assets, including business loans
guaranteed by the U.S. Small Business Administration and obligations of the
Tennessee Valley Authority. Some government agency obligations or
guarantees are supported by the full faith and credit of the U.S.
government, while others are supported principally by the issuing agency
and may not permit recourse against the U.S. Treasury if the issuing agency
does not meet its commitments.

.. Other Pass-Through Securities The Fund may invest in certain other types of
pass-through debt securities, issued or guaranteed by U.S. government
agencies or instrumentalities.

.. The Fund also may:

. purchase securities on a "to be announced" and "delayed delivery"
basis;
. enter into covered mortgage "dollar rolls;"
. lend portfolio securities up to 30% of its assets;
. borrow up to 5% of the value its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes;
and
. engage in repurchase agreements.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8,
9, 10, 11, 12, 13, 14 and 15.

Franklin Zero Coupon Funds 2005, and 2010 (Zero Coupon Funds): Maturing in
December of 2005, 2010

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

Other Considerations

The Funds may purchase zero coupon bonds issued by foreign government issuers,
and domestic and foreign corporations.

The Funds also may purchase zero coupon bonds or stripped securities including:

.. securities issued by the U.S. Treasury (Stripped Treasury Securities). The
Funds do not anticipate that these securities will exceed 55% of a Fund's
assets;
.. securities issued by the U.S. government and its agencies and
instrumentalities (Stripped Government Securities);
.. debt securities denominated in U.S. dollars that are issued by foreign
issuers, often subsidiaries of domestic corporations (Stripped Eurodollar
Obligations); and
.. to a lesser extent, zero coupon securities issued by domestic corporations,
which consist of corporate debt securities without interest coupons, and,
if available, interest coupons that have been stripped from corporate debt
securities, and receipts and certificates for such stripped debt securities
and stripped coupons (collectively, Stripped Corporate Securities).

Zero coupon bonds and stripped securities, like other debt securities, are
subject to certain risks, including credit and market risks. To the extent the
Funds invest in securities other than U.S. Treasury securities, these
investments will be rated at least A by nationally recognized statistical rating
agencies or unrated securities that the manager determines are of comparable
quality. Debt securities rated A are regarded as having an adequate capacity to
pay principal and interest but are vulnerable to adverse economic conditions and
have some speculative characteristics. The Funds will also attempt to minimize
the impact of individual credit risks by diversifying their portfolio
investments. The availability of stripped securities, other than Stripped
Treasury Securities, may be limited at times. During such periods, because the
Funds must meet annuity tax diversification rules, they may invest in other
types of fixed-income securities.

Because each Fund will be predominantly invested in zero coupon securities,
investors who hold shares to maturity will experience a return consisting
primarily of the amortization of discount on the underlying securities in the
Fund. However, the net asset value of a Fund's shares increases or decreases
with changes in the market value of that Fund's investments.

Maturity The estimated expense of terminating and liquidating a Fund will be
accrued ratably over the year preceding its Target Date. These expenses, which
are charged to income like all expenses, are not expected to exceed
significantly the ordinary annual expenses incurred by the Fund and, therefore,
should have no significant additional effect on the maturity value of the Fund.

Tax considerations Under federal income tax law, a portion of the difference
between the purchase price of the zero coupon securities and their face value
(original issue discount) is considered to be income to the Zero Coupon Funds
each year, even though the Funds

will not receive cash payments representing the discount from these securities.
This original issue discount will comprise a part of the net taxable investment
income of the Funds that must be "distributed" to the insurance company, as
shareholder, each year whether or not the distributions are paid in cash. To the
extent the distributions are paid in cash, the Fund may have to generate the
required cash from interest earned on non-zero coupon securities or possibly
from the disposition of zero coupon securities.

Other Investments and Strategies

.. Foreign securities Although each Fund reserves the right to invest up to
10% of its assets in foreign securities, each Fund typically invests less
than that and only in dollar denominated foreign securities.

.. Structured notes Although each Fund reserves the right to invest up to 10%,
each Fund currently does not intend to invest more than 5% of its assets in
certain structured notes that are comparable to zero coupon bonds in terms
of credit quality, interest rate volatility, and yield.

.. Money Market Instruments Each Fund may invest up to, but under normal
circumstances will have less than, 20% of its assets in money market
instruments for purposes of providing income for expenses, redemption
payments, and cash dividends.

.. Each Fund also may:

. lend portfolio securities up to 30% of its assets;
. borrow up to 5% of the value of its total assets, except from banks
for temporary or emergency purposes, and not for direct investments in
securities; and
. enter into repurchase agreements.

The Funds are subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8,
9, 10, 11,12, 13, 14 and 15.

Mutual Discovery Securities Fund
(Mutual Discovery Fund)

The Fund's investment goal is capital appreciation.

Other Considerations

The Fund may invest in securities that are traded on U.S. or foreign exchanges,
the NASDAQ national market or in the over-the-counter market, and may invest in
any industry or sector. From time to time, the Fund may hold significant cash
positions, consistent with its policy on temporary investments, until suitable
investment opportunities are available.

Debt securities in which the Fund may invest include securities or indebtedness
issued by corporations or governments in any form, as well as distressed
mortgage obligations and

other debt secured by real property. The Fund does not have established
percentage limits for its investment in equity securities, debt securities or
money market instruments.

Restructuring or distressed companies The Fund does not presently anticipate
investing more than 50% of its assets in such investments, but is not restricted
to that amount.

Control The Fund may invest in other entities that purchase securities for the
purpose of influencing or controlling management. These entities may invest in a
potential takeover or leveraged buyout or invest in other entities engaged in
such practices.

Lower-rated securities The Fund may invest in debt securities in any rating
category. In general, the Fund will invest in these instruments for the same
reasons as equity securities, i.e., the manager believes that the securities may
be acquired at prices less than their intrinsic values. Consequently, the
manager's own analysis of a debt instrument exercises a greater influence over
the investment decision than the stated coupon rate or credit rating. The Fund
expects to invest in debt securities issued by reorganizing or restructuring
companies, or companies that recently emerged from, or are facing the prospect
of a financial restructuring. It is under these circumstances, which usually
involve unrated or low rated securities that are often in, or are about to,
default, that the manager seeks to identify securities which are sometimes
available at prices which it believes are less than their intrinsic values. The
Fund may invest without limit in defaulted debt securities, subject to the
Fund's restriction on investments in illiquid securities. The purchase of debt
of a troubled company always involves a risk that the investment may be lost.
However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.

Other Investments and Strategies

.. Other Indebtedness The Fund also may invest in other forms of secured or
unsecured indebtedness or participations (indebtedness), which may have
very long maturities or may be illiquid.

.. Foreign securities The Fund presently does not intend to invest more than
5% of its assets in securities of emerging market countries including
Eastern European countries and Russia. Foreign investments may include both
voting and non-voting securities, sovereign debt and participation in
foreign government deals.

.. Currency hedging To the extent that hedging is available, the Fund may use
the following currency hedging techniques: foreign currency futures
contracts, options on foreign currencies or currency futures, forward
foreign currency exchange contracts and currency swaps.

.. The Fund also may:

. sell short securities it does not own up to 5% of its assets;
. sell securities "short against the box" without limit;

. lend its portfolio securities up to 33 1/3% of its assets;
. borrow up to 33 1/3% of the value of its total assets from banks;
. enter into repurchase transactions;
. purchase securities on a "when-issued" or "delayed delivery" basis;
. invest in restricted or illiquid securities;
. purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other
financial instruments; and

. purchase and sell futures contracts and related options.

The Fund is subject to Fundamental Investment Policies 1, 2.1, 3, 4, 5.1, 7,
9.2, 10.1, 11, 13 and 15.

Mutual Shares Securities Fund
(Mutual Shares Fund)

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

Other Considerations

The Fund may invest in securities that are traded on U.S. or foreign exchanges,
the NASDAQ national market or in the over-the-counter market, and may invest in
any industry sector. From time to time, the Fund may hold significant cash
positions, consistent with its policy on temporary investments, until suitable
investment opportunities are available.

Debt securities in which the Fund may invest include securities or indebtedness
issued by corporations or governments in any form, as well as distressed
mortgage obligations and other debt secured by real property. The Fund does not
have established percentage limits for its investment in equity securities, debt
securities or money market instruments.

Restructuring or distressed companies The Fund does not presently anticipate
investing more than 50% of its assets in such investments, but is not restricted
to that amount.

believes are less than their intrinsic values. The Fund may invest without limit
in defaulted debt securities, subject to the Fund's restriction on investments
in illiquid securities. The purchase of debt of a troubled company always
involves a risk that the investment may be lost. However, the debt securities of
reorganizing or restructuring companies typically rank senior to the equity
securities of such companies.

Other Investments and Strategies

.. Indebtedness The Fund also may invest in other forms of secured or
unsecured indebtedness or participations (indebtedness), which may have
very long maturities or may be illiquid.

.. Foreign securities Although the Fund reserves the right to purchase
securities in any foreign country without percentage limitation, the Fund's
current investment strategy is to invest primarily in domestic securities,
with approximately 15-20% of its assets in foreign securities. The Fund
presently does not intend to invest more than 5% of its assets in
securities of emerging markets, including Eastern European countries and
Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.

.. Currency hedging The Fund may use the following currency hedging
techniques: investments in foreign currency futures contracts, options on
foreign currencies or currency futures, forward foreign currency exchange
contracts and currency swaps.

.. The Fund also may:

. sell short securities it does not own up to 5% of its assets;
. sell securities "short against the box" without limit;
. lend its portfolio securities up to 33 1/3% of its assets;
. borrow up to 33 1/3% of the value of its assets from banks;
. enter into repurchase transactions;
. purchase securities on a "when-issued" or "delayed delivery" basis;
. invest in restricted or illiquid securities: purchase and sell
exchange-listed and over-the- counter put and call options on
securities, equity and fixed-income indices and other financial
instruments; and

. purchase and sell futures contracts and related options.

The Fund is subject to Fundamental Investment Policies 1, 2.1, 3, 4, 5.1, 7,
9.2, 10.1, 11, 13 and 15.

Templeton Developing Markets Securities Fund
(Developing Markets Fund)

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

Other Considerations

For this Fund, emerging market countries include: (i) countries that are
generally considered low or middle income countries by the International Bank
for Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation; or (ii) countries that are classified by
United Nations or otherwise regarded by their authorities as emerging; or (iii)
countries with a market capitalization of less than 3% of the Morgan Stanley
Capital World Index.

Emerging market equity securities are equity securities of emerging market
companies. Emerging market companies are: (i) companies the principal securities
trading markets of which are in emerging market countries; or (ii) companies
that derive a significant share of their total revenue from either goods or
services produced or sales made in emerging market countries; or (iii) companies
that have a significant portion of their assets in emerging market countries; or
(iv) companies that are linked to currencies of emerging market countries; or
(v) companies that are organized under the laws of, or with principal offices
in, emerging market countries. The manager will determine eligibility based on
publicly available information and inquiries to the companies.

The manager will determine the eligibility of investments based on publicly
available information and inquiries made to companies.

From time to time, the Fund may hold significant cash positions until suitable
investment opportunities are available, consistent with its policy on temporary
investments.

The Fund seeks to benefit from economic and other developments in emerging
markets. The investment goal of the Fund reflects the belief that investment
opportunities may result from an evolving, long-term international trend
favoring more market-oriented economies. This trend may be facilitated by local
or international political, economic or financial developments that could
benefit the capital markets of such countries. Countries in the process of
developing more market-oriented economies may experience relatively high rates
of economic growth, but there are many factors that may slow development and
growth. Other countries, although having relatively mature emerging markets,
also may be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental intervention
in economic affairs.

The Fund may use various derivative strategies. The performance of derivative
investments depends, at least in part, on the performance of an underlying
asset. Derivatives involve costs, may be volatile, and may involve a small
investment relative to the risk assumed. Their successful use will depend on the
manager's ability to predict market movements. Risks include delivery failure,
default by the other party or the inability to close out a position because the
trading market becomes illiquid.

Other Investments and Strategies

.. Smaller companies The Fund may invest significantly in smaller companies,
which have market capitalizations of $1.5 billion or less. Market
capitalization is the total market value of a company's outstanding stock.

.. Debt securities Depending upon current market conditions, the Fund may
invest up to 20% of its assets in fixed-income debt securities for capital
appreciation.

To the extent the Fund invests in debt securities, it will invest in those
rated at least C by Moody's or S&P(R) or, if unrated, that the manager
determines to be of comparable quality. As a fundamental policy, the Fund
will not invest more than 10% of its assets in defaulted debt securities.
The Fund does not, however, currently intend to invest in defaulted debt.
As an operating policy (which may be changed without shareholder approval),
the Fund will not invest more than 5% of its assets in lower-rated debt
securities which include debt securities rated BBB or lower by S&P(R) or
Baa or lower by Moody's (the lowest category of "investment grade" rating).

.. Closed end investment companies The Fund may invest up to 10% of its total
assets in securities of closed-end investment companies to facilitate
foreign investment. Investors should realize that they indirectly bear a
proportionate share of the expenses of these investment companies,
including operating costs, and investment advisory or administrative fees.

.. Foreign securities The Fund will at all times, except during defensive
periods, maintain investments in at least three emerging markets countries.
As a non-fundamental policy, however, the Fund will limit its investments
in securities of Russian issuers to 5% of assets. The Fund may, but
currently does not intend to, invest more than 15% of its total assets in
securities of foreign issuers that are not listed on a recognized U.S. or
foreign securities exchange.

.. The Fund also may:

. lend its portfolio securities up to 33 1/3% of its assets;

. borrow up to 33 1/3% of the value of its assets;

. purchase convertible securities and warrants;

. invest up to 15% of its net assets in illiquid securities;

. engage in repurchase transactions;

. enter into forward foreign currency exchange contracts; and

. enter into futures contracts, and related options, with respect to
securities, securities indices and foreign currencies. The value of
the underlying securities of written futures contracts will not exceed
at any time, 25% of the Fund's total assets.

When deemed appropriate by the manager, the Fund may invest cash balances in
repurchase agreements and other money market investments to maintain liquidity
in an amount to meet expenses or for day-to-day operating purposes.

The Fund is subject to Fundamental Investment Policies 1.1, 2.4, 3.1, 4.1, 7.2,
10.3 and 18.

Templeton Foreign Securities Fund
(Foreign Securities Fund)

Before May 1, 2002, the Fund's name was Templeton International Securities Fund.

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

Other Considerations

As an international fund, the Fund will invest at least 65% of its total assets
in securities of issuers in at least three countries outside the U.S. The Fund
will invest predominantly in large-cap and mid-cap companies with market
capitalizations of $5 billion or more, and $2 billion to $5 billion,
respectively. It also may invest up to 15% of its assets in smaller companies.

Other Investments and Strategies

.. Foreign securities As a non-fundamental policy, the Fund will limit its
investments in securities of Russian issuers to 5% of its assets.

.. Debt securities The Fund may invest up to 20% of its assets in debt
securities including in medium and lower quality debt securities that are
rated between BBB and as low as D by S&P(R), and between Baa and as low as
C by Moody's or unrated securities the manager determines are of comparable
quality. As an operating policy (which may be changed by the Board without
shareholder approval) the Fund will not invest more than 5% of its assets
in lower-rated securities rated BB or lower by S&P(R), Ba or lower by
Moody's, or lower unrated securities that the manager determines are an
equivalent investment quality.

.. The Fund also may:

. invest up to 15% of its net assets in illiquid securities;

. invest up to 5% of its net assets in convertible securities;

. enter into firm commitment agreements;

. purchase securities on a "when issued" basis;

. purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts. It may engage in
these transactions only if the total contract value of the futures do
not exceed 20% of the Fund's total assets;

. lend its portfolio securities up to 33 1/3% of its total assets; and

. borrow up to 33 1/3% of the value of its total assets.

The Fund is subject to Fundamental Investment Policies 1.1, 2.4, 3.1, 4.1, 7.2,
10.3 and 18.

Templeton Global Asset Allocation Fund
(Asset Allocation Fund)

Before May 1, 2002, the Fund's name was Templeton Asset Strategy Fund.

The Fund's investment goal is high total return. This goal is fundamental, which
means it may not be changed without shareholder approval.

Other Considerations

The Fund will normally invest its assets in at least three countries, except
during defensive periods.

Other Investments and Strategies

.. Foreign securities The Fund has an unlimited ability to purchase exchange
listed securities in any foreign country, developed or emerging. The Fund
will not invest more than 15% of its total assets in securities of foreign
issuers that are not listed on a recognized U.S. or foreign securities
exchange. As a non-fundamental policy, the Fund will limit its investments
in securities of Russian issuers to 5% of its assets.

.. Debt securities The Fund may invest in debt securities issued by
governments or companies, whether domestic or foreign, such as bonds,
debentures, notes, commercial paper, collateralized mortgage obligations
(CMOs) and securities issued or guaranteed by governments agencies and
instrumentalities. The Fund may invest in preferred stocks and certain debt
securities, rated or unrated, such as convertible bonds and bonds selling
at a discount. The average maturity of debt securities in the Fund's
portfolio is medium-term (about 5 to 15 years), but will fluctuate
depending on the manager's outlook on the issuer's country and future
interest rate changes.

.. Money Market Instruments The Fund may hold cash and time deposits with
banks in the currency of any major nation and invest in certificates of
deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund also may invest in commercial
paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P(R) or,
unrated commercial paper issued by companies having outstanding debt issue
currently rated Aaa or Aa by Moody's or AAA or AA by S&P(R).

.. The Fund also may:

. invest in illiquid securities up to 15% of its net assets;

. invest in collateralized mortgage obligations;

. purchase securities on a "when-issued" basis;

. invest in REITS;

. enter into repurchase transactions;

. lend its portfolio securities up to 33 1/3% of its assets;

. borrow up to 33 1/3% of the value of its assets;

. invest in forward foreign currency exchange contracts; and

. purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purpose
only and not for speculation. It may engage in these transactions only
if the total contract value of the futures contract does not exceed
20% of the Fund's total assets.

The Fund is subject to Fundamental Investment Policies 1.1, 2.4, 3.1, 4.1, 7.2,
10.3 and 18.

Templeton Global Income Securities Fund
(Global Income Fund)

The Fund's investment goal is high current income consistent with preservation
of capital. This goal is fundamental, which means it may not be changed without
shareholder approval. Capital appreciation is a secondary consideration.

Other Considerations

A supranational organization is an entity designated or supported by the
national government of one or more countries to promote economic reconstruction
or development. The Fund selects investments to provide a high current yield and
currency stability, or a combination of yield, capital appreciation, and
currency appreciation. As a global fund, the Fund may invest in securities
issued in any currency and may hold foreign currency.

Under normal market conditions, the Fund will have at least 25% of its assets
invested in debt securities issued or guaranteed by foreign governments. Under
normal circumstances, at least 65% of the Fund's assets will be invested in
issuers located in at least three countries, one of which may be the U.S.

The Fund may invest a significant portion of its assets in securities and
currency in emerging market countries.

Other Investments and Strategies

.. Debt securities The Fund may invest in debt or equity securities of any
type of issuer, including domestic and foreign corporations, domestic and
foreign banks (with assets in excess of one billion dollars), other
business organizations, and domestic and foreign governments and their
political subdivisions, including the U.S. government,

its agencies, and authorities or instrumentalities, and supranational
organizations. The Fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by
entities owned by either a national, state, or equivalent government or of
a government jurisdiction that are not backed by its full faith and credit
and general taxing powers. The Fund considers securities issued by central
banks that are guaranteed by their national governments to be government
securities.

The debt securities in which the Fund invests may have equity features,
such as conversion or exchange rights or warrants for the acquisition of
stock of the same or a different issuer; participation based on revenues,
sales or profits; or the purchase of common stock in a unit transaction
(where an issuer's debt securities and common stock are offered as a unit).

The Fund may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the average life span of all
of the Fund's investments (the dollar-weighted average maturity of the
Fund's investments) will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when the manager expects interests rates
worldwide or in a particular country to rise and longer when the manager
expects interest rates to fall.

.. Portfolio turnover The manager's rebalancing of the portfolio when seeking
to keep interest rate risk, country allocations, and bond maturities at
desired levels, may cause the Fund's portfolio turnover rate to be high.
High turnover generally increases the Fund's transaction costs..

.. The Fund also may:

.. use forward and futures contracts, options on currencies, and interest rate
swaps;
.. invest in preferred stock;
.. invest in structured notes;
.. purchase and sell call and put options on U.S. or foreign securities;
.. acquire loan participations;
.. lend its portfolio securities up to 30% of its assets;
.. borrow up to 5% of the value of its total assets, except from banks for
temporary or emergency purposes, and not for direct investments in
securities;
.. enter into repurchase, reverse repurchase, and "when-issued" transactions;
and
.. enter into futures contracts for the purchase or sale of U.S. Treasury or
foreign securities or based upon financial indices.

The Fund is subject to Fundamental Investment Policies 2, 3, 4, 5, 6, 7, 8.1,
9.3, 10.1, 11, 12, 13, 14 and 15.

Templeton Growth Securities Fund
(Growth Securities Fund)

The Fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval. Any
income the Fund earns will be incidental.

Other Considerations

The Fund considers emerging market countries to include those generally
considered low or middle income countries by the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. As a non-fundamental policy, the Fund will
limit its investments in securities of Russian issuers to 5% of assets.

Other Investments and Strategies

.. Debt securities The Fund may invest in bonds, convertible bonds, and bonds
selling at a discount, as a defensive measure while looking for attractive
equity investments. The Fund also may invest in debt securities for capital
appreciation. The Fund may invest in debt securities that are rated as low
as C by Moody's or S&P(R)(the lowest rating category) or, if unrated, that
the manager determines to be of comparable quality, but intends to invest
in those that are highly rated. However, as a policy established by the
Board, the Fund will not invest more than 5% of its assets in debt
securities rated BBB or lower by S&P(R)or Baa or lower by Moody's.
Consistent with the goal of the Fund, the Board may consider a change if
economic conditions change such that a higher level of investment in high
risk, lower quality debt securities would be appropriate. As a fundamental
policy, the Fund may not invest more than 10% of its assets in defaulted
debt securities. The Fund, however, does not currently intend to invest in
any defaulted debt securities.

.. Stock Index Futures The Fund may purchase and sell stock index futures
contracts up to, in the aggregate, 20% of its assets. It may not at any
time commit more than 5% of its assets to initial margin deposits on
futures contracts.

.. Loans of portfolio securities In order to increase income to the Fund, the
Fund may lend certain of its portfolio securities up to 30% of its total
assets to qualified banks and broker dealers.

