FRANKLIN FLOATING RATE TRUST, 497, 1998-04-06

FRANKLIN FLOATING RATE TRUST
497, 1998-04-06

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PROSPECTUS & APPLICATION

INVESTMENT STRATEGY
INCOME

FRANKLIN
FLOATING RATE TRUST

APRIL 1, 1998

Franklin Floating Rate Trust is a closed-end investment company. Its goal is
to provide as high a level of current income and preservation of capital as
is consistent with investment primarily in senior secured Corporate Loans and
Corporate Debt Securities with Floating Interest Rates.

Franklin Advisers, Inc., the Fund's investment manager, uses its credit
analysis to select Corporate Loans and Corporate Debt Securities that are
suitable investments for the Fund. The Fund will invest at least 65% of its
total assets in such loans, interests, assignments or debt securities that
are rated B or higher by an NRSRO or, if unrated, determined to be of
comparable quality by Advisers.

This Prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.

The Fund has an SAI dated April 1, 1998, which may be amended from time to
time. It includes more information about the Fund's procedures and policies.
It has been filed with the SEC and is incorporated by reference into this
Prospectus. For a free copy of the SAI or a larger print version of this
Prospectus, call 1-800/DIAL BEN. The Table of Contents of the SAI appears on
page 58 of this Prospectus.

Common Shares of the Fund are not deposits or obligations of, or guaranteed
or endorsed by, any bank, and Common Shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency of the U.S. Government. Common Shares of the Fund involve
investment risks, including the possible loss of the original amount of your
investment, known as "principal."

LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

Franklin Floating Rate Trust

This Prospectus is not an offering of the Common Shares herein described in
any state, jurisdiction or country in which the offering is not authorized.
No sales representative, dealer, or other person is authorized to give any
information or make any representations other than those contained in this
Prospectus. Further information may be obtained from Distributors.

The Fund began offering its Common Shares and began investment operations on
October 10, 1997. The Fund engages in a continuous offering of Common Shares.
The Fund has registered 10,000,000 Common Shares and is authorized as a
business trust to issue an unlimited number of Common Shares. Common Shares
are offered at a price equal to the next determined Net Asset Value per share
which, as of March 10, 1998, was $10.04 per share. There is no initial
front-end sales charge on purchases of Common Shares. An Early Withdrawal
Charge of 1% will be imposed on Common Shares purchased after March 31, 1998,
that are held less than twelve months and that are accepted by the Fund for
repurchase in a Tender Offer. Certain waivers of this charge may apply. See
"Early Withdrawal Charge." The price of Common Shares will fluctuate,
depending upon the Fund's Net Asset Value per share.

o Proceeds of the offering estimated at $99,938,397 to be invested by the
Fund over the course of the continuous offering.

o Offering expenses of $61,603 deducted from net proceeds to Fund upon
completion of the initial offering on October 10, 1997.

o Because Distributors will pay all sales commissions to selected Securities
Dealers from its own or affiliates' assets, net proceeds of the offering will
be available to the Fund for investment.

o Expenses payable by Fund incurred to organize Fund estimated at $124,000.

o Organizational expenses to remain liability of Fund and be gradually
reduced in equal installments over period not to exceed 60 months from the
date Fund commenced investment operations on October 10, 1997.

No market presently exists for Common Shares. It is not currently anticipated
that a secondary market will develop for Common Shares. The Fund, Advisers
and Distributors do not intend to make a secondary market in Common Shares or
to list Common Shares on any securities exchange or for quotation on any
over-the-counter market. Common Shares are not readily marketable. As a
consequence, you should consider Common Shares to be an illiquid investment.
This means that you may not be able to freely sell your Common Shares. See
"Prospectus Summary - Special Considerations and Risk Factors - Illiquidity"
and "Periodic Offers By The Fund To Repurchase Common Shares From
Shareholders - Special Considerations of Repurchases."

To provide shareholders some liquidity, the Fund will make quarterly Tender
Offers to repurchase Common Shares from shareholders. Each Tender Offer will
be for a specified percentage (between 5% and 25%) of the Fund's outstanding
Common Shares set by the Fund's Board. Common Shares will be repurchased at
the Net Asset Value determined as of the close of business (1:00 p.m.,
Pacific Time) on the day the Tender Offer ends or within a maximum of
fourteen days after the Tender Offer ends as described in "Periodic Offers By
the Fund To Repurchase Common Shares From Shareholders." Each Tender Offer
will last for between six weeks and three weeks. Shareholders will be
notified in writing at the beginning of each Tender Offer. A Tender Offer is
expected to end near the end of June 1998, and every three months after June,
1998. See "Periodic Offers By The Fund To Repurchase Common Shares From
Shareholders."