.. The Fund also may:

.. purchase preferred stocks;
.. invest up to 10% of its assets in securities with a limited trading market,
i.e., "illiquid securities";
.. enter into repurchase agreements;
.. borrow up to 5% of the value of its total assets, except from banks for
temporary or emergency purposes, and not for direct investments in
securities; and
.. invest in restricted securities.

The Fund is subject to Fundamental Investment Policies 1, 2, 3, 4, 5, 6, 7, 8.1,
9.3, 10.1, 11, 12, 13, 14, 15, 16 and 17.

Glossary of Securities, Investment Techniques and Their Risks

This section describes certain types of securities and investment techniques
that a Fund may use to help it achieve its investment goals and to the extent
not expressly prohibited by its investment policies. Not all investments,
strategies and techniques are available to all Funds. You should refer to the
information in the Fund's prospectus or earlier in this SAI to determine if an
investment, strategy or technique may be used by a particular Fund. If there
appears to be an inconsistency between this section and the individual Fund
section with respect to investments, strategies or techniques, the individual
Fund section controls and should be relied upon.

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

The value of your shares will increase as the value of the securities owned by a
Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares also may
change with movements in the stock and bond markets as a whole.

During a period beginning in the early 1990's, the U.S. economy experienced the
longest period of expansion in its history. At times, gains in the stock market,
and for many individual securities, significantly exceeded prior historical
norms. Investors should not have unrealistic expectations that such expansion or
the pace of gains will resume or continue in the future.

In addition to the risks described in each Fund's prospectus and the individual
Fund summaries in this SAI, investors should consider the risks that pertain to
the Funds that may invest in the instruments or engage in the following
strategies.

BORROWING

None of the Funds will purchase additional securities while its borrowing
exceeds its stated percentage limitations on borrowing. Under federal securities
laws, a fund may borrow from banks provided it maintains continuous asset
coverage of 300% with respect to such borrowings, including selling (within
three days) sufficient portfolio holdings to

restore such coverage should it decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint.

Leveraging by means of borrowing may make any change in the Fund's net asset
value even greater and thus result in increased volatility of returns. The
Fund's assets that are used as collateral to secure the borrowing may decrease
in value while the borrowing is outstanding, which may force the Fund to use its
other assets to increase the collateral. In addition, the money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances). The cost of borrowing may
exceed the income received from the securities purchased with borrowed funds.

In addition to borrowing for leverage purposes, the Funds also may borrow money
to meet redemptions in order to avoid forced, unplanned sales of portfolio
securities. This allows the Funds greater flexibility to buy and sell portfolio
securities for investment or tax considerations, rather than cash flow
considerations. See "Fundamental Investment Policies" for more information about
the Funds' policies with respect to borrowing.

CONVERTIBLE SECURITIES

IN GENERAL. A convertible security is generally a debt obligation or preferred
stock that may be converted within a specified period of time into a certain
amount of common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when interest
rates decline and decrease in value when interest rates rise. Like a common
stock, the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because both interest rate and market
movements can influence its value, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor 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 that convertible security
is "converted," the operating company often issues new stock to the holder of
the convertible security. If, however, the parity price (the price at which the
common stock underlying the convertible security may be obtained) of the
convertible security is less than the call price (the price of the bond,
including any premium related to the conversion feature), the operating company
may pay out cash instead of common stock. When a convertible security is issued
by an investment bank, the security is an obligation of and is convertible
through the issuing investment bank.

In addition, 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 convertible security may be subject to
redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.

While each 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 of the issuer 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 its market value is dependent on the issuer's business
prospects for an indefinite period of time. In addition, distributions from
preferred stock are dividends, rather than interest payments, and are usually
treated as such for corporate tax purposes.

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

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

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

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

EXCHANGEABLE SECURITIES. Exchangeable securities are often used by a company
divesting a holding in another company. The primary difference between
exchangeable and standard convertible securities is that the issuing company is
a different company from that which issued the underlying shares.

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

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

SYNTHETIC CONVERTIBLE SECURITIES. A synthetic convertible is created by
combining distinct securities that together possess fixed income payments and
the right to acquire the underlying equity security. This combination is
achieved by investing in nonconvertible fixed-income securities and in warrants
or stock or stock index call options that grant the holder the right to purchase
a specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be equity securities for
purposes of each Fund's investment policy regarding those securities.

Synthetic convertible securities differ from a true convertible security in the
following respects:

.. The value of a synthetic convertible is the sum of the values of its
fixed-income and convertibility components, which means that the values of
a synthetic convertible and a true convertible security will respond
differently to market fluctuations.

.. Typically, the two components of a synthetic convertible represent one
issuer, but a Fund may combine components representing distinct issuers or
combine a fixed income security with a call option on a stock index when
the manager determines that such a combination would better promote
pursuing a Fund's investment objectives.

.. The component parts of a synthetic convertible security may be purchased
simultaneously or separately.

.. The holder of a synthetic convertible faces the risk that the price of the
stock, or the level of the market index underlying the convertibility
component will decline.

DEBT SECURITIES

IN GENERAL. In general, debt securities represent a loan of money by the
purchaser of the securities to the issuer. A debt security typically has a fixed
payment schedule that obligates the issuer to pay interest to the lender and to
return the lender's money over a certain time period. A company typically meets
its payment obligations associated with its outstanding debt securities before
it declares and pays any dividend to holders of its equity securities. Bond,
notes and commercial paper are types of debt securities. Each of these differs
in the length of the issuer's payment schedule, with commercial paper having the
shortest payment schedule.

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.

Interest Rate The market value of debt securities generally varies in response
to changes in interest rates and the financial condition of each issuer. To the
extent a Fund invests in debt securities, changes in interest rates in any
country where the Fund is invested will affect the value of the Fund's portfolio
and its share price. During periods of declining interest rates, the value of
debt securities generally increases. Conversely, rising interest rates, which
will often occur during times of inflation or a growing economy, are likely to
have a negative effect on the value of the Fund's shares. Of course, interest
rates throughout the world have increased and decreased, sometimes very
dramatically, in the past. These changes are likely to occur again in the future
at unpredictable times.

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

The interest rates on ARS are readjusted periodically to an amount above the
chosen interest rate index. These readjustments occur at intervals ranging from
one to sixty

months. The degree of volatility in the market value of the securities held by a
Fund and of the net asset value of the Fund's shares will be a function
primarily of the length of the adjustment period and the degree of volatility in
the applicable indices. It will also be a function of the maximum increase or
decrease of the interest rate adjustment on any one adjustment date, in any one
year, and over the life of the securities. These maximum increases and decreases
are typically referred to as "caps" and "floors," respectively. A Fund does not
seek to maintain an overall average cap or floor, although the manager will
consider caps or floors in selecting ARS for a Fund.

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

Inverse Floaters are instruments with floating or variable interest rates that
move in the opposite direction, usually at an accelerated speed, to short-term
interest rates or interest rate indices.

Structured Notes Structured notes may be much more volatile than the underlying
instruments themselves, depending on the direction of interest rates, and may
present many of the same risks as investing in futures and options. Certain
structured notes without leverage characteristics may still be considered risky
and an investor could lose an amount equal to the amount invested. As with any
debt instruments, structured notes pose credit risk, i.e., the issuer may be
unable to make the required payments. Finally, some structured notes may be
illiquid, that is, the securities may not be sold as readily as other securities
because few investors or dealers trade in such securities or because the notes
are complex and difficult to price. Such potential illiquidity may be especially
pronounced during severe bond market corrections, i.e., a change or a reversal
in the direction of the market. The Board will monitor the liquidity of
structured notes. Notes determined to be illiquid will be subject to a Fund's
percentage limits on illiquid securities. These notes would have coupon resets
that may cause the current coupon to fall to, but not below, zero. Existing
credit quality, duration and liquidity standards would apply so that a Fund may
not invest in structured notes unless the manager believes that the notes pose
no greater credit or market risk than stripped notes. These notes may, however,
carry risks similar to those of stripped securities.

RATINGS. Various investment services publish ratings of some of the debt
securities in which the Funds may invest. These ratings represent the opinions
of the rating services

with respect to the issuer's ability to pay interest and repay principal. They
do not purport to reflect other risks, such as the risk of fluctuations in
market value, and are not absolute standards of quality. See "Description of
Ratings for Bonds, Short-Term Debt and Commercial Paper" for a more complete
discussion of the ratings.

Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to assess
whether, at the time of purchase, the planned investment offers potential
returns that are reasonable in light of the risks involved. The manager, in its
evaluation of the overall investment merits of a security, will consider the
fact that the rating on an issue held in a Fund's portfolio is changed by the
rating service or that the security goes into default, but, in general, will not
automatically sell the security.

Lower-Rated Securities Higher yields are ordinarily available from securities in
the lower rating categories, such as securities rated Ba or lower by Moody's or
BB or lower by S&P(R) or from unrated securities deemed by a Fund's manager to
be of comparable quality. However, lower- rated securities typically are riskier
than investment grade securities. Bonds that are rated C by Moody's are the
lowest rated class of bonds and can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Bonds rated C by
S&P(R) are securities on which no interest is being paid.

An investment in any Fund that invests in non-investment grade securities,
including those issued by foreign companies and governments, is subject to a
higher degree of risk than an investment in a Fund that invests primarily in
higher-quality securities. You should consider the increased risk of loss to
income and principal that is present with an investment in higher risk
securities, such as those in which certain of the Funds invest. Accordingly, an
investment in any Fund should not be considered a complete investment program
and should be carefully evaluated for its appropriateness in light of your
overall investment needs and goals.

Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of lower-rated debt securities may be more complex than for issuers of
higher rated securities. The ability of a Fund to achieve its investment goal
may, to the extent of investment in lower-rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities. A Fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters.

Lower-rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of lower-rated debt securities may 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
raising interest rates, for example, could cause a decline in lower rated debt
securities prices. This is 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 lower-rated debt securities defaults, the
Fund may incur additional expenses to seek recovery.

High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from a Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for a Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for a
Fund to manage the timing of its income. To generate cash for distributions, a
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares. A
portfolio may be required under the Internal Revenue Code and U.S. Treasury
Regulations to accrue income for income tax purposes on defaulted obligations
and to distribute such income to the portfolio shareholders even though the
portfolio is not currently receiving interest principal payments on such
obligations.

The markets in which lower rated and unrated debt securities are traded are more
limited than those in which high 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 deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
lower rated or unrated debt securities also may 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 lower 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.

High yield, fixed-income securities that are sold without registration under the
federal securities laws carry restrictions on resale. While many high yielding
securities have been sold with registration rights, covenants and penalty
provisions for delayed registration, if a Fund is required to sell restricted
securities before the securities have been registered, it may be deemed an
underwriter of the securities under the Securities Act of 1933, which entails
special responsibilities and liabilities. A Fund also may incur special costs in
disposing of restricted securities, although the Fund will generally not incur
any costs when the issuer is responsible for registering the securities.

High yield, fixed-income securities acquired during an initial underwriting
involve special risks because they are new issues. The manager will carefully
review their credit and other characteristics. The Funds have no arrangement
with their underwriter or any other person concerning the acquisition of these
securities.

The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. Since 1990, the market for high yield
securities has been adversely affected during periods of recessions. When
recessions occur in the future, the market for high yield securities may be
adversely affected. Factors adversely impacting the market value of high yield
securities may lower a Fund's net asset value.

The credit risk factors above also apply to lower-quality zero coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, a Fund will not receive any cash until the cash payment date. If the
issuer defaults, a Fund may not obtain any return on its investment.

Certain of the high yielding, fixed-income securities in which the Funds may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.

Defaulted Debt The risk of loss due to default may be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in a
Fund's portfolio defaults, the Fund may have unrealized losses on the security,
which may lower the Fund's net asset value. Defaulted securities tend to lose
much of their value before they default. Thus, a Fund's net asset value may be
adversely affected before an issuer defaults. In addition, a Fund may incur
additional expenses if it must try to recover principal or interest payments on
a defaulted security.

A Fund will buy defaulted debt securities if, in the opinion of the manager,
they may present an opportunity for later price recovery, the issuer may resume
interest payments, or other advantageous developments appear likely in the near
future. Defaulted debt securities may be illiquid and, as such, will be part of
the percentage limits on investments in illiquid securities discussed under
"Fundamental Investment Policies."

LOAN PARTICIPATIONS. Loan participations are interests in floating or variable
rate senior loans to U.S. corporations, partnerships and other entities.
Generally, these instruments are sold without a guarantee by the lending
institution, and are subject to the credit risks of both the borrower and the
lending institution. While loan participations generally trade at par value, a
Fund also may be able to acquire loan participations that sell at a discount
because of the borrower's credit problems. To the extent the borrower's credit
problems are resolved, such loan participations may appreciate in value. The
manager may acquire loan participations for a Fund when it believes that
appreciation will occur over the long term. Most loan participations in which
the Funds intend to invest are illiquid and, to that extent, will be included in
a Fund's limitation on illiquid investments described under "Illiquid
Securities." An investment in these securities

carries substantially the same risks as those for defaulted debt securities.
Interest payments on these securities may be reduced, deferred, suspended or
eliminated and principal payments may likewise be reduced, deferred, suspended
or canceled, causing the loss of the entire amount of the investment.

BANK OBLIGATIONS. Bank obligations, or instruments secured by bank obligations,
include fixed, floating or variable rate CDs, letters of credit, time deposits,
bank notes and bankers' acceptances. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Time deposits are non-negotiable
deposits that are held in a banking institution for a specified time at a stated
interest rate. Bankers' acceptances are negotiable drafts or bills of exchange
normally drawn by an importer or exporter to pay for specific merchandise. When
a bank "accepts" a bankers' acceptance, the bank, in effect, unconditionally
agrees to pay the face value of the instrument upon maturity.

Certain Funds may invest in obligations of U.S. banks, foreign branches of U.S.
banks, foreign branches of foreign banks, and U.S. branches of foreign banks
that have a federal or state charter to do business in the U.S. and are subject
to U.S. regulatory authorities. The Funds that are permitted to invest in bank
obligations may invest in dollar-denominated certificates of deposit and
bankers' acceptances of foreign and domestic banks having total assets in excess
of $1 billion, certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion, or cash and time
deposits with banks in the currency of any major nation.

COMMERCIAL PAPER. Commercial paper typically refers to short-term obligations of
banks, corporations and other borrowers with maturities of up to 270 days. A
Fund may invest in domestic or foreign commercial paper. Investments in
commercial paper are generally limited to obligations rated Prime-1 or Prime-2
by Moody's or A-1 or A-2 by S&P(R) or, if unrated, issued by companies having an
outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or AA by
S&P(R). Certain Funds also may invest in lower rated commercial paper to the
extent permitted by their policies on lower rated debt securities generally. See
"Description of Ratings for Bonds, Short-Term Debt and Commercial Paper" for a
more complete description of commercial paper ratings.

DEFERRED INTEREST AND PAY-IN-KIND BONDS. Deferred interest and pay-in-kind bonds
are bonds issued at a discount that defer the payment of interest until a later
date or pay interest through the issuance of additional bonds, known as
pay-in-kind bonds. A Fund will accrue income on deferred interest bonds for tax
and accounting purposes. Similarly, a Fund will be deemed to receive interest
over the life of such bonds and be treated as if interest were paid on a current
basis for federal income tax purposes, although no cash interest payments are
received by the Fund until the cash payment date or until the bonds mature. This
accrued income from both deferred interest and pay-in-kind bonds must be
"distributed" to the insurance company shareholders each year, whether or not
such distributions are paid in cash. To the extent such distributions are paid
in cash, a Fund may be required to dispose of portfolio securities that it
otherwise

would have continued to hold or to use other sources such as sales of Fund
shares. See "Lower-Rated Securities" above for more information about these
bonds.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities differ from conventional
bonds in that the principal is paid back over the life of the certificate rather
than at maturity. As a result, Funds invested in these securities will receive
monthly scheduled payments of interest as well as principal on their
investments. In addition, the Funds may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When a Fund reinvests the
payments and any unscheduled prepayments of principal it receives, it may not be
able to purchase another security with a rate of interest that is as low as the
rate on the existing security. For this reason, mortgage-backed securities may
be less effective than other types of U.S. government securities as a means of
"locking in" long-term interest rates.

The market value of mortgage-backed securities, like other U.S. government
securities held by the Funds, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. However, mortgage-backed securities, while having
comparable risk of decline in value during periods of rising rates, may have
less potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. To the extent these securities are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may result
in some loss of a Fund's principal investment to the extent of the premium paid.

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

Because the interest rates on the mortgages underlying ARMS are reset
periodically, a Fund may participate in increases in interest rates resulting in
both higher current yields and lower price fluctuations. This is different from
fixed-rate mortgages, which generally decline in value during periods of rising
interest rates. A Fund, however, will not benefit from increases in interest
rates to the extent that interest rates exceed the maximum allowable annual or
lifetime reset limits (or "cap rates") for a particular mortgage security. Since
most mortgage securities held by the Funds will generally have annual reset
limits or caps of 100 to 200 basis points, short-term fluctuations in interest
rates above these levels could cause these mortgage securities to "cap out" and
behave more like long-term, fixed-rate debt securities. If prepayments of
principal are made on the

underlying mortgages during periods of rising interest rates, a Fund generally
will be able to reinvest these amounts in securities with a higher current rate
of return.

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

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

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

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

2. Collateralized mortgage obligations (CMOs), real estate mortgage investment
conduits (REMICs), and multi-class pass-throughs are debt obligations that are
collateralized by mortgage loans or mortgage pass-through securities. These
obligations may be issued and guaranteed by U.S. government agencies or
instrumentalities or issued by certain financial institutions and other mortgage
lenders. CMOs and REMICs are debt instruments issued by special purpose entities
and are secured by pools of mortgages backed by residential and various types of
commercial properties. Multi-class pass-through securities are equity interests
in a trust composed of mortgage loans or other mortgage-backed securities.

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

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

CMOs and REMICS purchased by a Fund may be:

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

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

If the collateral securing the obligation is insufficient to make payment on the
obligation, a holder could sustain a loss. In addition, a Fund may buy CMOs
without insurance or guarantees if, in the opinion of the manager, the sponsor
is creditworthy. The ratings of the CMOs will be consistent with the ratings
criteria of the Fund. Prepayments of the mortgages included in the mortgage pool
may influence the yield of the CMO. Prepayments usually increase when interest
rates are decreasing, thereby decreasing the life of the pool. Reinvestment of
prepayments may be at a lower rate than that on the original CMO. As a result,
the value of CMOs decrease like other debt obligations when interest rates rise,
but when interest rates decline, they may not increase as much as other debt
obligations due to the prepayment feature.

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

. the one-, three-, and five-year constant-maturity Treasury rates;
. the three-month Treasury bill rate;
. the 180-day Treasury bill rate;

. rates on longer-term Treasury securities;
. the 11th District Federal Home Loan Bank Cost of Funds;
. the National Median Cost of Funds;
. the one-,three-, six-month, or one-year LIBOR;
. the prime rate of a specific bank; or
. commercial paper rates.

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

4. Caps and floors. The underlying mortgages that collateralize ARMS and CMOs
will frequently have caps and floors that limit the maximum amount by which the
loan rate to the borrower may change up or down (a) per reset or adjustment
interval and (b) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization (an increase in the
principal due). In periods of rising interest rates, certain coupons may be
temporarily "capped out" resulting in declines in the prices of those securities
and, therefore, a negative affect on share price. Conversely, in periods of
declining interval rates, certain coupons may be temporarily "floored out"
resulting in an increase in the price of those securities and, therefore, a
positive effect on a Fund's share price.

5. Stripped mortgage securities are derivative multi-class mortgage securities.
The stripped mortgage securities in which a Fund may invest will only be issued
or guaranteed by the U.S. government, its agencies or instrumentalities, or
issued by private originators of, or investors in, mortgage loans, including
saving and loan associations, mortgagers, banks, commercial banks, investment
banks, and special purpose subsidiaries of any of these. Stripped mortgage
securities have greater market volatility than other types of mortgage
securities in which a Fund invests.

Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class that receives some of the interest and most of the principal from the
mortgage assets, while the other class receives most of the interest and the
remainder of the principal. In the most extreme case, one class receives all of
the interest (the interest-only or "IO" class), while the other class receives
the entire principal (the principal-only or "PO" class). The yield to maturity
on an IO class is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
underlying mortgage assets. A rapid rate of principal payments may have a
material adverse effect on the yield to maturity of any IO class held by a Fund.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to recoup its initial investment
fully, even if the securities are rated in the highest rating categories, AAA or
Aaa, by S&P(R) or Moody's, respectively.

Stripped mortgage securities are purchased and sold by institutional investors,
such as a Fund, through several investment banking firms acting as brokers or
dealers. These securities were only recently developed, and traditional trading
markets have not yet been established for all stripped mortgage securities.
Accordingly, some of these securities may be illiquid. The staff of the SEC has
indicated that only government-issued IO or PO securities that are backed by
fixed-rate mortgages may be deemed to be liquid. In addition, even with respect
to those securities, if procedures with respect to determining liquidity must be
established by a Fund's Board. The Board may, in the future, adopt procedures
that would permit a Fund to acquire, hold, and treat as liquid government-issued
IO and PO securities. At the present time, however, all such securities will
continue to be treated as illiquid and will, together with any other illiquid
investments, not exceed a Fund's limitation on illiquid securities. This
position may be changed in the future, without notice to shareholders, in
response to the SEC staff's continued reassessment of this matter, as well as to
changing market conditions.

6. Mortgage dollar rolls. In a mortgage dollar roll, a Fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (name, type, coupon, and maturity)
securities on a specified future date. During the period between the sale and
repurchase (the "roll period"), the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop"), as well as by the interest earned on
the cash proceeds of the initial sale.

A "covered roll" is a specific type of mortgage dollar roll for which there is
an offsetting cash position or liquid securities of an equivalent value. A Fund
will not enter into any dollar rolls that are not covered rolls. The Fund could
suffer a loss if the contracting party fails to perform the future transaction
and the Fund is therefore unable to buy back the mortgage-backed securities it
initially sold.

The Funds intend to enter into mortgage dollar rolls only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System. As a matter of non-fundamental policy, the Funds
do not consider the purchase and/or sale of a mortgage dollar roll to be a
borrowing, for purposes of the Funds' fundamental restrictions.

ASSET-BACKED SECURITIES. Asset-backed securities, including adjustable-rate
asset-backed securities (which have interest rates that reset at periodic
intervals), are similar to mortgage-backed securities except that the underlying
assets may include receivables on home equity and credit card loans, and
automobile, mobile home, and recreational vehicle loans and leases. The issuer
intends to repay using the assets backing the securities (once collected).
Therefore, repayment depends largely on the cash-flows generated by the assets
backing the securities. Sometimes, the credit support for these securities is
limited to the underlying assets. Such assets are more likely than real estate

collateral to be inadequate to cover payments on these securities. In other
cases, it may be provided by a third party through a letter of credit or
insurance guarantee.

Asset-backed commercial paper is often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligators on these underlying assets to make payment, the
securities may contain elements of credit support. The credit support falls into
two categories: liquidity protection and protection against ultimate default on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that
scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of these
approaches. The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with the payments. Delinquency or loss that exceeds the anticipated
amount could adversely impact the return on an investment in an asset-backed
security.

Asset-backed securities are issued in either a pass-through structure (similar
to a mortgage pass-through structure) or a pay-through structure (similar to a
CMO structure). There may be other types of asset-backed securities that are
developed in the future in which a Fund may invest. In general, collateral
supporting asset-backed securities has shorter maturities than mortgage loans
and historically has been less likely to experience substantial prepayment.

STRIPPED SECURITIES. Stripped securities are the separate income and principal
components of a debt security. Once the securities have been stripped, the
principal portion may be referred to as a zero coupon security or as a
"principal-only strip." Stripped securities do not make periodic payments of
interest prior to maturity and the stripping of the interest coupons causes them
to be offered at a discount from their face amount. This results in the security
being subject to greater fluctuations in response to changing interest rates
than interest-paying securities of similar maturities. Stripped securities
include: U.S. Treasury STRIPS, Stripped Government Securities, Stripped
Obligations of the Financing Corporation (FICO STRIPS), Stripped Corporate
Securities, and Stripped Eurodollar Obligations.

1. U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal
of Securities) are considered U.S. Treasury securities for purposes of a Fund's
investment policies. Their risks are similar to those of other U.S. government
securities, although they may be more volatile. The U.S. Treasury has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve book-entry
record-keeping system.

2. Stripped government securities are issued by the U.S. government and its
agencies and instrumentalities, by a variety of tax-exempt issuers (such as
state and local governments

and their agencies and instrumentalities), and by "mixed-ownership government
corporations."

3. FICO STRIPS represent interests in securities issued by the Financing
Corporation (FICO). FICO is the financing vehicle for the recapitalization of
the Federal Savings and Loan Insurance Corporation (FSLIC). FICO STRIPS are not
backed by the full faith and credit of the U.S. government but are generally
treated as U.S. government agency securities.

4. Stripped corporate securities are zero coupon securities issued by domestic
corporations. They consist of corporate debt obligations without interest
coupons, interest coupons that have been stripped from corporate debt
obligations, and receipts and certificates for stripped debt obligations and
stripped coupons.

5. Stripped eurodollar obligations are stripped debt obligations denominated in
U.S. dollars that are issued by foreign issuers, often subsidiaries of domestic
corporations.

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

1. Government National Mortgage Association obligations (Ginnie Maes). The
Government National Mortgage Association's guarantee of payment of principal and
interest on Ginnie Maes is backed by the full faith and credit of the U.S.
government. The Government National Mortgage Association may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee. Ginnie
Mae yields (interest income as a percentage of price) have historically exceeded
the current yields on other types of U.S. government securities with comparable
maturities. The effects of interest rate fluctuations and unpredictable
prepayments of principal, however, can greatly change realized yields. As with
most bonds, in a period of rising interest rates, the value of a Ginnie Mae will
generally decline. In a period of declining interest rates, it is more likely
that mortgages contained in Ginnie Mae pools will be prepaid, thus reducing the
effective yield. This potential for prepayment during periods of declining
interest rates may reduce the general upward price increases of Ginnie Maes as
compared to the increases experienced by noncallable debt securities over the
same periods. In addition, any

premium paid on the purchase of a Ginnie Mae will be lost if the obligation is
prepaid. Of course, price changes of Ginnie Maes and other securities held by
the Funds will have a direct impact on the net asset value per share of the
Funds.

2. Small Business Administration (SBA) securities are pools of loans to small
businesses that are guaranteed as to principal and interest by the SBA, and
supported by the full faith and credit of the U.S. government. SBA loans
generally have variable interest rates that are set at a premium above the prime
rate, and generally have no interest rate caps or floors. The terms on SBA loans
currently range from 7 to 25 years from the time they are issued. As with
mortgage-backed securities such as GNMAs, prepayments can greatly change
realized yields for SBA securities. While the prepayment rate of mortgage-backed
securities has generally been a function of market interest rates, the
prepayment rate of SBA securities has historically depended more on the purpose
and term of the loan and the rate of borrower default. Shorter-term SBA loans
have had the highest prepayment rates, particularly if the loans were for
working capital; long-term, real-estate backed SBA loans prepay much more
slowly. SBA securities are sometimes offered at a premium above their principal
amount, which increases the risks posed by prepayment.

U.S. TREASURY ROLLS. In "U.S. Treasury rolls," a Fund sells outstanding U.S.
Treasury securities and buys back "when-issued" U.S. Treasury securities of
slightly longer maturity for simultaneous settlement on the settlement date of
the "when-issued" U.S. Treasury security. Two potential advantages of this
strategy are (1) the Fund can regularly and incrementally adjust its weighted
average maturity of its portfolio securities (which otherwise would constantly
diminish with the passage of time); and (2) in a normal yield curve environment
(in which shorter maturities yield less than longer maturities), a gain in yield
to maturity can be obtained along with the desired extension.

During the period before the settlement date, the Fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities that it is purchasing until after the settlement date. The Fund could
suffer an opportunity loss if the counterparty to the roll failed to perform its
obligations on the settlement date, and if market conditions changed adversely.
The Fund intends, however, to enter into U.S. Treasury rolls only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System.

MUNICIPAL SECURITIES. Municipal securities are issued by state and local
governments, their agencies and authorities, as well as by the District of
Columbia and U.S. territories and possessions, to borrow money for various
public or private projects. The issuer pays a fixed, floating or variable rate
of interest, and must repay the amount borrowed (the "principal") at maturity.
Municipal securities generally pay interest free from federal income tax.

ZERO COUPON BONDS. Zero coupon bonds are debt obligations that are issued at a
significant discount from the value set forth on the face of the bond. The
original discount approximates the total amount of interest the bonds will
accumulate and compounds over the period until maturity or the first interest
accumulation date at a rate of interest

reflecting the market rate of the security at the time of issuance. Although a
zero coupon bond pays no interest to its holder during its life, a Fund will be
deemed to have received income on such investments for tax and accounting
purposes. That income is distributable to shareholders even though no cash is
received at the time of accrual, which may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations. Zero coupon
bonds may include stripped securities as noted above.

Zero coupon or deferred interest securities are debt securities that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date), and therefore
are generally issued and traded at a discount from their face amount or par
value. The discount varies depending on the time remaining until maturity or the
cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.

The value of zero coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality.

DERIVATIVE SECURITIES

IN GENERAL. In general, derivative securities are those securities whose values
are dependent upon the performance of one or more securities, indices or
currencies.

Derivatives may be used for "hedging," which means that they may help manage
risks relating to interest rates, currency fluctuations and other market
factors. They also may be used to increase liquidity or to invest in a
particular stock or bond in a more efficient or less expensive way.

FUTURES CONTRACTS. A futures contract is a standard binding agreement to buy or
sell a specified quantity or grade of a commodity or a broad-based stock index
at a later date. In general, commodities include most agricultural products,
such as wheat, cotton and rice, other types of goods and articles, and all
services, rights, and interests in which the contract calls for a future
delivery of the item at a predetermined price. A futures contract for the sale
and purchase of a financial instrument, such as a security, is considered a
futures contract on a commodity. Although futures contracts by their terms call
for the actual delivery or acquisition of the commodities, or the cash value of
the index, in most cases the contractual obligation is fulfilled before the date
of the contract and without the parties having to make or take delivery. A
contractual obligation is offset by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for delivery in the
same month. This transaction, which is effected through a member of an exchange,
cancels the obligation to make or take delivery of the securities, commodities,
or cash. Since all transactions in the futures market are made, offset or
fulfilled through a clearinghouse associated with the exchange on which the

contracts are traded, the Fund will incur brokerage fees when it buys or sells
futures contracts.

A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities or commodity called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities or commodity
called for by the contract at a specified price on a specified date. The purpose
of the acquisition or sale of a futures contract is to attempt to protect the
Fund from fluctuations in the price of portfolio securities or of commodities
that may have an effect on the price of portfolio securities, without actually
buying or selling the underlying security or commodity. Futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission (CFTC) and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the relevant
contract market. The exchanges guarantee performance of the contracts as between
the clearing members of the exchange.

A purchase or sale of a futures contract may result in losses in excess of the
amount invested. A Fund may not be able to properly hedge its securities where a
liquid secondary market is unavailable for the futures contract the Fund wishes
to close. In addition, there may be an imperfect correlation between movements
in the securities, commodities or foreign currency on which the futures or
options contract is based and movements in the securities or currency held by
the Fund or the commodity which may have an effect on the securities held by the
Fund. Adverse market movements could cause the Fund to lose up to its full
investment in a call option contract and/or to experience substantial losses on
an investment in a futures contract. There is also the risk of loss by the Fund
of margin deposits in the event of bankruptcy of a broker with whom the Fund has
an open position in a futures contract or option.

Although the manager believes that the use of futures contracts may benefit
certain Funds, if the manager's investment judgment about the general direction
of interest or currency exchange rates or commodity prices is incorrect, a
Fund's overall performance would be poorer than if it had not entered into any
such contract. For example, if a Fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of the bonds which it has hedged
because it will have offsetting losses in its futures positions. Similarly, if a
Fund sells a foreign currency futures contract and the U.S. dollar value of the
currency unexpectedly increases, the Fund will lose the beneficial effect of the
increase on the value of the security denominated in that currency. In addition,
in such situations, if a Fund has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements. Sales of bonds
may be, but are not necessarily, at increased prices that reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.

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

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

The Funds that are authorized to engage in futures transactions intend to
purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist. A Fund may not be able to achieve a perfect correlation
between its futures positions and portfolio positions in corporate fixed-income
securities because futures contracts based on these securities are not currently
available.

Futures contracts that are purchased on foreign exchanges may not be as liquid
as those purchased on CFTC-designated contract markets. In addition, foreign
futures contracts may be subject to varied regulatory oversight. The price of
any foreign futures contract and, therefore, the potential profit and loss
thereon, may be affected by any variance in the foreign exchange rate between
the time a particular order is placed and the time it is liquidated, offset or
exercised.

A Fund may enter into futures contracts on foreign currencies, interest rates,
or on debt securities that are backed by the full faith and credit of the U.S.
government, such as

long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, and three-month
U.S. Treasury bills. In addition, certain Funds may enter into futures contracts
for commodities in other types of commodity groups, including energy, livestock,
agriculture, industrial metals and precious metals. A Fund also may enter into
futures contracts on corporate securities and non-U.S. government debt
securities, but such futures contracts are not currently available.

At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial deposit). Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be required
since each day the Fund would provide or receive cash that reflects any decline
or increase in the contract's value. In addition, the Fund must maintain with
its custodian bank, to the extent required by the rules of the Securities and
Exchange Commission (SEC), assets in a segregated account to cover its
obligations with respect to such contract, which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in an amount
equal to the market value of such futures contract or related option.

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

A Fund will not engage in transactions in futures contracts for speculation.
Futures contracts will be used as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy
or to attempt to protect a Fund from fluctuations in price of portfolio
securities or of commodities that might affect the price of portfolio securities
without actually buying or selling the underlying security or commodity.

The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are also imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Funds do not believe that these trading and
positions limits will have an adverse impact on the Funds' strategies for
hedging their securities.

1. Financial futures. Financial futures contracts are commodity contracts that
obligate the purchase or seller to take or make delivery of a specified quantity
of a financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price.

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

2. Futures Contracts on Non-Financial Commodities. Certain Funds may enter into
futures contracts for commodities in other types of commodity groups, including
energy, livestock, agriculture, industrial metals and precious metals. These
Funds intend to enter into such futures contracts (and any related options) only
for hedging purposes. They do not intend to actually take receipt or make
delivery of these types of non-financial commodities and will usually enter into
an offsetting futures contract to insure that the transaction is closed out
prior to the delivery date contemplated under the futures contract. In addition
to the risk associated with futures contracts in general, a futures contract for
non-financial commodities presents the risk that the offsetting contract may
fail and the counterparty to the initial futures contract may demand a party's
performance or sue for damages. The CFTC has established certain regulatory
safeguards that seek to reduce this risk.

3. Options on futures contracts. A Fund may purchase and write options on
futures contracts for hedging purposes only. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security or currency. Depending on the price of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying securities or currency, the option may be less risky
than direct ownership of the futures contract or the underlying securities or
currency. As with the purchase of futures contracts, when a Fund is not fully
invested, it may purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates or appreciation in the value of a
foreign currency against the U.S. dollar.

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

The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
writing options on futures, a Fund's loss is potentially unlimited and may
exceed the amount of the premium received. Also, a Fund may not be able to
properly hedge its securities or close out option contract positions where a
liquid secondary market is unavailable for the option the Fund wishes to close.
In addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Unless a Fund has a stated policy otherwise, it will purchase a put option on a
futures contract only to hedge the Fund's portfolio against the risk of rising
interest rates or the decline in the value of securities denominated in a
foreign currency.

4. Bond index futures and options on such futures. A Fund may buy and sell
futures contracts based on an index of debt securities and options on such
futures contracts to the extent they currently exist and, in the future, may be
developed. The Fund also reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. A Fund's
investment strategy in employing futures contracts based on an index of debt
securities may be similar to that used by it in other financial futures
transactions. A Fund also may buy and write put and call options on such index
futures and enter into closing transactions with respect to such options.

5. Stock index futures and options on such futures. A Fund may buy and sell
stock index futures contracts and options on stock index futures contracts that
trade on domestic exchanges and, to the extent such contracts have been approved
by the CFTC for sale to customers in the U.S., on foreign exchanges. In general,
these Funds may invest in index futures for hedging purposes. Open futures
contracts are valued on a daily basis and a Fund may be obligated to provide or
receive cash reflecting any decline or increase in the contracts value.

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

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

Options on stock index futures. To hedge against risks of market price
fluctuations, a Fund may buy and sell call and put options on stock index
futures. The need to hedge against these risks will depend on the extent of
diversification of the Fund's common

stock portfolio and the sensitivity of such investments to factors influencing
the stock market as a whole.

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

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

Forward conversions. In a forward conversion, a Fund buys securities and writes
call options and buys put options on such securities. By purchasing puts, a Fund
protects the underlying security from depreciation in value. By selling calls on
the same security, a Fund receives premiums which may offset part or all of the
cost of purchasing the puts while foregoing the opportunity for appreciation in
the value of the underlying security. A Fund will not exercise a put it has
purchased while a call option on the same security is outstanding.

Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, a Fund's
return may depend in part on movements in the price of the underlying security.

FORWARD CONTRACTS. Forward contracts are not traded on contract markets
regulated by the CFTC or by the SEC. The ability of a Fund to use forward
contracts could be restricted to the extent that Congress authorizes the CFTC or
the SEC to regulate such transactions. Forward contracts are traded through
financial institutions acting as market makers. Also, a hedging strategy may not
be successful if the Fund is unable to sell its forward contract, currency
futures contract, or option on a foreign currency with the market maker from
which it bought the security.

OPTIONS. A stock option is a contract that provides the holder the right to buy
or sell shares of the stock at a fixed price, within a specified period of time.
An option on a stock index is a contract that allows the buyer of the option the
right to receive from the seller cash, in an amount equal to the difference
between the index's closing price and the option's exercise price. A futures
contract is an obligation to buy or sell a specified

security or currency at a set price on a specified future date. A stock index
futures contract is an agreement to take or make delivery of an amount of cash
based on the difference between the value of the index at the beginning and end
of the contract period.

Unless otherwise noted in a Fund's policies, the value of the underlying
securities on which options may be written at any one time will not exceed 15%
of the Fund's assets. Nor will a Fund purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its assets at the
time of purchase. Unless otherwise noted in a Fund's policies, none of the Funds
permitted to purchase contracts will purchase or sell futures contracts or
options on futures contracts if, immediately thereafter, the aggregate amount of
initial margin deposits on all the futures positions of the Fund and the
premiums paid on options on futures contracts would exceed 5% of the market
value of the Fund's total assets.

A Fund may write (sell) covered put and call options and buy put and call
options on securities listed on a national securities exchange and in the
over-the-counter (OTC) market. Additionally, a Fund may "close out" options it
has entered into.

A call option gives the option holder the right to buy the underlying security
from the option writer at the option exercise price at any time prior to the
expiration of the option. A put option gives the option holder the right to sell
the underlying security to the option writer at the option exercise price at any
time prior to the expiration of the option. The OTC market is the
dealer-to-dealer market in securities, in this case, option securities in which
the Fund may buy or sell.

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

When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
The purchaser of an option can lose the amount of the premium plus related
transaction costs. Moreover, a Fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements associated with option writing.

Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities

exchange are cleared and guaranteed by the Options Clearing Corporation, thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.

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

A Fund also may use "collars." A"collar" position combines a long put option
(the right of the Fund to sell a specific security within a specified period)
with a short call option (the right of the counterparty to buy the same
security) in a single instrument. The Fund's right to sell the security is
typically set at a price that is below the counterparty's right to buy the
security. Thus, the combined position "collars" the performance of the
underlying security, providing protection from depreciation below the price
specified in the put option, and allowing for participation in any appreciation
up to the price specified by the call option.

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

A Fund may buy call options on securities that it intends to buy in order to
limit the risk of a substantial increase in the market price of the security
before the purchase is effected. A Fund also may buy call options on securities
held in its portfolio and on which it has written call options.

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

A Fund may buy a put option on an underlying security or currency owned by the
Fund (a protective put) as a hedging technique in order to protect against an
anticipated decline

in the market value of the security. Such hedge protection is provided only
during the life of the put option when a Fund, as the holder of the put option,
is able to sell the underlying security at the put exercise price, regardless of
any decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect unrealized
appreciation of a security when the manager deems it desirable to continue to
hold the security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any short-term capital
gain that may be available for distribution when the security is eventually
sold.

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

2. Writing covered call and put options on securities. A Fund may write options
to generate additional income and to hedge its portfolio against market or
exchange rate movements. The writer of covered calls gives up the potential for
capital appreciation above the exercise price of the option should the
underlying stock rise in value. If the value of the underlying stock rises above
the exercise price of the call option, the security may be "called away" and a
Fund required to sell shares of the stock at the exercise price. A Fund will
realize a gain or loss from the sale of the underlying security depending on
whether the exercise price is greater or less than the purchase price of the
stock. Any gain will be increased by the amount of the premium received from the
sale of the call; any loss will be decreased by the amount of the premium
received. If a covered call option expires unexercised, a Fund will realize a
gain in the amount of the premium received. If, however, the stock price
decreases, the hedging benefit of the covered call option is limited to the
amount of the premium received.

A call option written by a Fund is "covered" if a Fund:

(a) owns the underlying security that is subject to the call; or
(b) has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian bank) upon conversion or
exchange of other securities held in its portfolio.

A call option is also covered if 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 in exercise prices is maintained by a Fund in cash and
marketable securities.

Options may be written in connection with "buy-and-write" transactions; that is,
a Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below (in-the-money), equal to (at-the-money), or above (out-of-the-money) the
current value of the underlying security at the time the option is written.

When a Fund writes a covered call option, the underlying securities that are
subject to the call will be held in a segregated account (or escrow) with the
Fund's custodian. It will be unable to sell the underlying securities that are
subject to the call until it either effects a closing transaction with respect
to the call, or otherwise satisfies the conditions for release of the underlying
securities from escrow, as may be imposed by the broker through which the call
is effected. In addition, if the broker fails to timely issue instructions to
the Fund's custodian to permit the release of the underlying security when the
escrow is no longer required, the Fund may be unable to sell the securities when
it desires to do so.

The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines below
the exercise price of the put option, the security may be "put to" a Fund and
the Fund required to buy the stock at the exercise price. A Fund will incur an
unrealized loss to the extent that the current market value of the underlying
security is less than the exercise price of the put option. However, the loss
will be offset at least in part by the premium received from the sale of the
put. If a put option written by a Fund expires unexercised, the Fund will
realize a gain in the amount of the premium received.

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

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

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

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

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

3. Options on stock indices. A Fund also may buy and sell both call and put
options on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the Fund. Call
and put options on stock indices are similar to options on securities except
that, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater (or less, in the case of puts) than the exercise price of the option.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars multiplied by a
specified number. Thus, unlike stock options, all settlements are in cash, and
gain or loss depends on the price movements in the stock market generally (or in
a particular industry or segment of the market) rather than price movements in
individual stock.

When a Fund writes an option on a stock index, the Fund may cover the option by
owning securities whose price changes, in the opinion of the manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. The Funds also may cover by establishing a
segregated account containing cash or marketable securities with its custodian
bank in an amount at least equal to the market

value of the underlying stock index. The Fund will maintain the account while
the option is open or it will otherwise cover the transaction.

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

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

4. Over-the-counter (OTC) options. Like exchange traded options, OTC options
give the holder the right to buy, in the case of OTC call options, or sell, in
the case of OTC put options, an underlying security from or to the writer at a
stated exercise price. OTC options, however, differ from exchange traded options
in certain material respects.

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

There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. A Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. A Fund
may suffer a loss if it is not able to exercise or sell its position on a timely
basis. When a Fund writes an OTC option, it generally can close out that option
prior to its expiration only by entering into a closing purchase transaction
with the dealer with which the Fund originally wrote the option. If a Fund as a
covered call option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.

The Funds understand the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Funds and the manager
disagree with this position. Nevertheless, pending a change in the staff's
position, the Funds will treat OTC options and "cover" assets as subject to a
Fund's limitation on illiquid securities.

5. Spread and straddle options transactions. In "spread" transactions, a Fund
buys and writes a put or buys and writes a call on the same underlying security
with the options having different exercise prices and/or expiration dates. In
"straddles," a Fund purchases or writes combinations of put and call options on
the same security. When a Fund engages in spread and straddle transactions, it
seeks to profit from differences in the option premiums paid and received and in
the market prices of the related options positions when they are closed out or
sold. Because these transactions require a Fund to buy and/or write more than
one option simultaneously, the Fund's ability to enter into such transactions
and to liquidate its positions when necessary or deemed advisable may be more
limited than if the Fund was to buy or sell a single option. Similarly, costs
incurred by a Fund in connection with these transactions will in many cases be
greater than if the Fund was to buy or sell a single option.

SWAP AGREEMENTS. A Fund may enter into swap agreements for the purpose of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in a security that yielded or produced
that desired return. These instruments also may be used for tax and/or cash
management purposes. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year (swap transaction). 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 in a particular security, or 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 that the parties to a
swap agreement have agreed to exchange. A Fund's 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. A Fund's 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 limit any potential leveraging of
the Fund's portfolio.

Whether a Fund's 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, a Fund 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 a Fund to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain positions adopted by the
Internal Revenue Service may limit a Fund's ability to use swap agreements in a
desired tax strategy. 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
effect a Fund's 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.

1. Interest rate swaps. An interest rate swap is an agreement between two
parties to exchange sets of cash flows over a period in the future. Most
corporate and government bonds pay fixed coupons, and are exposed to the risk of
rising interest rates. Swapping fixed payments for floating payments, an
interest rate swap is a vehicle to hedge interest rate risk.

An example of an interest rate swap is an exchange between one obligation that
has an interest rate fixed to maturity with another that has an interest rate
that changes with changes in a designated benchmark, such as the London
Interbank Offered Rate (LIBOR), prime, commercial paper, or other benchmarks.
The obligations to make repayment of principal on the underlying securities are
not transferred. Similarly, the right to receive such payments is not
transferred. These transactions generally require the participation of an
intermediary, frequently a bank. The entity holding the fixed rate obligation
will transfer the obligation to the intermediary, and the entity will then be
obligated to pay to the intermediary a floating rate of interest, generally
including a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity that has a
floating-rate obligation that substantially mirrors the obligation desired by
the first entity. In return for assuming a fixed obligation, the second entity
will pay the intermediary all sums that the intermediary pays on behalf of the
first entity, plus an arrangement fee and other agreed upon fees.

Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly available
in the credit market, while permitting the party desiring a fixed rate
obligation the opportunity to acquire a fixed rate obligation, also frequently
at a price lower than is available in the capital markets. The success of the
transaction depends in large part on the availability of fixed rate obligations
at a low enough coupon rate to cover the cost involved.

Certain Funds intend to participate in interest rate swaps involving obligations
held in a Fund's portfolio on which it is receiving payments of principal and
interest. A Fund might do this, for example, in order to gain or reduce its
exposure to fixed interest rate payments under certain market conditions. To the
extent, a Fund does not own the underlying obligation, however, the Fund will
maintain, in a segregated account with its

custodian bank, cash or marketable securities with an aggregate value equal to
the amount of the Fund's outstanding swap obligation.

A Fund will only enter into interest rate swaps on a net basis, which means that
the Fund will receive or pay, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, a Fund's risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund must make. If the other party to an interest rate swap defaults, a
Fund's risk of loss consists of the net amount of interest payments that the
Fund is entitled to receive.

Diversification

Each Fund, except Global Income, Small Cap Value, Strategic Income and
Technology Funds, will operate as a diversified fund under federal securities
law. Each diversified Fund may not, with respect to 75% of its total assets,
purchase the securities of any one issuer (except U.S. government securities) if
(a) more than 5% of the value of the Fund's assets would be invested in such
issuer, or (b) hold more than 10% of any or all classes of the securities of any
one issuer or, in the case of the Aggressive Growth, Developing Markets, Foreign
Securities, Global Asset Allocation, Rising Dividends, S&P 500 Index and Small
Cap Funds, the Fund would hold more than 10% of the outstanding voting
securities of such issuer.

In addition, each diversified Fund intends to diversify its investments to meet
the requirements under federal tax laws relating to regulated investment
companies and variable contracts issued by insurance companies.

In the case of Funds investing in obligations of U.S. government agencies or
instrumentalities, each agency or instrumentality is treated as a separate
issuer for purposes of the above rules.

FOREIGN CURRENCY TECHNIQUES AND HEDGING

The Funds typically enter into forward currency exchange contracts to protect
against declines in the value of a Fund's portfolio securities and the income on
these securities. A Fund will normally conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. Successful use of forward contracts,
currency futures contracts and options on foreign currencies depends on the
manager's ability to properly predict movements in the foreign currency markets.
There may be an imperfect correlation between movements in the foreign currency
on which a forward contract, currency futures contract, or option on a foreign
currency is based and movements in the foreign currency. The Funds may, but do
not presently intend to, enter into other transactions, or use other techniques.

FORWARD CURRENCY EXCHANGE CONTRACTS. The Funds use forward currency exchange
contracts in an effort to minimize the risk of adverse changes in the
relationship between currencies or to enhance income. A forward contract
involves an obligation to buy or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks).

A Fund may either accept or make delivery of the currency specified at the
maturity of a forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.

A Fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.

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 that security by buying
the amount of foreign currency needed to settle the transaction. Thus, 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. Similarly,
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. A Fund also may purchase and sell
forward contracts for non-hedging purposes when the manager anticipates that the
foreign currency will appreciate or depreciate in value but securities
denominated in that currency do not present attractive investment opportunities
and are held in a Fund.

A Fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The Fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of a Fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the ability
of the Fund to honor redemption requests.

Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies.

Unanticipated changes in currency exchange rates also may result in poorer
overall performance for the Fund than if it had not entered into such contracts.

The Funds generally will not enter into a forward contract with a term of
greater than one year.

If a Fund retains a portfolio security and enters into a closing transaction,
the Fund will have a gain or a loss to the extent that the forward contract
prices have increased or decreased. If a Fund enters into a closing transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. If forward prices decline between the date that a Fund enters into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain. If forward prices increase, a Fund will suffer a loss.

The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, possible intervention by governmental authorities,
and the effects of other political and economic events.

CURRENCY RATE SWAPS. A currency rate swap is the transfer between two
counterparties of their respective rights to receive payments in specified
currencies.

Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore, a
Fund could lose the entire principal value of a currency swap if the other party
defaults.

The use of interest rate and currency swaps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the managers are incorrect
in their forecasts of market values, interest rates and currency exchange rates,
the investment performance of a Fund would be less favorable than it would have
been if this investment technique were not used.

CURRENCY FUTURES CONTRACTS. Currency futures contracts are traded on regulated
commodity exchanges, including non-U.S. exchanges. A currency futures contract
is a standardized contract for the future delivery of a specified amount of
currency at a future date at a price set at the time of the contract. A Fund may
use currency futures contracts to hedge against anticipated future changes in
exchange rates which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of securities that a Fund
intends to purchase at a later date.

A Fund may either accept or make delivery of the currency specified at the
maturity of a currency futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to currency futures contracts are effected on
the exchange on which the contract was entered into (or on a linked exchange).

OPTIONS ON FOREIGN CURRENCIES. A Fund may buy and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter)
for hedging purposes to protect against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities or other assets to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. A
Fund could be required to buy or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to a Fund's position, the
Fund may lose the entire amount of the premium plus related transaction costs.

FOREIGN SECURITIES AND INVESTMENTS

IN GENERAL. Funds may invest in foreign securities, provided the investments are
consistent with their objectives and comply with their concentration and
diversification policies. The Funds may buy the securities of foreign issuers
directly in foreign markets, both in developed and developing countries. The
securities of foreign issuers may be denominated in foreign currency. The Funds
also may buy foreign securities that are traded in the U.S. Investments in
foreign securities may offer potential benefits not available from investments
solely in securities of domestic issuers or dollar-denominated securities. These
benefits may include the opportunity to invest in foreign issuers that appear,
in the opinion of the manager, to offer:

. a better outlook for long-term capital appreciation or current earnings
than investments in domestic issuers;

. an opportunity to invest in foreign nations whose economic policies or
business cycles are different from those of the U.S.; and

. the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in
a manner parallel to U.S. markets.

Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax and other laws limiting the amount and types of foreign
investments. A Fund could experience investment losses if there are changes of:

. governmental administrations;
. economic or monetary policies in the U.S. or abroad;
. circumstances in dealings between nations; or
. currency convertibility or exchange rates.

The value of foreign (and U.S.) securities is affected by general economic
conditions and individual company and industry earnings prospects. While foreign
securities may offer significant opportunities for gain, they also involve
additional risks that can increase the potential for losses in a Fund. These
risks can be significantly greater for investments in

emerging markets. Investments in Depositary Receipts also involve some or all of
the risks described below.

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

There may be less publicly available information about foreign companies or
governments compared to the reports and ratings published about U.S. companies
and available information about public entities in the U.S. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. A Fund, therefore, may encounter difficulty in
obtaining market quotations for purposes of valuing its portfolio and
calculating its net asset value. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
(the costs associates with buying and selling securities) on foreign securities
markets, including those for custodial services are generally higher than in the
U.S. The settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. A Fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining judgments
with respect to foreign investments in foreign courts than with respect to
domestic issuers in U.S. courts.

Investments in securities of issuers in foreign nations also may be affected by
cessation of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or other
amounts, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a Fund has invested in the
country. Confiscatory taxation refers to the possibility that a foreign country
will adopt a tax law which has the effect of requiring the Fund to pay
significant amounts, if not all, of the value of the Fund's investment to the
foreign country's taxing authority. Diplomatic developments means that all
communications and other official governmental relations between the country and
the United States could be severed. This may occur as a result of certain
actions occurring within a foreign country, such as significant civil rights
violations, or because of the actions of the United States during a time of
crisis in the particular country. As a result of such diplomatic developments,
U.S. investors' money in the particular country, including that of the Funds,
could be abandoned with no way to recover the money.

A Fund's investments in foreign securities may increase the risks with respect
to the liquidity of the Fund's portfolio. This could inhibit the Fund's ability
to meet a large number

of shareholder redemption requests in the event of economic or political turmoil
in a country in which the Fund has a substantial portion of its assets invested
or deterioration in relations between the U.S. and the foreign country.

Through the Funds' 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 Funds' 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 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 Funds' manager, any losses resulting from the holding of the Funds'
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.

Each Fund's definition of "foreign securities" may differ from the definition of
the same or similar term as used for other Funds or in other mutual fund
prospectuses. As a result, each Fund may hold foreign securities that other
funds may classify differently.

CURRENCY CONSIDERATIONS. If a Fund holds securities denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value of
what the Funds owns and its share price. In addition, changes in foreign
currency exchange rates will affect a Fund's income and distributions to
shareholders. Some countries in which the Funds may invest also may have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Certain currencies may not be internationally traded. To the extent that the
manager intends to hedge currency risk in certain Funds, the Funds endeavor to
buy and sell foreign currencies on as favorable a basis as practicable. Some
price spread in currency exchange (to cover service charges) may be incurred,
particularly when a Fund changes investments from one country to another or when
proceeds of the sale of shares in U.S. dollars are used for the purchase of
securities in foreign countries. Some countries may adopt policies that would
prevent the Funds from transferring cash out of the country or withhold portions
of interest and dividends at the source.

Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Where the
exchange rate for a currency declines materially after a Fund's income has been
accrued and translated into U.S. dollars, a Fund may need to redeem portfolio
securities to make required distributions. Similarly, if an exchange rate
declines between the time a Fund incurs expenses in U.S. dollars and

the time such expenses are paid, the Fund will have to convert a greater amount
of the currency into U.S. dollars in order to pay the expenses.

Euro On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. Beginning January 1, 2002, the
euro, which was implemented in stages, replaced the national currencies of the
following participating countries: Austria, Belgium, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

Currently the exchange rate of the currencies of each of these participating
countries is fixed to the euro. The euro trades on currency exchanges and is
available for non-cash transactions. The participating countries currently issue
sovereign debt exclusively in the euro. Beginning January 1, 2002,
euro-denominated bills and coins replaced the bills and coins of the
participating countries.

The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.

The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers, and issuers in other
regions, whose securities the Fund may hold, or the impact, if any, on Fund
performance. In the first three years of the euro's existence, the exchange
rates of the euro versus many of the world's major currencies steadily declined.
In this environment, U.S. and other foreign investors experienced erosion of
their investment returns on their euro-denominated securities. The transition
and the elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets, but the
impact of those changes cannot be assessed at this time.

EMERGING MARKETS. Each Fund that invests in emerging market securities may use a
slightly different definition of emerging market countries. Emerging market
countries generally include countries that are generally considered low or
middle income countries by the International Bank for Reconstruction and
Development (commonly known as the World Bank) or the International Finance
Corporation.

As many developing countries restructure their existing bank debt and economic
conditions improve, these obligations have become available and may offer the
Funds the potential for current U.S. dollar income. Such instruments are not
traded on any exchange. However, the managers believe there may be a market for
such securities either in multi-national companies wishing to purchase such
assets at a discount for further investment or from the issuing governments that
may decide to redeem their obligations at a discount.

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

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

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

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

Russian securities involve all of the risks of emerging markets. No Fund will
invest more than 5% of its assets in 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 the risk of loss arising out
of Russia's unsophisticated 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 court-ordered judgment;
(c) the 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 such as the techniques discussed under "Currency
techniques and hedging" in this SAI;
(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;
(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 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
Funds due to the underdeveloped nature of the securities markets;
(n) the possibility that legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia;
(o) the risk that 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 is 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 Investment Company Act of 1940 (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 Funds to
lose their registration through fraud, negligence or even mere oversight. While
each Fund will endeavor to ensure that its interest continues to be
appropriately recorded by 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 Funds of their ownership rights or improperly dilute their
interests. In addition, while applicable Russian regulations impose liability on
registrars for losses resulting from their errors, it may be difficult for the
Funds to enforce any rights they 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 Funds 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 a Fund if a
potential purchaser is deemed unsuitable, which may expose the Fund to potential
loss on the investment.

FOREIGN DEBT. Certain Funds may invest in debt securities issued by foreign
corporations, governments and their instrumentalities, and by supranational
entities. A supranational entity is an entity designated or supported by the
national government of one or more countries to promote economic reconstruction
or development. Examples of supranational entities include the World Bank, the
European Development Bank and the Asian Development Bank.

Many debt obligations of foreign issuers, and especially emerging markets
issuers, are either (i) rated below investment grade or (ii) not rated by U.S.
rating agencies so that their selection depends on the managers' individual
analysis.

DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.

Depositary receipts may be issued by sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between the availability of such information and the market value of the
depositary receipts. To the extent a Fund acquires depositary receipts through
banks that do not have a contractual relationship with the foreign issuer of the
security underlying the depository receipt to issue and service such depository
receipts, there are may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner.

Depositary receipts also involve the same risks as direct investments in foreign
securities, as discussed below. For purposes of a Fund's investment policies,
the Fund will consider its investments in depositary receipts to be investments
in the underlying securities.

LIMITATIONS. Certain countries do not permit direct investments. Some countries
have authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In order to gain
investment access to these countries, a Fund may invest up to 10% of its assets
in shares of such closed-end investment companies and up to 5% of its assets in
any one closed-end investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
If a Fund acquires shares of closed-end investment companies, shareholders would
bear both their share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.

ILLIQUID SECURITIES

Each Fund may invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 (restricted
securities), or in other securities which, in the opinion of the Board, may be
illiquid. See "Fundamental Investment Policies" for more information about the
Fund's policies with respect to 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. Reduced liquidity in the secondary market for certain
securities may make it more difficult for the Fund to obtain market quotations
based on actual trades for purposes of valuing the Fund's portfolio.

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

Subject to each Fund's percentage limitation on illiquid securities, the Board
has authorized each Fund to invest in restricted securities where such
investment is consistent with each Fund's investment goal. The Board has
authorized these securities to be considered liquid to the extent the investment
manager determines on a daily basis that there is a liquid institutional or
other market for such securities - for example, restricted securities which may
be freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board will review any determination by
the manager to treat a restricted security as a liquid security on an ongoing
basis, including the managers' assessment of current trading activity and the
availability of reliable price information. In spite of the managers'
determinations in this regard, the Board will remain responsible for such
determinations and will consider appropriate action, consistent with a Fund's
goals and policies, if the security should become illiquid after purchase. In
determining whether a restricted security is properly considered a liquid
security, the investment manager and the Board will take into account, among
others, the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and the
number of other potential buyers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). To the extent a 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 buying these securities or the market for these
securities contracts.

LOANS OF PORTFOLIO SECURITIES

To generate additional income, each Fund may lend certain of its portfolio
securities to qualified banks and broker-dealers. For each loan, the borrower
must maintain with the Fund's custodian collateral (consisting of any
combination of cash, securities issued by the U.S. government and its agencies
and instrumentalities, or irrevocable letters of credit) with a value at least
equal to 102% of the current market value of the loaned securities. The Fund
retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. The Fund also continues to
receive any distributions paid on the loaned securities. The Fund may terminate
a loan at any time and obtain the return of the securities loaned within the
normal settlement period for the security involved.

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

PORTFOLIO TURNOVER

Portfolio turnover is a measure of how frequently a portfolio's securities are
bought and sold. As required by the SEC, annual portfolio turnover is calculated
generally as the dollar value of the lesser of a portfolio's purchases or sales
of portfolio securities during a given year, divided by the monthly average
value of the portfolio's securities during that year (excluding securities whose
maturity or expiration at the time of acquisition were less than one year). For
example, a portfolio reporting a 100% portfolio turnover rate would have
purchased and sold securities worth as much as the monthly average value of its
portfolio securities during the year. The portfolio turnover rates for each Fund
are disclosed in the section entitled "Financial Highlights" of the Fund's
prospectus. Except for certain Funds noted in the prospectuses, the Funds
generally do not expect their annual turnover rates to exceed 100%. It is not
possible to estimate future turnover rates with complete accuracy, however,
because so many variable factors are beyond the control of the managers.

Portfolio turnover is affected by factors within and outside the control of the
Fund and its managers. The investment outlook for the type of securities in
which each Fund invests may change as a result of unexpected developments in
national or international securities markets, or in economic, monetary or
political relationships. High market volatility may result in a manager using a
more active trading strategy than it might have otherwise pursued. Each Fund's
manager will consider the economic effects of portfolio turnover

but generally will not treat portfolio turnover as a limiting factor in making
investment decisions. Investment decisions affecting turnover may include
changes in investment policies, including changes in management personnel, as
well as individual portfolio transactions.

Moreover, turnover may be increased by certain factors wholly outside the
control of the managers. For example, during periods of rapidly declining
interest rates, such as the U.S. experienced in 1991 through 1993, the rate of
mortgage prepayments may increase rapidly. When this happens, "sales" of
portfolio securities are increased due to the return of principal to Funds that
invest in mortgage securities. Similarly, the rate of bond calls by issuers of
fixed income securities may increase as interest rates decline. This causes
"sales" of called bonds by Funds that invest in fixed-income securities and the
subsequent purchase of replacement investments. In other periods, increased
merger and acquisition activity, or increased rates of bankruptcy or default,
may create involuntary transactions for portfolios that hold affected stocks and
bonds, especially high-yield bonds. Global or international fixed income
securities funds may have higher turnover rates due to the rebalancing of the
portfolio to keep interest rate risk and country allocations at desired levels.

In addition, redemptions or exchanges by investors may require the liquidation
of portfolio securities. Changes in particular portfolio holdings may be made
whenever it is considered that a security is no longer the most appropriate
investment for a Fund, or that another security appears to have a relatively
greater opportunity, and will be made without regard to the length of time a
security has been held.

Higher portfolio turnover rates generally increase transaction costs, which are
portfolio expenses, but would not create taxable capital gains for investors
because of the tax-deferred status of variable annuity and life insurance
investments.

REAL ESTATE

IN GENERAL. Although none of the Funds invest directly in real estate, through
an investment in a company in the real estate sector, a Fund could ultimately
own real estate directly as a result of a default on debt securities it may own.
Receipt of rental income or income from the disposition of real property by a
Fund may adversely affect its ability to retain its tax status as a regulated
investment company.

REAL ESTATE INVESTMENT TRUSTS (REITs). REITs typically invest directly in real
estate and/or in mortgages and loans collateralized by real estate. "Equity"
REITs are real estate companies that own and manage income-producing properties
such as apartments, hotels, shopping centers or office buildings. The income,
primarily rent from these properties, is generally passed on to investors in the
form of dividends. These companies provide experienced property management and
generally concentrate on a specific geographic region or property type.
"Mortgage" REITs make loans to commercial real estate developers and earn income
from interest payments.

REPURCHASE AGREEMENTS

IN GENERAL. The Funds generally will have a portion of their assets in cash or
cash equivalents for a variety of reasons, including waiting for a special
investment opportunity or taking a defensive position. To earn income on this
portion of its assets, a Fund may enter into repurchase agreements. Under a
repurchase agreement, the Fund agrees to buy securities guaranteed as to payment
of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the Fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the Fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.

Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
Fund's ability to sell the underlying securities. The 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, a Fund may incur a loss upon
disposition of the security. If the other party to the agreement becomes
insolvent and subject to liquidation or reorganization under the bankruptcy code
or other laws, a court may determine that the underlying security is collateral
for a loan by a Fund not within the control of a 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 a Fund, these risks
can be controlled through careful monitoring procedures. A Fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.

REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are considered
borrowings by the Funds and as such are subject to the investment limitations
discussed under "Fundamental Investment Policies." These transactions may
increase the volatility of a Fund's income or net asset value. The Fund carries
the risk that any securities purchased with the proceeds of the transaction will
depreciate or not generate enough income to cover the Fund's obligations under
the reverse repurchase transaction. These transactions also increase the
interest and operating expenses of a Fund. Reverse repurchase agreements are the
opposite of repurchase agreements but involve similar mechanics and risks. A
Fund sells securities to a bank or dealer and agrees to repurchase them at a
mutually agreed price and date. Cash or liquid high-grade debt securities having
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount sold by the Fund are segregated, i.e., set aside, as
collateral and marked-to-market daily to maintain coverage of at least 100%.
Reverse repurchase agreements involve the

risk that the market value of the securities retained by a Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. A default by the purchaser might cause the Fund
to experience a loss or delay in the liquidation costs. The Funds intend to
enter into reverse repurchase agreements with domestic or foreign banks or
securities dealers. The manager will evaluate the creditworthiness of these
entities prior to engaging in such transactions and it will conduct these
activities under the general supervision of the Board.

SECTOR

By having significant investments in one or more sectors from time to time, a
Fund carries greater risk of adverse developments in a sector than a fund that
invests more broadly.

TECHNOLOGY COMPANIES. Technology company stocks can be subject to abrupt or
erratic price movements and have been volatile in price, especially over the
short term, due to the rapid pace of product change and development affecting
such companies. Technology companies are subject to significant competitive
pressures, such as new market entrants, aggressive pricing, and tight profit
margins. Prices of technology company stocks often change collectively without
regard to the merits of individual companies.

1. Electronic technology and technology services companies. These companies also
face the risks that new services, equipment or technologies will not be accepted
by consumers and businesses or will rapidly become obsolete. These factors can
affect the profitability of technology companies and, as a result, their value.
In addition, because many Internet-related companies are in the emerging stage
of development, they are particularly vulnerable to these risks.

2. Biotechnology and health technology companies. These companies may be
affected by government regulatory requirements, regulatory approval for new
drugs and medical products, patent considerations, product liability, and
similar matters. For example, in the past several years, the U.S. Congress has
considered legislation concerning health care reform and changes to the U.S.
Food and Drug Administration's (FDA) approval process, which would, if enacted,
affect the biotechnology and health technology industries. In addition, these
industries are characterized by competition and rapid technological
developments, which may make a company's products or services obsolete in a
short period of time.

COMMUNICATIONS COMPANIES. The securities of communications companies may
experience more price volatility than securities of companies in some other
sectors or industries. Communications companies are subject to a variety of risk
factors including: significant competitive pressures, such as new market
entrants, aggressive pricing and competition for market share; the potential for
falling profit margins; and the risks that new services, equipment or
technologies will not be accepted by consumers and businesses or will become
rapidly obsolete. These factors can affect the profitability of communications
companies and, as a result, the value of their securities. In addition,

many wireless telecommunication and Internet-related companies are in the
emerging stage of development and are particularly vulnerable to the risks of
rapidly changing technologies, as well as the potential of both accidental and
deliberate disruption or failure of services or equipment. Prices of these
companies' securities historically have been more volatile than other
securities, especially over the short term. Portions of the communications
sector are also subject to government regulation, which may affect company
profitability and share price.

FINANCIAL SERVICES COMPANIES. Financial services companies are subject to
extensive government regulation, which may affect their profitability in many
ways. A financial services company's profitability, and therefore its stock
price, is especially sensitive to interest rate changes throughout the world.
Changing regulations, continuing consolidations, and development of new products
and structures are all likely to have a significant impact on financial services
companies.

1. Banking and thrift institutions. Banking and thrift institutions are
subject to extensive government regulation. These regulations may limit
both the amounts and types of loans and other financial commitments that
the institutions can make, and the interest rates and fees they can charge.
The profitability of these institutions largely depends upon the
availability and cost of capital funds. Their profits have recently
fluctuated significantly as a result of volatile interest rate levels. In
addition, general economic conditions influence the operations of these
institutions. Financial institutions are exposed to credit losses, which
result when borrowers suffer financial difficulties.

2. Insurance companies. Insurance companies are also affected by economic and
financial conditions and are subject to extensive government regulation,
including rate regulation. Property and casualty companies may be exposed
to material risks, including reserve inadequacy. Latent health exposure and
inability to collect from their reinsurance carriers.

These industries are currently undergoing rapid change as existing distinctions
between different businesses become blurred. On November 12, 1999, the
Gramm-Leach-Bliley Act was signed into law. This new law, which became effective
March 11, 2000, repealed the sections of the Glass-Steagall Act prohibiting
banks and bank holding companies, and their subsidiaries, from engaging in the
business of underwriting securities, distributing securities, or sponsoring,
organizing or controlling a registered open-end investment company that
continuously offers its shares. Banks and bank holding companies that satisfy
certain capitalization, managerial and other criteria are now permitted to
engage in such underwriting and distribution activities. Recent business
combinations have included insurance, finance and securities brokerage under
single ownership.

HEALTH CARE COMPANIES. The activities of health care companies are strongly
affected by government activities, regulation and legislation. Health care
companies may be funded or subsidized by federal and state governments, and if
such subsidies are discontinued or reduced, the profitability of these companies
could be adversely affected. Stocks held by a Fund also may be affected by
government policies on health care reimbursements, regulatory approval for new
drugs and medical instruments, and similar

matters. Health care companies are also subject to legislative risk, which is
the risk of changes in the health care system through legislation. Health care
companies may face lawsuits related to product liability issues and the risk
that their products and services may rapidly become obsolete. Price changes
among stocks in the health care sector are often affected by developments
pertaining only to one or a few companies and the value of an investment in the
Fund may fluctuate significantly over relatively short periods of time.

NATURAL RESOURCES COMPANIES. The securities of companies in the natural
resources sector may experience more price volatility than securities of
companies in other industries. Some of the commodities that these industries use
or provide are subject to limited pricing flexibility because of supply and
demand factors. Others are subject to broad price fluctuations as a result of
the volatility of the prices for certain raw materials and the instability of
supplies of other materials. For example, commodity prices and the supply or
demand for commodities change dramatically for reasons beyond a company's
control. In addition, supply and demand factors may dictate the prices at which
a company acquires raw materials or sells its products or services. Moreover,
many natural resources companies will hedge commodity prices seeking to create
more stable and predictable cash flows. Although the Funds' managers attempt to
determine the impact of such hedging, extreme events in the natural resources
sector may result in these hedges becoming financial liabilities. These factors
can affect the profitability of companies in the natural resources sector and,
as a result, the value of their securities.

1. Energy companies. Companies that are involved in oil or gas exploration,
production, refining, marketing or distribution, or any combination of the
above are greatly affected by the prices and supplies of raw materials such
as oil or gas. The earnings and dividends of energy companies can fluctuate
significantly as a result of international economic, political, and
regulatory developments.

UTILITIES COMPANIES. Utilities companies have generally been subject to
substantial government regulation. Major changes in government policies, ranging
from increased regulation or expropriation to deregulation, privatization or
increased competition, may dramatically increase or reduce opportunities for
these companies. For example, while certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable.

SHORT SALES

In a short sale, the Fund sells a security it does not own in anticipation of a
decline in the market value of that security. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. Until the security is replaced, the Fund must pay
the lender any dividends or interest that accrues during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin

requirements, until the short position is closed out.

The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security, and the Fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the Fund is required to pay in connection with
the short sale.

The Fund will segregate, in accordance with the law, an amount equal to the
difference between (a) the market value of the securities sold short at the time
they were sold short and (b) any cash or securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated amount will be marked-to-market
daily and at no time will the amount segregated d deposited with the broker as
collateral be less than the market value of the securities at the time they sold
short.

A Fund may make a short sale when the manager believes the price of the stock
may decline and when, for tax or other reasons, the manager does not currently
want to sell the stock or convertible security it owns. In this case, any
decline in the value of a Fund's portfolio securities would be reduced by a gain
in the short sale transaction. Conversely, any increase in the value of a Fund's
portfolio securities would be reduced by a loss in the short sale transaction.

Short sales "against the box" are transactions in which a Fund sells a security
short for which it owns an equal amount of the securities sold short or owns
securities that are convertible or exchangeable, without payment of further
consideration, into an equal amount of such security.

SECURITIES INDUSTRY RELATED INVESTMENTS

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

STANDBY COMMITMENT AGREEMENTS

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

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

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

TEMPORARY INVESTMENTS

When the manager believes market or economic conditions are unfavorable for
investors, the manager may invest up to 100% of the Fund's assets in a temporary
defensive manner or hold a substantial portion of the Fund's portfolio in cash.
Unfavorable market or economic conditions may include excessive volatility or a
prolonged general decline in the securities market, the securities in which the
Fund normally invests, or the economies of the countries where the Fund invests.

Temporary defensive investments for all Funds (other than the Money Market Fund)
generally may include high quality money market instruments or, in the case of
the Technology and Strategic Income Funds, short-term debt instruments.
High-quality money market instruments include government securities, bank
obligations, the highest quality commercial paper and repurchase agreements.
Short-term debt instruments include high-grade commercial paper, repurchase
agreements, and other money market equivalents. To the extent allowed by
exemptions granted under the 1940 Act and the Funds' other investment policies
and restrictions, a manager also may invest the Fund's assets in shares of one
or more money market funds managed by the manager or its affiliates. The manager
also may invest in these types of securities or hold cash while looking for
suitable investment opportunities or to maintain liquidity.

In addition, certain Funds also may invest in short-term (less than twelve
months to maturity) fixed-income securities, non-U.S. currency, short-term
instruments denominated in non-U.S. currencies, or medium-term (not more than
five years to

maturity) obligations issued or guaranteed by the U.S. government or the
governments of foreign countries, their agencies or instrumentalities. Certain
Funds also may invest cash, including cash resulting from purchases and sales of
Fund shares, temporarily in short-term debt instruments.

Because each Fund has its own goals and strategies, as well as cash flows in and
out, the cash positions of the Funds may vary significantly. When a Fund's
investments in cash or cash equivalents increase, it may not participate in
market advances or declines to the same extent as it would if the Fund were
fully invested in stocks or bonds.

Any decision to make a substantial withdrawal for a sustained period of time
from a Fund's investment goals will be reviewed by the Board.

TRADE CLAIMS

Trade claims are purchased from creditors of companies in financial difficulty.
For buyers, such as a Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation if the value of the claim increases as the
debtor's financial position improves. If the debtor is able to pay the full
obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.

An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding.

WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS

When-issued, delayed delivery and to-be-announced (TBA) transactions are
arrangements under which a Fund buys securities that have been authorized but
not yet issued with payment for and delivery of the security scheduled for a
future time, generally within 15 to 60 days. Purchases of securities on a
when-issued or delayed delivery basis are subject to the risk that the value or
the yields at delivery may be more or less than the purchase price or yields
available when the transaction was entered into. To the extent a Fund engages in
these transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. Although the Funds will generally buy
securities on a when-issued or TBA basis with the intention of holding the
securities, they may sell the securities before the settlement date if the
manager believes it is advisable to do so.

When a Fund is the buyer in this type of transaction, it will maintain, in a
segregated account with its custodian bank, cash or marketable securities having
an aggregate value equal to the amount of the Fund's purchase commitments until
payment is made. As a buyer in one of these transactions, the Fund relies on the
seller to complete the transaction. The seller's failure to do so may cause a
Fund to miss a price or yield considered advantageous to the Fund. Securities
purchased on a when-issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Entering into a when-issued,
delayed delivery or TBA transaction is a form of leverage that may affect
changes in net asset value to a greater extent.

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

Officers and Trustees
- --------------------------------------------------------------------------------

The Trust's Board is responsible for the overall management of the Trust,
including general supervision and review of each Fund's investment activities.
The Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's day-to-day operations. The Board also monitors each
Fund to ensure no material conflicts exist among share classes, among different
insurance companies or between owners of variable annuity and variable life
insurance contracts. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.

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

Independent Board Members
- -------------------------
Number of
Portfolios in
Fund Complex
Length of Time Overseen by
Name, Age and Address Position Served Board Member* Other Directorships Held
- -------------------------------------------------------------------------------------------------------------

FRANK H. Trustee Since 1988 105 None
ABBOTT, III (80)
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
President and Director, Abbott Corporation (an investment company); and formerly, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing) (until 1996).
- -------------------------------------------------------------------------------------------------------------

HARRIS J. Trustee Since 1988 135 Director, RBC Holdings,
ASHTON (69)

One Franklin Parkway Inc. (bank holding
San Mateo, CA company) and Bar-S Foods
94403-1906 (meat packing company).
Principal Occupation During Past 5 Years:
Director of various companies; and formerly, President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers) (until 1998).
- -------------------------------------------------------------------------------------------------------------

ROBERT F. Trustee Since 1998 41 None
CARLSON (73)
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice President and past President, Board of Administration, California Public Employees Retirement Systems
(CALPERS); and formerly, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
- -------------------------------------------------------------------------------------------------------------

S. JOSEPH Trustee Since 1989 136 None
FORTUNATO (69)
One Franklin Parkway
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Member of the law firm of Pitney, Hardin, Kipp & Szuch.
- -------------------------------------------------------------------------------------------------------------

FRANK W.T. Trustee Since 1988 105 Director, The California
LAHAYE (72) Center for Land Recycling
One Franklin Parkway (redevelopment).
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
President, Las Olas L.P. (Asset Management); and formerly, Chairman, Peregrine Venture Management Company
(venture capital).
- -------------------------------------------------------------------------------------------------------------

GORDON S. Trustee Since 1993 135 Director, Martek
MACKLIN (73) Biosciences Corporation,
One Franklin Parkway WorldCom, Inc.
San Mateo, CA (communications
94403-1906 services), MedImmune,
Inc. (biotechnology),
Overstock.com (Internet
services), and Spacehab,
Inc. (aerospace services).

Principal Occupation During Past 5 Years:
Deputy Chairman and Director, White Mountains Insurance Group, Ltd. (holding company); and formerly,
Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment
banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987).

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

Interested Board Members and Officers
- -------------------------------------

Name, Age and Address Position Length of Number of Other Directorships Held
Time Served Portfolios in
Fund Complex
Overseen by
Board Member*
- -------------------------------------------------------------------------------------------------------------

**CHARLES B. Chairman of the Chairman of the 135 None
JOHNSON (68) Board and Trustee Board and
One Franklin Parkway, Trustee since
San Mateo, CA 1988
94403-1906
Principal Occupation During Past 5 Years:
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company
International; officer and/or director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer of 48 of the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

**CHARLES E. President and President and 91 None
JOHNSON (45) Trustee Trustee since
One Franklin Parkway, 1988
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
President, Member - Office of the President and Director, Franklin Resources, Inc.; Senior Vice President,
Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin
Advisers, Inc.; Chairman of the Board, President and Director, Franklin Investment Advisory Services, Inc.;
officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 34 of
the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

**RUPERT H. Vice President and Vice President 141 None
JOHNSON, JR. (61) Trustee and Trustee
One Franklin Parkway, since 1988
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin Resources, Inc.; and officer of
51 of the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

**CHRISTOPHER Trustee Since 2001 24 None
H.PINKERTON (43)
One Franklin Parkway,

San Mateo, CA 94403-1906
Principal Occupation During Past 5 Years:
President, Chairman and Chief Executive Officer, USAllianz Investor Services, LLC and USAllianz Advisors;
President and Chief Executive Officer, USAllianz Investment Advisor and USAllianz VIP Trust; Senior Vice
President, Variable Products Division, Allianz Life Insurance Company of North America; fellow, Life
Management Institute; and formerly, Vice President of Marketing, Nationwide Financial Services (until 1999).
- -------------------------------------------------------------------------------------------------------------

HARMON E. Vice President Since 1988 Not Applicable None
BURNS (56)
One Franklin Parkway,
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and
Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies
in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

MARTIN L. Vice President and Vice President Not Applicable None
FLANAGAN (41) Chief Financial and Chief
One Franklin Parkway, Officer Financial
San Mateo, CA Officer since
94403-1906 1995
Principal Occupation During Past 5 Years:
President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer, Franklin
Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive
Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and
Chief Operating Officer, Templeton Investment Counsel, LLC; Executive Vice President and Director, Franklin
Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton
Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton
Services, LLC; 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 52 of the investment companies in Franklin
Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

DAVID P. Vice President Since 2000 Not Applicable None
GOSS (54)
One Franklin Parkway,
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Associate General Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and Director,
Property Resources, Inc. and Franklin Properties, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin Templeton
Investments; and formerly, President, Chief Executive Officer and Director, Property Resources Equity Trust
(until 1999) and Franklin Select Realty Trust(until 2000).
- -------------------------------------------------------------------------------------------------------------

BARBARA J. Vice President Since 2000 Not Applicable None
GREEN (54)
One Franklin Parkway,

Parkway, San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Vice President and Deputy General Counsel, Franklin Resources, Inc.; and Senior Vice President, Templeton
Worldwide, Inc.; officer of 53 of the investment companies in Franklin Templeton Investments; 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 (until 1986), and Judicial Clerk, U.S. District Court (District of
Massachusetts) (until 1979).
- -------------------------------------------------------------------------------------------------------------

EDWARD V. Vice President Since 1988 Not Applicable None
MCVEY (64)
One Franklin Parkway,
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Senior Vice President, Franklin Templeton Distributors, Inc.; Executive Vice President, Templeton/Franklin
Investment Services, Inc.; and officer of 29 of the investment companies in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

KIMBERLEY Treasurer and Since 1995 Not Applicable None
MONASTERIO(38) Principal
One Franklin Parkway, Accounting
San Mateo, CA Officer
94403-1906
Principal Occupation During Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC.; and officer of 34 of the investment companies in
Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------

MURRAY L. Vice President and Since 2000 Not Applicable None
SIMPSON (64) Secretary
One Franklin Parkway,
San Mateo, CA
94403-1906
Principal Occupation During Past 5 Years:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of
the subsidiaries of Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin
Templeton Investments; and formerly, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until 2000) and Director, Templeton Asset Management Ltd. (until 1999).
- -------------------------------------------------------------------------------------------------------------

*We base the number of portfolios on each separate series of the registered
investment companies comprising the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered
interested persons of the Trust under the federal securities laws due to their
positions as officers and directors and major shareholders of Franklin
Resources, Inc., which is the parent company of the Trust's adviser and
distributor. Charles E. Johnson's status as an interested person results from
his position as an officer of Franklin Resources, Inc.
***Mr. Pinkerton is considered an interested person of the Trust because of the
share ownership of Allianz Life in the Trust.

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

The following tables provide the dollar range of equity securities beneficially
owned by the Board members of the Trust on December 31, 2001.

Independent Board Members
- -------------------------
Name of Board Dollar Range of Equity Securities in Aggregate Dollar Range of
Member Each Series of the Trust Equity Securities in All Funds
Overseen by the Board
Member in the Franklin
Templeton Fund Complex
- -----------------------------------------------------------------------------------------------------------

Frank H. Abbott, III None Over $100,000
Harris J. Ashton None Over $100,000
Robert F. Carlson None Over $100,000
S. Joseph Fortunato None Over $100,000
Frank W.T. LaHaye None Over $100,000
Gordon S. Macklin None Over $100,000

Interested Board Members
- ------------------------
Name of Board Dollar Range of Equity Securities in Aggregate Dollar Range of
Member Each Series of the Trust Equity Securities in All Funds
Overseen by the Board
Member in the Franklin
Templeton Fund Complex
- -----------------------------------------------------------------------------------------------------------

Charles B. Johnson None Over $100,000
Charles E. Johnson None Over $100,000
Rupert H. Johnson, Jr. None Over $100,000
Christopher H. Pinkerton None None

BOARD COMMITTEES

The Board maintains two standing committees: the Audit Committee and the
Nominating Committee. The Audit Committee is generally responsible for
recommending the selection of the Trust's independent auditors, including
evaluating their independence and meeting with such accountants to consider and
review matters relating to the Trust's financial reports and internal
accounting. The following Independent Trustees of the Trust comprise the Audit
Committee: Frank H. Abbott, III, Robert F. Carlson and Frank W.T. La Haye. The
following Independent Trustees of the Trust comprise the Nominating Committee:
Frank H. Abbott, III, Harris J. Ashton, Robert F. Carlson, S. Joseph Fortunato,
Frank W.T. LaHaye and Gordon S. Macklin. The Trust's Nominating Committee sets
trustees' fees and is responsible for the nomination of trustees to the Board.
When vacancies arise or elections are held, the Committee considers qualified
nominees, including those recommended by shareholders who provide a written
request to the Board, care of the Trust, to the following address:

P.O. Box 997151
Sacramento, CA 95899-9983

During the fiscal year ended December 31, 2001, the Audit Committee met twice
and the Nominating Committee met once.

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

Number of Boards
Total Fees Received in Franklin
from Franklin Templeton
Total Fees Received Templeton Investments Investments on
from the Funds ($)/2/ which Each Serves
($)/1/
Name

Frank H. Abbott, III 10,487 163,675 28
Harris J. Ashton 10,813 353,221 48
Robert R. Carlson 13,600 93,240 12
S. Joseph Fortunato 10,090 352,380 49
Frank W.T. LaHaye 9,937 154,197 28
Gordon S. Macklin 10,813 353,221 48

1. For the fiscal year ended December 31, 2001.
2. For the calendar year ended December 31, 2001.

Noninterested Board members are reimbursed for expenses incurred in connection
with attending Board meetings, paid pro rata by each fund in Franklin Templeton
Investments 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 Franklin
Templeton Investments. Certain officers or Board members who are shareholders of
Franklin Resources, Inc. (Resources) may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.

Board members historically have followed a policy of having substantial
investments in one or more of the funds in Franklin Templeton Investments, as is
consistent with their individual financial goals. In February 1998, this policy
was formalized through adoption of a requirement that each Board member invest
one-third of fees received for serving as a director or trustee of a Templeton
fund in shares of one or more Templeton funds and one-third of fees received for
serving as a director or trustee of a Franklin fund in shares

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

Management and Other Services
- --------------------------------------------------------------------------------

Managers and services provided

The managers are:

Investment Adviser Fund
-------------------------------------------- ----------------------------

Franklin Advisers, Inc. (Advisers) Aggressive Growth Fund
Global Communications Fund
Growth and Income Fund
High Income Fund
Income Securities Fund
Large Cap Growth Fund
Money FundReal Estate Fund
S&P 500 Index Fund
Small Cap Fund
Strategic Income Fund
Technology Fund
U.S. Government Fund
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Global Income Fund

Franklin Advisory Services, LLC (FAS) Rising Dividends Fund
Small CapValue Fund

Franklin Mutual Advisers, LLC (FMA) Mutual Discovery Fund
Mutual Shares Fund

Templeton Investment Counsel, Global Asset Allocation Fund
LLC (TIC) Foreign Securities Fund

Templeton Global Advisors Growth Securities Fund
Limited (TGAL)

Investrment Advisor Fund
---------------------------------------- ------------------------------
Templeton Asset Management Developing Markets Securities
LTD. (TAML) Fund

Peter A. Nori, CFA, has been a manager of the Foreign Securities Fund since
November 1999. He was a manager of the Templeton International Equity Fund from
1996 until its merger and reorganization into the Foreign Securities fund on May
1, 2000. Mr. Nori has been with Franklin Templeton Investments since 1987.

The managers are directly or indirectly wholly owned by 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
select the securities for the Funds to buy, hold or sell. The managers also
select the brokers who execute the Funds' portfolio transactions. The managers
provide periodic reports to the Board, which reviews and supervises the
managers' investment activities. To protect the Funds, the managers and their
officers, directors and employees are covered by fidelity insurance. TAML and
TGAL render their services to the Funds from outside the U.S.

The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, Australia, Bahamas, Belgium,
Brazil, Canada, Peoples' Republic of China, Cyprus, France, Germany, Hong Kong,
Hungary, India, Ireland, Italy, Japan, Korea, Luxembourg, Malaysia, Mauritius,
the Netherlands, Poland, Russia, Singapore, South Africa, Spain, Sweden,
Switzerland, Taiwan, Turkey, United Arab Emirates, United Kingdom, Venezuela and
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 they manage, or for their own accounts, 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 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 they manage.

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

Franklin Advisers, Inc. is the sub-advisor for Global Asset Allocation Fund.
Templeton Asset Management Limited, Singapore (TAML) is the sub-advisor for
Growth Securities Fund. SSgA Funds Management, Inc. (SSgA), is the sub-advisor
for Franklin S&P 500 Index Fund (Fund). SSgA, a registered investment advisor,
is a subsidiary of State Street Bank and Trust Company. The sub-advisors have
agreements with the managers and provide the managers with investment advice and
assistance. TAML provides the portfolio management services of John Crone while
he remains employed by TAML. The sub-advisors' activities are subject to the
Board's review and control, as well as the managers' instructions and
supervision. The code of ethics of SSgA is filed with, and available from, the
SEC.

During the past fiscal year, the Board considered and approved the renewal
of each Fund's management agreement with its manager. In connection with this
annual review, the Board, with the advice and assistance of independent counsel,
received and considered information and reports relating to the nature, quality
and scope of the services provided to each Fund by its manager and its
affiliates, including generally arrangements paid from the advisers or
affiliates of Resources. The Board considered the level of and the
reasonableness of the fees charged for these services, together with comparative
fee and expense information showing, among other things, the fees paid for
advisory (including any sub-advisory services), administrative, transfer agency,
and shareholder services and the total expense ratio of each Fund relative to
its peer group of mutual funds.

In addition, the Board considered, among other factors:

. the effect of the investment advisory fee (and where relevant, any
sub-advisory fees) and fund administration fee structure on the expense
ratio of each Fund;

. the effect of the investment advisory fee (and where relevant, any
sub-advisory fees) and fund administration fee structure on the
nature or level of services to be provided to each Fund;

. the investment performance of each Fund;

. information on the investment performance, advisory fees, administration
fees and expense ratios of other registered investment companies within
Franklin Templeton Investments;

100

. information on the investment performance, advisory fees,
administration fees and expense ratios of other investment
companies not advised by the manager but believed to be generally
comparable in their investment objectives and size to each Fund;
and

. the continuing need of the manager to retain and attract qualified
investment and service professionals to serve the Trust in an
increasingly competitive industry.

The Board also considered various improvements and upgrades in shareholder and
contract owner services made during the year, financial information about the
manager's costs, an analysis of historical profitability of each Fund, and the
importance of supporting quality, long-term service by the manager to help
achieve solid investment performance.

Based on all the factors described above and such other considerations and
information as it deemed relevant to its decision, the Board determined that
renewal of the management agreement was in the best interests of each Fund and
its shareholders and on that basis approved their renewal.

Management fees Each Fund pays the manager a fee equal to an annual rate as
follows:

Fund Management Fee Rates
------------------------------------------------------------------------------------------------------

Global Communications Fund 0.625% of the value of net assets up to and including
Growth and Income Fund $100 million; plus
High Income Fund 0.50% of the value of net assets over $100 million up to
Income Securities Fund and including $250 million; plus
Money Fund 0.45% of the value of net assets over $250 million up to
Real Estate Fund and including $10 billion; plus
U.S. Government Fund 0.44% of the value of net assets over $10 billion up to
Zero Coupon Fund - 2005 and including $12.5 billion; plus
Zero Coupon Fund - 2010 0.42% of the value of net assets over $12.5 billion up
Global Income Fund to and including $15 billion; plus
0.40% of the value of net assets over $15 billion.

Large Cap Fund 0.75% of the value of net assets up to $500 million;
Rising Dividends Fund 0.625% of the value of net assets over $500 million up
to and including $1 billion; and
0.50% of the value of net assets in excess of $1 billion.

Growth Securities Fund 1.00% of the value of net assets up to $100 million;
0.90% of the value of net assets over $100 million up to
and including $250 million;
0.80% of the value of net assets over $250 million up to
and including $500 million; and
0.75% of the value of net assets over $500 million.

101

Foreign Securities Fund 0.75% of the value of net assets
up to and including $200 million;
0.675% of the value of net
assets over $200 million up
to and including $1.3 billion;
0.60% of the value of net assets
over $1.3 billion.

Developing Markets Fund 1.25% of the value of net assets.

Global Asset Allocation Fund 0.65% of the value of net assets
up to and including $200
million;
0.585% of the value of net assets
over $200 million up to and
including $1.3 billion;
0.52% of the value of net assets
over $1.3 billion.

Small Cap Value Fund 0.60% of the value of net assets
up to an including $200 million;
0.50% of the value of net assets
up to and including $1.3 billion;
and
0.40% of value of net assets over
$1.3 billion.

Mutual Discovery Fund 0.80% of the value of net assets.

Mutual Shares Fund 0.60% of the value of net assets.

Aggressive Growth Fund 0.500% of the value of net assets
up to $500 million;
0.400% of the value of net assets
over $500 million up to and
including $1 billion;
0.350% of the value of net assets
over $1 billion up to and
including $1.5 billion;
0.300% of the value of net assets
over $1.5 billion up to and
including $6.5 billion;
0.275% of the value of net assets
over $6.5 billion up to and
including $11.5 billion;
0.250% of the value of net assets
over $11.5 billion up to and
including $16.5 billion;
0.240% of the value of net assets
over $16.5 billion up to and
including $19 billion;
0.230% of the value of net assets
over $19 billion up to and
including $21.5 billion; and
0.220% of the value of net assets
over $21.5 billion.

Small Cap Fund 0.550% of the value of net assets
Technology Fund up to $500 million; and
0.450% of the value of net assets
over $500 million up to and
including $1 billion; and
0.400% of the value of net assets
over $1 billion up to and
including $1.5 billion; and

102

Fund Management Fee Rates
- --------------------------------------------------------------------------------

0.350% of the value of net assets
over $1.5 billion up to and
including $6.5 billion; and
0.325% of the value of net assets
over $6.5 billion up to and
including $11.5 billion; and
0.300% of the value of net
assets over $11.5 billion up
to and including $16.5
billion; and
0.290% of the value of net assets
over $16.5 billion up to and
including $19 billion; and
0.280% of the value of net
assets over $19 billion up
to and including $21.5
billion; and
0.270% of the value of net assets
over $21.5 billion.

S&P 500 Index Fund 0.15% of the value of net assets.

Strategic Income Fund 0.425% of the value of net
assets up to $500 million;
0.325% of the value of net
assets over $500 million up
to and including $1 billion;
0.280% of the value of net
assets over $1 billion up to
and including $1.5 billion;
0.235% of the value of net
assets over $1.5 billion up to
and including $6.5 billion;
0.215% of the value of net
assets over $6.5 billion up
to and including $11.5 billion;
0.200% of the value of net
assets over $11.5 billion up
to and including $16.5 billion;
0.190% of the value of net
assets over $16.5 billion up
to and including $19 billion;
0.180% of the value of net
assets over $19 billion up to
and including $21.5 billion; and
0.170% of the value of net
assets over $21.5 billion.

The fees are computed daily according to the terms of the management agreements.
Each class of a Fund's shares pays its proportionate share of the fee.

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

Management fees paid ($)
------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------

Aggressive Growth Fund 45,387 22,838/1/ n/a
Global Communications Fund 1,890,733 4,032,318 4,247,909
Growth and Income Fund 3,503,479 3,976,995 5,454,205
High Income Fund 1,004,788 1,350,684 1,992,885
Income Securities Fund 2,908,412 3,327,614 4,605,869
Large Cap Fund 2,705,875 3,420,758 2,501,063
Money Fund 1,521,353 1,599,158 1,971,026
Real Estate Fund 1,103,174 932,495 1,197,913
Rising Dividends Fund 2,608,589 2,738,475 4,308,795
S&P 500 Index Fund 80,998 70,310/1/ 0/3/
Small Cap Fund 2,848,023 3,511,885/1/ 2,375,111

103

Management fees paid ($)
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------

Small CapValue Fund/1/ 267,188 110,031 62,295
Strategic Income Fund 94,842 25,664/1/ 0/1, 2/
Technology Fund 63,523 25,076/1/ n/a
U.S. Government Fund 2,151,631 2,315,683 3,000,062
Zero Coupon Fund - 2005 379,802 374,270 470,096
Zero Coupon Fund - 2010 329,504 358,565 502,424
Mutual Discovery Fund 1,477,319 1,602,379 1,617,147
Mutual Shares Fund 3,218,079 2,544,563 2,833,172
Global Asset Allocation Fund 3,558,579 4,131,722 4,072,911/4/
Developing Markets Fund 4,180,830 4,860,007 3,292,465/4/
Foreign Securities Fund 5,974,813 9,942,391 7,168,839/4/
Global Income Fund 460,525 541,042 714,45/4/
Growth Securities Fund 9,152,469 8,610,867 5,923,920

1. The Fund's fees, before any advance waiver, were ($):

2001 2000 1999
---------------------------------------------------------------------------

Aggressive Growth Fund/a/ 48,589 25,512/a/ n/a
Money Fund n/a n/a n/a
S&P 500 Index Fund 84,144 73,826/a/ 1,735/b/
Small Cap Fund 3,328,141 3,797,838/a/ n/a
Small Cap Value Fund 282,342 113,954/a/ n/a
Strategic Income Fund 108,010 31,828/a, b/ 6,732/b/
Technology Fund 66,925 26,813/a/ n/a

a. The manager agreed in advance to reduce its fees to reflect
reduced services from the Fund's investment in a Franklin
Templeton money fund, as required by the Board and an SEC order.

b. The manager agreed in advance to waive or limit its fees.

2. For the period May 1, 2000 (effective date) to December 31, 2000.

3. For the period November 1, 1999 (effective date) to December 31, 1999.

4. For the period July 1, 1999 (effective date) to December 31, 1999.

5. Included in the financials in the Templeton Variable Products Series
Fund (TVP) Annual Report to Shareholders for the fiscal year ended
December 31, 1999.

For services provided to the Funds, the managers pay the sub-advisors the
following fees:

Sub-Advisor Fund Annual Fee Rates
--------------------------------------------------------------------------------

Advisers Global Asset Allocation 0.227% of the value of net assets up
Fund to and including $200 million;
0.205% of the value of net assets
over $200 million up to an including
$1.3 billion; and
0.182% of the value of net assets
over $1.3 billion.

SsgA S&P 500 Index Fund 0.05% of the value of the Fund's net

104

Sub-Advisor Fund Annual Fee Rates
--------------------------------------------------------------------------------

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

TAML Growth Securities Fund 0.80% of the value of the net assets
up to and including $100 million;
0.72% of the value of the net assets
up to and including $250 million;
0.64% of the value of the net assets
up to and including $500 million;
and 0.60% of the value of net assets
over $1.3 billion.
------------------------------------

The managers pay sub-advisory fees from the management fees they receive from
the Funds. For the last three fiscal years, the managers paid the following
sub-advisory fees:

sub-advisory fees paid ($)
---------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------

Global Income Fund 191,966 298,522 394,727
S&P 500 Index Fund 27,308 23,798 576/1/
Strategic Income Fund 0 5,636 0/1/

1. For the period November 1, 1999 (effective date) to December 31, 1999.

Administrator and services provided Franklin Templeton Services, LLC (FT
Services) provides certain administrative services and facilities for each Fund.
FT Services has direct agreements with the following Funds:

Aggressive Growth Fund
S&P 500 Index Fund
Small Cap Fund
Small Cap Value Fund
Strategic Income Fund
Technology Fund

Mutual Discovery Fund
Mutual Shares Fund
Global Asset Allocation Fund
Developing Markets Fund
Foreign Securities Fund

105

FT Services has subcontracts with the managers of all other Funds not listed
above. The administrative services provided by FT Services include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements. FT Services may make certain payments
to insurance companies for administrative services. FT Services is an indirect,
wholly owned subsidiary of Resources and is an affiliate of the Trust's managers
and principal underwriter.

Administration fees The Funds, in the case of the Funds with direct agreements
with FT Services (except for Aggressive Growth Fund, S&P 500 Index Fund, Small
Cap Fund, Strategic Income Fund and Technology Fund) and the managers for all
other Funds, pay FT Services a monthly fee for each Fund, equal to an annual
rate of:

. 0.15% of the Fund's average daily net assets up to $200 million;
. 0.135% of average daily net assets over $200 million up to $700
million;
. 0.10% of average daily net assets over $700 million up to $1.2
billion; and
. 0.075% of average daily net assets over $1.2 billion.

Small Cap Fund and Technology Fund each pays FT Services a monthly fee equal to
an annual rate of 0.25% of the average daily net assets of the Fund during the
preceding month.

Strategic Income Fund and Aggressive Growth Fund each pays FT Services a monthly
fee equal to an annual rate of 0.20% of the average daily net assets of the Fund
during the preceding month.

S&P 500 Index Fund pays FT Services a monthly fee equal to an annual rate of
0.10% of the Fund's average daily net assets.

During the last three fiscal years ended December 31, the Funds or the managers,
as applicable, paid FT services the following administration fees:

Administration fees paid ($)
---------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------

Aggressive Growth Fund 19,435 10,051/2/ n/a
Global Communications Fund 522,988 1,108,980 1,163,467
Growth and Income Fund 993,251 1,101,761 1,427,064
High Income Fund 264,165 361,578 553,410
Income Securities Fund 828,305 948,430 1,243,737
Large Cap Fund 517,586 644,210 479,784
Money Fund 409,632 436,105 546,502
Real Estate Fund 292,570 241,521 318,900
Rising Dividends Fund 506,786 525,587 826,684
S&P 500 Index Fund 55,651 48,367 0/4,5/
Small Cap Fund 1,555,535 1,588,387/3/ 457,520
Small Cap Value Fund 70,585 28,354 15,666
Strategic Income Fund 50,829 15,004 /,6/
Technology Fund 30,329 0/4/ n/a
U.S. Government Fund 600,427 648,078 855,487

106

Administration fees paid ($)
- ----------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------

Zero Coupon Fund - 2005 91,156 89,608 112,884
Zero Coupon Fund - 2010 79,105 85,841 120,676
Mutual Discovery Fund 276,996 300,017 302,448
Mutual Shares Fund 754,929 602,528 667,459
Developing Markets Fund/1/ 481,526 449,440 254,273/7/
Foreign Securities Fund/1/ 1,154,256 1,563,478 1,004,768/7/
Global Income Fund 110,525 127,938 177,066
Growth Securities Fund 1,399,978 1,343,436 982,673

1. Before the merger on May 1, 2000, the Fund's administrative fees were based
on the total net assets of TVP, with each Fund paying its proportionate
share based on each Fund's average net assets.
2. For the period May 1, 2000 (effective date) to December 31, 2000.
3. Before May 1, 2000, the administration fee was paid indirectly through the
management fee.
4. No fees paid under an advance agreement by the administrator to waive its
fees.
5. For the period November 1, 1999 (effective date) to December 31, 1999, the
Fund's administration fees, before any advance waiver, totaled $1,140.
Under an agreement by FT Services to waive its fees, the Fund paid no
administration fees for the period.
6. For the period July 1, 1999 (effective date) to December 31, 1999.
7. Included in the financials in the TVP Annual Report to Shareholders.

Shareholder servicing and transfer agent Franklin Templeton Investor Services,
LLC (Investor Services) is the Funds' shareholder servicing agent and acts as
the Funds' transfer agent and dividend-paying agent. Investor Services is
located at One Franklin Parkway, San Mateo, CA 94403-1906.

Custodians Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the Funds' securities and other assets,
except Asset Allocation Fund, Developing Markets Fund, Foreign Securities Fund,
Global Income Fund and Growth Securities Fund. JPMorgan Chase Bank, formerly
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 securities and other assets of Asset Allocation Fund,
Developing Markets Fund, Foreign Securities, Global Income Fund and Growth
Securities Fund. As foreign custody manager, JPMorgan Chase 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 PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105
is the Trust's independent auditor. The auditor gives an opinion on the
financial statements included in the Trust's Annual Report to Shareholders and
reviews the Trust's registration statement filed with the SEC.

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

107

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
managers, 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 they receive. This may be viewed in terms of either the particular
transaction or the managers' overall responsibilities to client accounts over
which they exercise 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 their clients.

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

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

108

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 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
Trust'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
Investments, also may 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 Fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.

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

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

Broker Commissions ($)
2001 2000 1999
- ----------------------------------------------------------------------------------------------

Aggressive Growth Fund 28,715 7,134/1/ n/a
Global Communications Fund 1,020,179 1,591,960 2,240,233
Growth and Income Fund 2,256,692 1,609,865 1,462,576
High Income Fund 7,156 12,917 1,469
Income Securities Fund 221,795 0 0
Large Cap Fund 726,865 389,057 285,773
Money Fund 0 0 0
Real Estate Fund 275,615 198,320 321,201
Rising Dividends Fund 176,521 327,751 468,845
S&P 500 Index Fund 17,111 15,697 4,396/2/
Small Cap Fund 483,898 178,280 170,758
Small Cap Value Fund 114,885 38,164 29,749
Strategic Income Fund 1,710 263 353/4/

109

Technology Fund 36,744 7,764/1/ n/a
U.S. Government Fund 0 0 0
Zero Coupon Fund - 2005 0 0 0
Zero Coupon Fund - 2010 0 0 0
Mutual Discovery Fund 343,484 469,166 826,555
Mutual Shares Fund 845,400 824,600 1,073,693
Developing Markets Fund 1,257,897 1,787,125 1,207,123/3/
Foreign Securities Fund 644,547 1,954,173 1,430,2762/3/
Global Asset Allocation Fund 397,845 755,161 1,099,879/3/
Global Income Fund 0 0 0
Growth Securities Fund 1,480,731 2,738,293 1,563,908

1. From May 1, 2000 (effective date) to December 31, 2000.
2. From November 1, 1999 (effective date) to December 31, 1999.
3. Included in the financials in the TVP Annual Report to Shareholders.
4. From July 1, 1999 (effective date) to December 31, 1999.

The following table identifies each Fund which held securities of its regular
brokers or dealers during 2001, the names of each such broker or dealer, and the
value, if any, of such securities as of December 31, 2001.

December 31,
2001 value
($)
Fund Name Regular Broker or Dealer (in 1,000's)
-----------------------------------------------------------------------------------------------

Growth and Income Banc of America Securities LLC 7,869
Fund Morgan Stanley Dean Witter 3,636

Income Securities J.P. Morgan Chase Securities, Inc. 1,091
Fund

Large Cap Fund Goldman Sachs & Co. 2,783
Lehman Brothers, Inc. 668
Merrill Lynch Pierce Fenner 3,867

Money Fund Deutsche Bank Securities 10,000
Goldman Sachs & Co. 9,994
Morgan Stanley Dean Witter 9,996

S&P 500 Fund Morgan Stanley Dean Witter 369
J.P. Morgan Chase Securities, Inc. 427
Banc of America Securities, LLC 593
Lehman Brothers, Inc. 94
Merrill Lynch Pierce Fenner 262
Wells Fargo Securities 439

Small Cap Fund Instinet Corp. 1,267

Mutual Discovery J.P. Morgan Chase Securities, Inc. 31
Fund Banc of America Securities, LLC 390

110

Mutual Shares J.P. Morgan Chase Securities, Inc. 4,475
Fund Banc of America Securities, LLC 1,397
Bear, Stearns & Securities Corp. 6,893

Foreign Securities HSBC Securities, Inc. 11,604
Fund

Global Asset Allocation Allstate Corp. 2,696
Fund

Growth Securities HSBC Securities, Inc 16,561
Fund Merrill Lynch Pierce Fenner 13,030

Because certain Funds may, from time to time, invest in broker-dealers, it is
possible that a Fund will own more than 5% of the voting securities of one or
more broker-dealers through whom a Fund places portfolio brokerage transactions.
In such circumstances, the broker-dealer would be considered an affiliated
person of the Fund. To the extent a Fund places brokerage transactions through
such a broker-dealer at a time when the broker-dealer is considered to be an
affiliate of the Fund, the Fund will be required to adhere to certain rules
relating to the payment of commissions to an affiliated broker-dealer. These
rules require the Fund to adhere to procedures adopted by the Board relating to
ensuring that the commissions paid to such broker-dealers do not exceed what
would otherwise be the usual and customary brokerage commissions for similar
transactions.

Distributions and Taxes
- --------------------------------------------------------------------------------
Each Fund calculates income dividends and capital gain distributions the same
way for each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the distribution and service (Rule
12b-1) fees applicable to each class.

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 (Code). Each has qualified as a regulated investment company for
its most recent fiscal year, and intends to continue to qualify during the
current fiscal year. As a regulated investment company, a Fund generally pays no
federal income tax on the income and gains it distributes. To ensure that
individuals holding the variable annuity and variable life insurance contracts
whose assets are invested in a Fund will not be subject to federal income tax on
distributions made by a Fund prior to receipt of payments under the variable
annuity and variable life insurance contracts, each Fund intends to comply with
the additional requirements of Section 817(h) of the Code relating to
diversification of its assets. The Board reserves the right not to maintain the
qualification of a Fund as a regulated investment company if it determines this
course of action to be beneficial to shareholders. In that case, the Fund would
be subject to federal, and possibly state, corporate taxes on its taxable income
and gains.

111

Organization, Voting Rights and Principal Holders
- --------------------------------------------------------------------------------
The Trust is an open-end management investment company, commonly called a mutual
fund. The Trust was organized as a Massachusetts business trust on April 26,
1988, and is registered with the SEC. Each Fund, except the Strategic Income
Fund, Technology Fund, Small Cap Value Fund and Global Income Fund, is a
diversified series of the Trust.

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

Each of the Funds currently offer two classes of shares, Class 1 and Class 2,
except for the S&P 500 Index Fund which currently offers Class 1, Class 2 and
Class 3. The Trust may offer additional classes of shares in the future. The
full title of each series and class is:

. Franklin Aggressive Growth Securities Fund - Class 1
. Franklin Aggressive Growth Securities Fund - Class 2
. Franklin Global Communications Securities Fund - Class 1/1/ (prior to
11/15/99, Franklin Global Utilities Securities Fund) (prior to 5/1/98,
Utility Equity Fund)
. Franklin Global Communications Securities Fund - Class 2/1/ (prior to
11/15/99, Franklin Global Utilities Securities Fund)
. Franklin Growth and Income Fund - Class 1/1/ (prior to 5/1/95, Equity
Growth Fund)
. Franklin Growth and Income Fund - Class 2/1/
. Franklin High Income Fund - Class 1/1/
. Franklin High Income Fund - Class 2/1/
. Franklin Income Securities Fund - Class 1/1/
. Franklin Income Securities Fund Class 2/1/
. Franklin Large Cap Growth Securities Fund - Class 1/1/ (prior to
12/15/99, Franklin Capital Growth Fund)

112

. Franklin Large Cap Growth Securities Fund - Class 2/1/
(same as Class 1)
. Franklin Money Market Fund - Class 1/1/
. Franklin Money Market Fund - Class 2/1/
. Franklin Real Estate Fund - Class 1
(prior to September 1999, Real Estate Securities Fund)
. Franklin Real Estate Fund - Class 2
(same as Class 1)
. Franklin Rising Dividends Securities Fund - Class 1
(prior to September 1999, Rising Dividends Fund)
. Franklin Rising Dividends Securities Fund - Class 2
(same as Class 1)
. Franklin S&P 500 Index Fund - Class 1/2/
. Franklin S&P 500 Index Fund - Class 2/2/
. Franklin S&P 500 Index Fund - Class 3/2/
. Franklin Small Cap Fund - Class 1/1/
. Franklin Small Cap Fund - Class 2/1/
. Franklin Small Cap Value Securities Fund - Class 1/1/
(prior to May 1, 2002, Franklin Value Securities Fund)
. Franklin Small Cap Value Securities Fund - Class 2/1/
(same as Class 1)
. Franklin Strategic Income Securities Fund - Class 1
. Franklin Strategic Income Securities Fund - Class 2
. Franklin Technology Securities Fund - Class 1
. Franklin Technology Securities Fund - Class 2
. Franklin U.S. Government Fund - Class 1/1/
. Franklin U.S. Government Fund - Class 2/1/
. Franklin Zero Coupon Fund - 2005 - Class 1/1/
. Franklin Zero Coupon Fund - 2005 - Class 2/1/
. Franklin Zero Coupon Fund - 2010 - Class 1/1/
. Franklin Zero Coupon Fund - 2010 - Class 2/1/
. Mutual Discovery Securities Fund - Class 1
. Mutual Discovery Securities Fund - Class 2
. Mutual Shares Securities Fund - Class 1
. Mutual Shares Securities Fund - Class 2
. Templeton Developing Markets Securities Fund - Class 1/2/
(prior to May 1, 2000, Templeton Developing Markets Fund)
. Templeton Developing Markets Securities Fund - Class 2/2/
(same as Class 1)
. Templeton Foreign Securities Fund - Class 1/2/
(prior to May 1, 2002, Templeton International Securities Fund)
. Templeton Foreign Securities Fund - Class 2/2/
(same as Class 2)

113

. Templeton Global Asset Allocation Fund - Class 1/2/
(prior to May 1, 2002, Templeton Asset Strategy Fund)
. Templeton Global Asset Allocation Fund - Class 2/2/
(same as Class 1)
. Templeton Growth Securities Fund - Class 1
. Templeton Growth Securities Fund - Class 2
. Templeton Global Income Securities Fund Class 1
(prior to May 1, 1996, Global Income Fund)
. Templeton Global Income Securities Fund Class 2
1. In September 1999, the names of the Funds were changed to include
"Franklin".
2. On February 8, 2000, Fund shareholders approved a merger and
reorganization that combined the Fund, a series of TVP with a similar
fund of the Trust, effective May 1, 2000. The Fund is the surviving
fund of the merger.

Shares of each class represent proportionate interests in a Fund's assets and
are identical except that the Fund's Class 2 shares will bear the expense of the
Class 2 distribution plan. (See "The Underwriter" below, for a description of
the Class 2 plans.) On matters that affect the Fund as a whole, each class has
the same voting and other rights and preferences as any other class. On matters
that affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the Trust for matters that affect the Trust as a whole. Additional
series may be offered in the future.

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

The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board to consider the
removal of a Board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
Board member. A special meeting may also be called by the Board in its
discretion.

Principal Shareholders Class 1 and Class 2 shares of the Funds generally are
sold to and owned only by insurance company separate accounts to serve as the
investment vehicle for variable annuity and life insurance contracts.

The insurance companies will exercise voting rights attributable to shares they
own in accordance with voting instructions received by owners of the contracts
issued by the insurance companies. To this extent, the insurance companies do
not exercise control over the Trust by virtue of the voting rights from their
ownership of Trust shares.

114

The name, address and percentage of ownership of shareholders that owned of
record 5% or more of the shares of the Funds, as of April 2, 2002, are as
follows:

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Aggressive Growth Securities Fund -
Class 1

Allianz Life Insurance 69.00
1750 Hennepin Ave.
Minneapolis, MN 55403

AIG Life of Bermuda 28.29
1 Alico Plz
Hamilton, HMAX, Bermuda

Aggressive Growth Securities Fund -
Class 2

Preferred Life Insurance Company 100.00
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Global Communications Fund - Class 1

Allianz Life Insurance 91.60
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 8.40
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Global Communications Fund - Class 2

Allianz Life Insurance 96.35
1750 Hennepin Ave.
Minneapolis, MN 55403

Growth and Income Fund - Class 1

Allianz Life Insurance 91.54
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 8.46
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Growth and Income Fund - Class 2

Allianz Life Insurance 98.85
1750 Hennepin Ave.
Minneapolis, MN 55403

High Income Fund - Class 1

115

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Allianz Life Insurance 92.49
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 7.51
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

High Income Fund - Class 2

Allianz Life Insurance 98.20
1750 Hennepin Ave.
Minneapolis, MN 55403

Income Securities Fund - Class 1

Allianz Life Insurance 93.37
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 6.63
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Income Securities Fund - Class 2

Allianz Life Insurance 35.49
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 5.09
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

American Enterprise Life 59.42
IDS Tower 10 T11/1646
Minneapolis, MN 55440

Large Cap Growth Fund - Class 1

Allianz Life Insurance 89.69
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 6.22
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Large Cap Growth Fund - Class 2 36.32
Allianz Life Insurance
1750 Hennepin Ave.
Minneapolis, MN 55403

Allmerica Fin Life & Annuity 9.54

116

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

440 Lincoln St MS-310
Worcester, MA 01653

COVA Financial Life Insurance 46.99
4700 Westown Pky Ste 200
Oakbrook Terrace, IL 60181

Money Fund - Class 1

Allianz Life Insurance 88.53
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 8.55
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Money Fund - Class 2

Allianz Life Insurance 70.81
1750 Hennepin Ave.
Minneapolis, MN 55403

Liberty Life Spectrum Select 29.19
100 Liberty Way
Boston, MA 02117

Real Estate Fund - Class 1

Allianz Life Insurance 93.51
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 6.49
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Real Estate Fund - Class 2

Hartford Life 17.86
PO Box 2999
Hartford, CT 06104-2999

IDS Life Insurance Company 68.77
IDS Tower 10 T11/1646
Minneapolis, MN 55440

Rising Dividends Fund - Class 1

Allianz Life Insurance 90.49
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 9.51
of New York
152 West 57th Street, 18th Floor

117

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

New York, NY 10019

Rising Dividends Fund - Class 2

Allianz Life Insurance 97.07
1750 Hennepin Ave.
Minneapolis, MN 55403

S&P 500 Index Fund - Class 1

Allianz Life Insurance 92.06
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 5.39
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

S&P 500 Index Fund - Class 2

Allianz Life Insurance 97.91
1750 Hennepin Ave.
Minneapolis, MN 55403

Small Cap Fund - Class 1

Allianz Life Insurance 90.45
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 5.03
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Small Cap Fund - Class 2

Allmerica Financial Life & 20.16
Annuity Co.
440 Lincoln Street Mail Stop
S310
Worcester, MA 01653

Pruco Life of Arizona 19.66
100 Mulberry Street
Gateway Center Three
6th, 7th & 8th Floors
Newark, NJ 07102-4077

Hartford Life 18.94
PO Box 2999
Hartford, CT 06104-2999

118

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Travelers Life & Annuity 8.72
One Tower Square
Hartford, CT 06183

Small Cap Value Fund - Class 1

Allianz Life Insurance 95.72
1750 Hennepin Ave.
Minneapolis, MN 55403

Small Cap Value Fund - Class 2

IDS Life Insurance Company 83.08
IDS Tower 10 T11/1646
Minneapolis, MN 55440

Aetna Life Insurance & Annuity Co. 7.71
151 Farmington Ave
Hartford, CT 06156-0001

Allianz Life Insurance 5.54
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance 93.49
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 6.51
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Technology Fund - Class 2

Hartford Life 98.06
PO Box 2999
Hartford, CT 06104-2999

U.S. Government Fund - Class 1
Allianz Life Insurance 90.32
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 9.68
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

U. S. Government Fund - Class 2
Allianz Life Insurance 46.35
1750 Hennepin Ave.
Minneapolis, MN 55403

American General Life 31.93
P.O. Box 1591
Houston, T 77251-1591

119

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

SAFECO 17.42
5069 154th Place NE
Redmond, WA 98052

Zero Coupon Fund - 2005 - Class 1

Allianz Life Insurance 90.87
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 9.14
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Zero Coupon Fund - 2010 - Class 1

Allianz Life Insurance 92.37
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 7.63
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Mutual Discovery Fund - Class 1

Allianz Life Insurance 94.20
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance Company 5.80
of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Mutual Discovery Fund - Class 2

Allianz Life Insurance 99.82
1750 Hennepin Ave.
Minneapolis, MN 55403

Mutual Shares Fund - Class 1

Allianz Life Insurance 91.12
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance 5.39

120

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Company of New York
152 West 57th Street, 18th Floor
New York, NY 10019

Mutual Shares Fund - Class 2

Hartford Life & Annuity 55.12
POBox 2999
Hartford, CT 06104-2999

Allmerica Financial Life & 13.24
Annuity Co.
440 Lincoln Street Mail Stop
S-310
Worcester, MA 01653

Lincoln National Life Insurance 7.86
Co.
1300 South Clinton
Fort Wayne, IN 46802

Allianz Life Insurance 6.55
1750 Hennepin Ave.
Minneapolis, MN 55403

Developing Markets Fund - Class 1

IDS Life Insurance Company 57.94
IDS Tower 10 T11/1646
Minneapolis, MN 55440

Allianz Life Insurance 24.82
1750 Hennepin Ave.
Minneapolis, MN

Developing Markets Fund - Class 2

CUNA 19.59
2000 Heritage Way
Waverly, IA 50677

Minnesota Life Insurance Company 17.29
400 Robert Street North
St. Paul, MN 55101-2098

Travelers Life & Annuity 11.29
One Tower Square
Hartford, CT 06183

Phoenix Variable Life 6.73
One American Row 1st Floor

121

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Hartford, CT 06115

Allianz Life Insurance 11.79
1750 Hennepin Ave.
Minneapolis, MN 55403

Foreign Securities Fund - Class 1

Phoenix Home Life 6.62
One American Row
Hartford, CT 06115

Allianz Life Insurance 61.02
1750 Hennepin Ave.
Minneapolis, MN 55403

Jefferson Pilot 11.35
One Granit Place
PO Box 515
Concord, NH 03302-0515

Nationwide Insurance Company 5.32
700 Harrison St SW

Foreign Securities Fund - Class 2

IDS Life Insurance Company 5.42
IDS Tower 10 T11/1646
Minneapolis, MN 55440

Travelers Life & Annuity 19.20
One Tower Square
Hartford, CT 06183

Phoenix Home Life 6.56
One America Row
Hartford, CT 06115

Hartford Life 8.36
PO Box 2999
Hartford CT 06104-2999

Mass Mutual 7.66
1295 State Street
Springfield, MA 01111

Phoenix Variable Life PHLVIC 7.22
One American Row
Hartford, CT 06115
Global Asset Allocation Fund - Class 1

VALIC 50.05
2929 Allen Pky
Houston, TX 77019-7100

122

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Travelers Insurance Company 33.79
One Tower Square
Hartford, CT 06183

Phoenix Home Life 10.14
One American Row
Hartford, CT 06115

Allianz Life Insurance 5.16
1750 Hennepin Ave.
Minneapolis, MN 55403

Global Asset Allocation Fund - Class 2

Hartford Life & Annuity 40.75
PO Box 2999
Hartford, CT 06104-2999

Phoenix Home Life 11.52
One American Row
Hartford, CT 06115

Minnesota Life Insurance Company 8.09
400 Robert Street North
St. Paul, MN 55101-2098

Allmerica Fin Life & Annuity 7.45
440 Lincoln St MS-310
Worcester, MA 01653

American General Life 5.03
P.O. Box 1591
Houston, T 77251-1591

Global Income Fund - Class 1

Travelers Insurance Company 15.91
One Tower Square
Hartford, CT 06183

Allianz Life Insurance 67.79
1750 Hennepin Ave.
Minneapolis, MN 55403

Preferred Life Insurance 7.14
Company of New York
152 West 57th Street, 18th Floor
New York, NY 10019

123

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Phoenix Home Life 6.85
One American Row
Hartford, CT 06115

Global Income Fund -Class 2

Allianz Life Insurance 22.15
1750 Hennepin Ave.
Minneapolis, MN 55403

Glenbrook 55.81
3100 Sanders Road
Northbrook, IL 60062

COVA Financial Life Insurance 20.10
4700 Westown Pky Ste 200
Oakbrook Terrace, IL 60181

Growth Securities Fund - Class 1

Allianz Life Insurance 41.30
1750 Hennepin Ave.
Minneapolis, MN 55403

Travelers Life & Annuity 40.54
One Tower Square
Hartford, CT 06183

13.09

Phoenix Home Life
One American Row
Hartford, CT 06115

Growth Securities Fund - Class 2

Glenbrook 5.35
3100 Sanders Road
Northbrook, IL 60062

Hartford Life & Annuity 24.28
PO Box 2999
Hartford, CT 06104-2999

124

Name and Address Share class Percentage (%)
-----------------------------------------------------------------------------------------------------

Allianz Life Insurance 8.32
1750 Hennepin Ave.
Minneapolis, MN 55403

Phoenix Variable Life 21.88
One American Row 1st Floor
Hartford, CT 06115

Phoenix Home Life 13.60
One American Row
Hartford, CT 06115

As of April 2, 2002, Board members and officers, as a group, owned less than 1%
of record or beneficially, of the outstanding shares of Trust. The Board members
may own shares in other funds in Franklin Templeton Investments.

Pricing Shares
- --------------------------------------------------------------------------------

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

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

The 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.

Funds other than Money Fund When determining its NAV, a 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.

A 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

125

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.

A 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
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.

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.

Money Fund The valuation of the Fund's portfolio securities, including any
securities set aside on the Fund's books for when-issued securities, is based on
the amortized cost of the securities, which does not take into account
unrealized capital gains or losses. This method involves valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
calculation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument. During periods of declining interest rates, the daily yield
on shares of the Fund computed as described above may tend to be higher than a
like computation made by a Fund with identical investments but using a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Fund resulted
in a lower aggregate portfolio value on a particular day, a prospective investor
in the Fund would be able to obtain a somewhat higher yield than would result
from an investment in a Fund

126

using only market values, and existing investors in the Fund would receive less
investment income. The opposite would be true in a period of rising interest
rates. The Fund's use of amortized cost, which helps the Fund maintain a $1
share price, is permitted by a rule adopted by the SEC.

The Board has established procedures designed to stabilize, to the extent
reasonably possible, the Fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
Fund's holdings by the Board, at such intervals as it may deem appropriate, to
determine if the Fund's net asset value calculated by using available market
quotations deviates from $1 per share based on amortized cost. The extent of any
deviation will be examined by the Board. If a deviation exceeds 1/2 of 1%, the
Board will promptly consider what action, if any, will be initiated. If the
Board determines that a deviation exists that may result in material dilution or
other unfair results to investors or existing shareholders, it will take
corrective action that it regards as necessary and appropriate, which may
include selling portfolio instruments before maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends,
redeeming shares in kind, or establishing a net asset value per share by using
available market quotations.

Redemptions in kind Each Fund has committed itself 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 $250,00 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 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.

The Underwriter
- --------------------------------------------------------------------------------

Distributors acts as the principal underwriter in the continuous public offering
of the Trust's shares. Distributors is located at One Franklin Parkway, San
Mateo, CA 94403-1906.

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, except to the extent these expenses are borne by the
insurance companies. The Fund pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other than those
necessitated by the activities of Distributors) and of sending prospectuses to
existing shareholders.

Distributors may be entitled to receive payment under Class 2 Rule 12b-1 plans
as described below. Except as noted below, Distributors does not receive
compensation

127

from the Trust for acting as underwriter.

Distribution and service (12b-1) fees The Board has adopted a plan pursuant to
Rule 12b-1 for each Class 2 shares. Under each Fund's Class 2 plan (except for
S&P 500 Index Fund, Strategic Income Fund, Global Asset Allocation Fund, Global
Income Fund, Foreign Fund and Developing Markets Fund), the Fund may pay up to a
maximum of 0.35% per year of the average daily net assets attributable to its
Class 2 shares. The Board, however, has set the current rate at 0.25% per year,
effective July 1, 1999. From January 6, 1999 to June 30, 1999, the fees were set
at 0.30% per year. The maximum rate for Class 2 shares of S&P 500 Index Fund,
Strategic Income Fund, Global Income Fund, Global Asset Allocation Fund,
Developing Markets Fund and Foreign Fund has been set at 0.25% per year under
each plan.

The plans are expected to, among other things, increase advertising of the
Funds, encourage sales of the Funds and service to its shareholders, and
increase or maintain assets of the Fund so that certain fixed expenses may be
spread over a broader asset base, resulting in lower per share expense ratios.
In addition, a positive cash flow into the Funds is useful in managing the Funds
because the managers have more flexibility in taking advantage of new investment
opportunities and handling shareholder redemptions.

Under each plan, the Funds pay Distributors, the insurance companies or others
to assist in the promotion and distribution of Class 2 shares or variable
contracts offering Class 2 shares. Payments made under the plans may be used
for, among other things, the printing of prospectuses and reports used for sales
purposes, preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the insurance companies' overhead expenses
attributable to the distribution of these variable contracts or shares of the
Funds. Payments made under the plans may also be used to pay insurance
companies, dealers or others for, among other things, furnishing personal
services and maintaining customer accounts and records, or as service fees as
defined under NASD rules. Together, these expenses, including the service fees,
are "eligible expenses."

Agreements for the payment of fees to the insurance companies or others shall be
in a form which has been approved from time to time by the Board, including the
non-interested Board members.

For the fiscal year ended December 31, 2001, the amounts paid by each Fund's
Class 2 shares pursuant to the plans, which were used by Distributors to pay
insurance companies or their affiliates, were as follows:

Amounts
Fund Paid ($)
---------------------------------------------------------------------

Aggressive Growth Fund 2
Global Communications Fund 996
Growth and Income Fund 11,888
High Income Fund 1,368

128

Amounts
Fund Paid ($)
---------------------------------------------------------------------

Income Securities Fund 10,059
Large Cap Fund 4,108
Money Fund 76,862
Real Estate Fund 106,602
Rising Dividends Fund 7,706
S&P 500 Index Fund - Class 2 173
Small Cap Fund 789,103
Small Cap Value Fund 36,317
Strategic Income Fund 13/1/
Technology Fund 10,696
U.S. Government Fund 24,118
Zero Coupon Fund - 2005 0
Zero Coupon Fund - 2010 0
Mutual Discovery Fund 6,165
Mutual Shares Fund 228,651
Global Asset Allocation Fund 87,721
Developing Markets Fund 156,704
Foreign Securities Fund 528,238
Global Income Fund 2,971
Growth Securities Fund 217,735

1. For the period May 15, 2001 (effective date) to December 31, 2001.

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

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

Sponsorship of meetings. Distributors routinely sponsors due diligence meetings
held by insurance companies for registered representatives of broker dealers
selling insurance products. During these meetings, the registered
representatives receive updates on various Franklin Templeton funds. Invitation
to these meetings is not conditioned on sales of specific numbers of shares in
Franklin Templeton funds.

Performance
- --------------------------------------------------------------------------------

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

129

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

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

For Class 2 shares which were started at a later date than Class 1 shares,
standardized Fund performance represents, a "blended" figure, combining: (a) for
periods prior to January 6, 1999 (or May 1, 1997 for Global Asset Allocation
Fund, Developing Markets Fund and Foreign Securities Fund) historical results of
Class 1 shares; and (b) for periods beginning January 6, 1999 (or May 1, 1997),
Class 2's results reflect an additional 12b-1 fee expense which also affects
future performance. Historical performance data for Class 2 shares, based on
Class 1 performance, will generally not be restated to include 12b-1 fees,
although each Fund may restate these figures consistent with SEC rules.

For Global Asset Allocation Fund, Developing Markets Fund and Foreign Securities
Fund, performance prior to the May 1, 2000 merger reflects the historical
performance of Templeton Asset Allocation Fund, Templeton Developing Markets
Fund and Templeton International Fund, respectively.

Average annual total return is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does not however, include any fees or sales charges imposed by the variable
insurance contract for which the funds' Class 1 and Class 2 shares are
investment options. If they were included, performance would be lower. The
average annual total returns for each Fund for the periods ended December 31,
2001, are reflected in the Trust's Annual Report to Shareholders for the fiscal
year ended December 31, 2001.

The following SEC formula was used to calculate the figures:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

130

T = average annual total return

n = number of years

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

Cumulative total return Like average annual total return, the cumulative total
return assumes income dividends and capital gain distributions are reinvested at
net asset value. It does not however, include any fees or sales charges imposed
by the variable insurance contract for which the Funds' Class 1 and Class 2
shares are investment options. If they were included, performance would be
lower. Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated in
the annual report. The cumulative total returns for the indicated periods ended
December 31, 2001, were:

Ten Year
One Five or From
Year Year Inception
(%) (%) (%)
-------------------------------------------------------

Aggressive Growth Fund - Class 1 -22.67 -- -41.31/1/
Aggressive Growth Fund - Class 2 -22.81 -- -41.41
Global Communications Fund - Class 1 -29.24 -6.64 40.65
Global Communications Fund - Class 2 -29.40 -7.28 39.68
Growth and Income Fund - Class 1 -2.02 61.76 191.73
Growth and Income Fund - Class 2 -2.28 60.65 189.73
High Income Fund - Class 1 4.26 2.04 83.49
High Income Fund - Class 2 4.18 1.49 82.48
Income Securities Fund - Class 1 .98 41.33 144.29
Income Securities Fund Class 2 .76 40.25 142.43
Large Cap Growth Fund - Class 1 -11.26 75.83 99.74/3/
Large Cap Growth Fund - Class 2 -11.43 74.43 98.15/3/
Money Fund - Class 1 3.91 27.73 55.88
Money Fund - Class 2 3.65 26.75 54.68
Real Estate Fund - Class 1 8.19 34.52 198.02
Real Estate Fund - Class 2 7.88 33.47 195.70
Rising Dividend Securities Fund - Class 1 13.90 77.08 190.04/4/
Rising Dividends Securities Fund - Class 2 13.57 75.48 187.41/4/
S&P 500 Index Fund - Class 1 -12.31 -- -15.24/5/
S&P 500 Index Fund - Class 2 -12.64 -- -15.77
Small Cap Fund - Class 1 -15.02 66.20 119.45/6/
Small Cap Fund - Class 2 -15.25 64.93 117.78/6/
Strategic Income Fund - Class 1 4.51 -- 12.54/11/
Strategic Income Fund - Class 2 3.94 -- 11.93/12/
Technology Fund -Class 1 -29.42 -- -46.50/1/
Technology Fund - Class 2 -29.59 -- -46.70/1/
U.S. Government Fund - Class 1 7.62 40.00 96.51
U.S. Government Fund - Class 2 7.37 38.91 94.99
Small Cap Value Fund - Class 1 14.21 -- 13.25/2/
Small Cap Value Fund - Class 2 13.79 -- 12.36/2/
Zero Coupon Fund - 2005 - Class 1 8.93 44.64 135.29
Zero Coupon Fund - 2010 - Class 1 5.62 46.82 156.37

131

Mutual Discovery Fund - Class 1 .39 55.62 58.73/7/
Mutual Discovery Fund - Class 2 .23 54.71 57.80/7/
Mutual Shares Fund - Class 1 7.31 62.93 68.63/7/
Mutual Shares Fund - Class 2 7.04 62.25 67.93/7/
Global Asset Allocation Fund - Class 1 -9.72 36.74 163.46
Global Asset Allocation Fund - Class 2 -9.95 35.13 160.36
Developing Markets Fund - Class 1 -8.08 -46.00 -49.08/8/
Developing Markets Fund - Class 2 -8.08 -46.57 -49.61/8/
Growth Securities Fund - Class 1 -.98 50.81 112.67/9/
Growth Securities Fund - Class 2 -1.31 49.68 111.07/9/
Global Income Securities Fund - Class 1 2.55 10.59 53.54
Global Income Securities Fund - Class 2 2.24 9.72 52.33
Foreign Securities Fund - Class 1 -15.75 26.91 146.47/10/
Foreign Securities Fund - Class 2 -15.99 25.37 143.47

1. Inception date 05-01-00
2. Inception date 05-01-98.
3. Inception date 05-01-96.
4. Inception date 01-27-92.
5. Inception date 11-01-99
6. Inception date 11-01-95.
7. Inception date 11-08-96.
8. Inception date 03-04-96.
9. Inception date 03-15-94.
10. Inception date 05-01-92.
11. Inception date 07/01/99
12. Inception date 05/15/01.

Yield, Money Fund

Current yield. Current yield shows the income per share earned by the Fund. It
is calculated by determining the net change, excluding capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return. The result is then annualized by multiplying the base period return by
(365/7). It does not include any fees or sales charges imposed by the variable
insurance contract for which the Fund is an investment option. The Fund's
current yield for the seven-day period ended December 31, 2001, was 1.66% for
Class 1 and 1.41% for Class 2.

Effective yield. The fund's effective yield is calculated in the same manner as
its current yield, except the annualization of the return for the seven-day
period reflects the results of compounding. The fund's effective yield for the
seven-day period ended December 31, 2001, was 1.68% for Class 1 and 1.42% for
Class 2.

This figure was obtained using the following SEC formula:

Effective Yield = [(Base Period Return + 1)365/7] - 1

132

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

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

Hypothetical performance information may also be prepared for sales literature
or advertisements. See the appropriate insurance company separate account
prospectus and SAI.

Volatility Occasionally statistics may be used to show a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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.

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

o Consumer Price Index is a measure of the average change in prices for a
fixed basket of goods and services regularly bought by consumers in the
United States; published by the U.S. Bureau of Labor Statistics.

o Credit Suisse First Boston Global High Yield (CSFB HY) Index an unmanaged,
trader-priced portfolio constructed to mirror the high yield debt market.

133

o Dow Jones Industrial Average is price-weighted based on the average market
price of 30 blue chip stocks. The average is found by adding the prices of
the 30 stocks and dividing by a denominator that has been adjusted for
stock splits, stock dividends, and substitutions of stocks.

o J. P. Morgan Emerging Markets Bond Index (EMBI Global) tracks total returns
for U.S. dollar-denominated debt instruments issued by emerging market
sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and
local market instruments. Countries covered are Algeria, Argentina, Brazil,
Bulgaria, Chile, China, Columbia, Cote I'voire, Croatia, Dominican
Republic, Ecuador, Egypt, Hungary, Lebanon, Malaysia, Mexico, Morocco,
Nigeria, Pakistan, Panama, Peru, the Philippines, Poland, Russia, South
Africa, South Korea, Thailand, Turkey, Ukraine, Uruguay and Venezuela.

o J.P. Morgan EMU Government Bond Index is a euro-aggregated index weighted
by market capitialization. The index includes only liquid bullet
euro-denominated fixed-rate debt, which has been issued by participating
governments. No callable, puttable or convertible features are allowed.
Bonds must have at least 12 months remaining maturity. The EMU bond index
is fully invested. All coupons received are immediately invested back into
the entire index until the next index rebalancing.

o J.P Morgan Global Government Bond Index tracks total returns of government
bonds in developed countries globally. The bonds included in the index are
weighted according to their market capitalization. The index is unhedged
and expressed in terms of $US.

o J.P. Morgan U.S. Government Bond Total Return includes only actively traded
fixed-rate bonds with a remaining maturity of one year or longer.

o Lehman Brothers Aggregate Index includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P or Fitch, in that order. All
issues have at least one year to maturity and an outstanding par value of
at least $100 million for U.S. government issues and $50 million for all
others. The index is a composite of the Government/Corporate Index and the
Mortgage-Backed Securities Index. Total return includes price
appreciation/depreciation and income as a percentage of the original
invesment. The index is rebalanced monthly by market capitalization.

134

.. Lehman Brothers Government/Credit Index includes securities in the Lehman
Brothers Government and Corporate Bond indexes. These securities are fixed
rate debt issues rated investment grade or higher by Moody's, S&P or Fitch,
in that order. All issues have at least one year maturity and an
outstanding par value of at least $50 million for corporate securities and
$100 million for government securities. The index includes all public,
fixed-rate, non-convertible investment grade domestic corporate debt rated
at least Baa by Moody's or BBB by S&P, and issues of the U.S. government or
any agency thereof, The non-convertible, publicly issued, domestic debt is
guaranteed by the U.S. government., Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The index is rebalanced monthly by market capitialization.

.. Lehman Brothers Intermediate Government Bond Index includes fixed rate debt
issues investment grade or higher by Moody's, S&P or Fitch, in that order.
All issues have at least $100 million for U.S. government issues. All
returns are market value-weighted inclusive of accrued interest. The
Government Bond Index includes issues of the U.S. government or any agency
thereof. It includes only issues with a remaining term to maturity of less
than ten years. Total return includes price appreciation/depreciation and
income as a percentage of the original investment. The total return index
is rebalanced monthly by market capitialization.

.. Lipper Science & Technology Funds Objective Average is an equally weighted
averge calculation of performance figures for all funds within the Lipper
Science & Technology Funds Prospective Investment Objective Classification
in the Lipper underlying funds universe. Lipper Science & Technology Funds
are defined as all mutual funds that invest at least 65% of their assets in
science and technology stocks. As of 12/31/01, there were 381 funds in this
category. Lipper calculations do not include contract fees, expenses or
sales charges. Fund performance relative to the average might have differed
if such charges had been considered.

.. Lipper VIP Growth & Income Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper
Growth & Income FundsProspective Investment Objective Classification in the
Lipper VIP underlying funds universe. Lipper Growth & Income Funds are
defined as all mutual funds that combine a growth of earnings orientation
and an income requirement for level and/or rising dividends. As of
12/31/01, there were 253 funds in this category. Lipper calculations do not
include contract fees, expenses or sales charges. Fund performance relative
to the average might have differed if such charges had been considered.

.. Lipper VIP Income Funds Objective Average,an equally weighted average
calculation of performance figures for all funds within the Lipper Income
FundsProspective Investment Objective Classification in the Lipper VIP
underlying funds universe. Lipper Income Funds are defined as all mutual
funds that normally seek a high level of current income through investing
in income-producing stocks, bonds and money market instruments. As of
12/31/01, there were 10 funds in this category

135

Lipper calculations do not include contract fees, expenses or sales
charges. Fund performance relative to the average might have differed if
such charges had been considered.

.. Lipper VIP U.S. Government Funds Objective Average is an equally weighted
average calculation of performance figures for all funds within the Lipper
U.S. Government Funds Prospective Investment Objective Classification in
the Lipper VIP underlying funds universe. Lipper calculations do not
include contract fees, expenses or sales charges. Fund performance relative
to the average might have differed if such charges had been considered.

.. Merrill Lynch 100 Technology Index is an equal dollar index of 100 stocks
designed to measure the performance of a cross section of large, actively
traded technology stocks and American Depositary Receipts. The index was
developed with a base value of 200 as of January 30, 1998.

.. Merrill Lynch Treasury Zero Coupon 5-and 10-Year Bond Total Return
Indexes,include zero coupon bonds that pay no interest and are issued at a
discount from redemption price.

.. Morgan Stanley Capital International (MSCI) All Country World Free Index
measures the total return (gross dividends are reinvested) of equity
securities available to foreign (non-local) investors in the developed and
emerging markets globally. Securities included are weighted according to
their market capitalization (outstanding shares times price).

.. Morgan Stanley Capital International (MSCI) Emerging Markets . Free Index
measures the total return(gross dividends are reinvested) of equity
securities in emerging markets globally. Only securities available to
foreign (non-local) investors are included. Securities included are
weighted according to their market capitalization (outstanding shares times
price).

.. Morgan Stanley Capital International (MSCI) Europe Australasia, Far East
(EAFE) Indexmeasures the total returns (gross dividends are reinvested) of
equity securities in the developed markets in Europe, Australasia and the
Far East. Securities are weighted according to their market capitalization
(outstanding shares times price).

.. Morgan Stanley Capital International (MSCI) World Index measures the total
returns (gross dividends are reinvested) of equity securities in the
developed markets globally. Securities included are weighted according to
their market capitalization (outstanding shres times price).

.. Nasdaq Telecommunications Index contains all types of telecommunications
companies, including point-to-point communications services and radio and
television broadcast, and companies that manufacture communication
equipment and

136

accessories. On November 1, 1993, the Nasdaq Utility Index was renamed the
Nasdaq Telecommunications Index.

.. National Association of Securities Dealers Automated Quotations (Nasdaq)
Composite Index measures all Nasdaq National Market common stocks. the
index is market value-weighted.

.. Russell 2000 Index measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which represent approximately 8% of the total
market capitalization of the Russell 3000. The index has been reconstituted
annually since 1989.

.. Russell 2000 Value Index measures the performance of those Russell 2000
companies in with lower price-to-book ratios and lower forecasted growth
values

.. Russell 1000 Growth Index measures the performance of the Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.

.. Russell 2500 Growth Index measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.

.. Russell 3000 Growth Index measures the performance of those Russell 3000
companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell
1000 Growth or Russell 2000 Growth Indexes.

.. Russell 3000 Value Index measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell
1000 Value or the Russell 2000 Value Indexes.

.. Russell Midcap Value Index measures the performance of those Russell Midcap
companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value Index.

.. S&P/International Finance Corporation (IFC) Investable Composite Index
measures the total return with dividends reinvested of equity securities in
emerging markets globally. Securities' weights are adjusted to reflect only
the portion of the market capitalization available to foreign (non-local)
investors. Securities included are weighted according to their adjusted
market capitalization (outstanding investable shares times price).

.. Salomon Smith Barney Global Ex-U.S. Less Than $2 Billion Index measures the
small stock component of the Salomon Global Equity Index that
includesdeveloped and emerging countries globally excluding the U.S Within
each country, those stocks falling under two billion dollar market cap of
the available market in each

137

country forms the universe. The unmanaged index measures the total returns
(gross dividends are reinvested) of small capitalization equity securities.
The securities in the index are weighted according to their market
capitalization (shares outstanding times price).

.. Standard & Poor's(R) 500 Index (S&P 500), consists of 500 widely held
domestic common stocks, consisting of four broad sectors: industrials,
utilities, financials and transportation. It is a market value-weighted
index, where the stock price is multiplied by the number of shares
outstanding, with each stock affecting the index in proportion to its
market value. The S&P is one of the most widely used benchmarks of U.S.
equity performance.

.. Standard & Poor's Health Care Composite Index is a capitalization-weighted
index of all of the stocks in the S&P 500 that are involved in the business
of health care-related products or services. The index was developed with a
base of 100 as of January 14, 1987.

.. Standard & Poor's Small Cap 600 Index consists of 600 domestic stocks
chosen for market size, liquidity (bid-ask spread ownership, share turnover
and number of no trade days) and industry group representation. Each
stock's weight in the index is proportionate to its market value.

.. Wilshire Real Estate Securities Indexis a broad measure of the performance
of the performance of publicly traded real estate securities, such as real
estate investment trusts (REITs) and real estate operating companies
(REOCs). It is rebalanced monthly, and returns are calculated on a buy and
hold basis. The index is capitalization-weighted and includes reinvested
dividends.

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

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

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

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

. The geographic and industry distribution of the Fund's portfolio and
the Fund's top ten holdings.

138

o 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.

o 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 Capital International
EAFE(R)Index).

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

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

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

o The Fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper(R)Inc. or Morningstar, Inc.

o 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.

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

o 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.

Advertisements or information also may compare the Fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the Fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. 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.

139

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 are members of Franklin Templeton Investments, one of the largest
mutual fund organizations in the U.S., and may be considered in a program for
diversification of assets. Founded in 1947, Franklin is one of the oldest mutual
fund organizations and now services approximately 3 million shareholder
accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and
an innovator in creating domestic equity funds, joined forces with Templeton, a
pioneer in international investing. The Mutual Series team, known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. In 2001, the Fiduciary Trust team, known for
providing global investment management to institutions and high net worth
clients worldwide, joined the organization. Together, Franklin Templeton
Investments has over $266 billion in assets under management, as of February 28,
2002, for more than 5 million U.S. based mutual fund shareholder and other
accounts. Franklin Templeton Investments offers 113 U.S. based open-end
investment companies to the public.

Fund similarity The investment objectives and policies of certain funds are
similar but not identical to those of certain public Franklin Templeton Funds
indicated in the following table. Because of differences in portfolio size, the
investments held, the timing of purchases of similar investments, cash flows,
minor differences in certain investment policies, insurance product related tax
diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the Funds will differ from the
performance of the corresponding Franklin Templeton funds:

Franklin Templeton Variable Franklin Templeton Funds
Insurance Products Trust
- ------------------------------------------------------------ ----------------------------------------------

Franklin Custodian Funds:
Income Securities Fund Income Series

U.S. Government Fund U.S. Government Securities Series

Franklin High Income Trust:
High Income Fund AGE High Income Fund

Franklin Investors Securities Trust:
Global Income Fund Franklin Global Government Income Fund
Growth and Income Fund Franklin Equity Income Fund

140

Franklin Templeton Variable Franklin Templeton Funds
Insurance Products Trust
- ------------------------------ ----------------------------------------
Franklin Managed Trust:
Rising Dividends Fund Franklin Rising Dividends Fund

Money Fund Franklin Money Fund

Franklin Mutual Series Fund Inc.:
Mutual Discovery Fund Mutual Discovery Fund
Mutual Shares Fund Mutual Shares Fund

Franklin Real Estate Securities Trust:
Real Estate Fund Franklin Real Estate Securities Fund

Franklin Strategic Series:
Aggressive Growth Fund Franklin Aggressive Growth Fund
Global Communications Fund Franklin Global Communications Fund

Large Cap Fund Franklin Large Cap Growth Fund

Small Cap Fund Franklin Small Cap Growth Fund II
Strategic Income Fund Franklin Strategic Income Fund
Technology Fund Franklin Technology Fund

Franklin Value Investment Trust:
Small Cap Value Fund Franklin Small Cap Value Fund

Growth Securities Fund Templeton Growth Fund, Inc.

Foreign Securities Fund Templeton Foreign Fund

Developing Markets Fund Templeton Developing Markets Trust

141

Description of Ratings for Bonds, Short-Term Debt and Commercial Paper
- --------------------------------------------------------------------------------

Corporate Bond Ratings

Moody's Investors Service, Inc. (Moody's)

INVESTMENT GRADE

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.

BELOW INVESTMENT GRADE

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.

142

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.

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 Ratings Group (S&P/(R)/)

INVESTMENT GRADE

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.

BELOW INVESTMENT GRADE

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

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

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

143

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.

Short-Term Debt & Commercial Paper Ratings

Moody's

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

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

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

S&P

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

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

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

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

144

PART C. OTHER INFORMATION

Item 15. INDEMNIFICATION

Please see the Agreement and Declaration of Trust and the By-Laws
previously filed as exhibits and incorporated herein by reference.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.

Item 16. EXHIBITS (Incorporated by reference to prior filings, except as noted)

(1) copies of the charter of the registrant as now in effect;

(i) Agreement and Declaration of Trust dated April 20, 1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated October 21, 1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust
Filing: Post-Effective Amendment No. 26 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: November 30, 1998
(iv) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Valuemark Funds filed on July 1, 1999
Filing: Post-Effective Amendment No. 33 to Registration
Statement of the Registrant on Form N-1A
File No. 33-23493
Filing Date: April 29, 2000

(2) copies of the existing bylaws or corresponding instruments of the
registrant;

II-1

(i) By-Laws
Filing: Post-Effective Amendment No. 16 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995

(3) copies of any voting trust agreement affecting more than 5% of any class
of equity securities of registrant;

Not Applicable

(4) copies of the agreement of acquisition, reorganization, merger,
liquidation and any amendments to it;

(i) Franklin Templeton Variable Insurance Products Trust Plan of
Reorganization of Franklin Technology Securities Fund and
Franklin Small Cap Fund, filed herewith as Exhibit A to the
Prospectus and Proxy Statement included as Part A of this
Registration Statement

(5) specimens or copies of each security being registered, including copies
of all constituent instruments defining the rights of holders of the
securities;

Not Applicable

(6) copies of all investment advisory contracts relating to the management of
the assets of the registrant;

(i) Investment Advisory Agreement between Franklin Templeton
Variable Insurance Products Trust, on behalf of Franklin
Small Cap Fund, and Franklin Advisers, Inc., effective on
the 1st day of May, 2000
Filing: Registration and Proxy Statement of Registrant on
Form N-14 File No. 333-333-73928
Filing Date: November 21, 2001

(7) copies of each underwriting or distribution contract between the
registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;

(i) Distribution Agreement between the Registrant and Franklin
Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 26 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: November 30, 1998

(8) copies of all bonus, profit sharing, pension or other similar contracts
or arrangements wholly or

II-2

partly for the benefit of directors or officers of the registrant in
their capacity as such.

Not Applicable

(9) copies of all custodian agreements and depository contracts under Section
17(f) of the 1940 Act, for securities and similar investments of the
registrant, including the schedule of remuneration;

(i) Master Custody Agreement between the Registrant and the Bank
of New York, dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of New
York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iii) Amendment to Master Custody Agreement between the Registrant
and the Bank of New York, dated April 1, 1996
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Registrant on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(iv) Letter Agreement between the Registrant and the Bank of New
York, dated April 22, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(v) Amendment dated as of May 16, 2001 to the Master Custody
Agreement dated as of February 16, 1996 between Registrant and
Bank of New York
Filing: Registration/Proxy Statement of Registrant on Form
N-14
File No. 333-73928
Filing Date: November 21, 2001

(10) copies of any plan entered into by registrant pursuant to rule 12b-1
under the 1940 Act and any agreements with any person relating to
implementation of the plan, and copies of any plan entered into by
registrant pursuant to Rule 18f-3 under the 1940 Act, any agreement with
any person relating to implementation of the plan, any amendment to the
plan, and a copy of the portion of a meeting of the minutes of the
registrant's directors describing any action taken to revoke the plan;

(i) Class 2 Distribution Plan pursuant to Rule 12b-1for all series
of the Registrant Filing: Post Effective Amendment No. 26 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date November 30, 1998

(ii) Multiple Class Plan pursuant to Rule 18f-3 for all series of
the Registrant, Filing: Post-Effective Amendment No. 26 to
Registration Statement of Registrant on

II-3

Form N-1A
File No. 33-23493
Filing Date: November 30, 1998

(11) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will, when sold, be legally
issued, fully paid and non-assessable;

(i) Legal Opinion, Securities Act of 1933, dated February 5, 1999
Filing: Post-Effective Amendment No. 27 to Registration
Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: February 25, 1999

(ii) Consent to Use of Opinion, dated November 20, 2002

(12) an opinion, and consent to their use, of counsel or, in lieu of an
opinion, a copy of the revenue ruling from the Internal Revenue Service,
supporting the tax matters and consequences to shareholders discussed in
the prospectus;

(i) Form of opinion of Jorden Burt LLP regarding tax matters and
consequences

(13) copies of all material contracts of the registrant not made in the
ordinary course of business which are to be performed in whole or in part
on or after the date of filing the registration statement;

Not Applicable

(14) copies of any other opinions, appraisals or rulings, and consents to
their use relied on in preparing the registration statement and required
by Section 7 of the 1933 Act;

(i) Consent of Independent Auditors with respect to Franklin Small
Cap Fund
(ii) Consent of Independent Auditors with respect to Franklin
Technology Securities Fund

(15) all financial statements omitted pursuant to Item 14(a)(1);

Not Applicable

(16) manually signed copies of any power of attorney pursuant to which the
name of any person has been signed to the registration statement; and

(i) Power of Attorney

(17) any additional exhibits which the registrant may wish to file.

(i) Form of Voting Instruction Card

Item 17. Undertakings.

II-4

(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus that is part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form.

(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act,
each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.

II-5

As required by the Securities Act of 1933, this registration statement has been
signed on behalf of the registrant, in the City of San Mateo and State of
California, on the 22nd day of November, 2002.

FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST

By: /s/ RUPERT H. JOHNSON, JR.*
-----------------------------
Rupert H. Johnson, Jr., Principal Executive
Officer - Investments, and Trustee

As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities on the dates
indicated.

RUPERT H. JOHNSON, JR.* Principal Executive Officer -
Rupert H. Johnson, Jr. Investments, and Trustee
Dated: November , 2002

JIMMY D. GAMBILL* Principal Financial Officer
Jimmy D. Gambill Dated: November 22, 2002

KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: November 22, 2002

FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: November , 2002

HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: November , 2002

S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: November , 2002

ROBERT F. CARLSON* Trustee
Robert F. Carlson Dated: November , 2002

CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: November , 2002

FRANK W. T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: November , 2002

GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: November 22, 2002

CHRISTOPHER H. PINKERTON* Trustee
Christopher H. Pinkerton Dated: November 22, 2002

II-6

/s/ Karen L. Skidmore
* By KAREN L. SKIDMORE, ATTORNEY-IN-FACT
(Pursuant to Power of Attorney attached)

II-7

Item No. Exhibit

EX-99 (11)(ii) Consent to Use of Opinion, dated November xx 2002
EX-99 (12)(i) Form of Opinion of Jorden Burt LLP regarding tax matters and
consequences
EX-99 (14)(i) Consent of Independent Auditors with respect to Franklin
Technology Securities Fund
EX-99 (14)(ii) Consent of Independent Auditors with respect to Franklin Small
Cap Fund
EX-99 (16)(i) Power of Attorney
EX-99 (17)(i) Form of Voting Instruction Card