Franklin
Floating Rate Trust

April 1, 1998

When reading this Prospectus, you will see certain terms beginning with
capital letters. This means that the term is explained in our Glossary
section.

777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN

TABLE OF CONTENTS

Expense Summary .................... 2

Prospectus Summary ................. 3

Information About the Fund ......... 15

Use of Proceeds From Sales
of Common Shares .................. 15

What Kinds of Securities
Does the Fund Purchase? ........... 16

Other Investment Policies .......... 26

What Are the Risks of
Investing in the Fund? ............ 29

Who Manages the Fund? .............. 33

Portfolio Transactions By the Fund . 34
Investment Performance Information . 35

How to Buy Common Shares ........... 35

Periodic Offers By the Fund to Repurchase
Common Shares From Shareholders ... 38

Early Withdrawal Charge ............ 42

Exchanges .......................... 45

Dividends and Distributions
To Shareholders ................... 46

How Taxation Affects the Fund
and Its Shareholders .............. 48

Description of Common Shares ....... 50

Transaction Procedures and
Special Requirements .............. 53

Services To Help You
Manage Your Account ............... 56

What If I Have Questions
About My Account? ................. 57

Additional General Information ..... 58

Table of Contents of Statement
of Additional Information ......... 58

Glossary

Useful Terms and Definitions ....... 58

Appendix

Description of Ratings ............. 63

Expense Summary

This table is designed to help you to understand the costs of investing in
the Fund. The table is based upon the Fund's estimated expenses for the
current fiscal year. The Fund's actual expenses may vary.

A. Shareholder Transaction Expenses+
Sales Load (as a percentage of offering price) ............. None
Dividend Reinvestment and Cash Purchase Plan Fees ............ None
Early Withdrawal Charge Imposed on Repurchase
of Common Shares Held Less than Twelve Months
(as a percentage of tender proceeds exclusive of all
reinvestments and capital appreciation in the account)......... 1.00%++

B. Annual Fund Operating Expenses
(as a percentage of net assets attributable to Common Shares)

Management Fees (after waiver/reimbursement) ................. 0.65%*
Administration Fees .......................................... 0.15%
Other Expenses ............................................... 0.60%
----------

Total Annual Fund Operating Expenses
(after waiver/reimbursement) .................................. 1.40%
==========

+If you buy your Common Shares through your Securities Dealer, the Securities
Dealer may charge you a fee for this service.

++An Early Withdrawal Charge of 1% may apply to purchases of Common Shares if
you sell the Common Shares within one year. See "Early Withdrawal Charge."

*Advisers has agreed to limit its management fees and/or to make certain
payments to reduce the Fund's expenses so the Fund's total operating expenses
do not exceed 1.40% of average daily net assets for the current fiscal year.
Without this reduction, management fees would be 0.80% and total annual Fund
operating expenses would be expected to be 1.55%. After July 31, 1998,
Advisers may end this arrangement at any time.

Other Expenses are based on estimated amounts for the current fiscal year.
For a more detailed discussion of these fees, charges and expenses, you
should refer to the appropriate sections of this Prospectus.

C. Example

Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your Common Shares after the number of years shown.
These are projected amounts you would pay for each $1,000 that you invest
in Common Shares.

1 YEAR 3 YEARS 5 YEARS 10 YEARS

Assuming no tender of Common Shares
for repurchase by the Fund .................. $14 $44 $77 $168

Assuming tender and repurchase of Common
Shares by the Fund on last day of period and,
for the one-year period, imposition of the
Early Withdrawal Charge ..................... $24

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends and are not directly charged
to your account.

PROSPECTUS SUMMARY

THIS SECTION SUMMARIZES INFORMATION THAT IS DISCUSSED LATER IN THIS
PROSPECTUS. YOU SHOULD CAREFULLY CONSIDER THE MORE DETAILED INFORMATION. FOR
A MORE COMPLETE DISCUSSION OF RISKS OF INVESTING IN THE FUND, SEE "WHAT ARE
THE RISKS OF INVESTING IN THE FUND?"

THE FUND The Fund is a continuously offered, closed-end management investment
company. It was organized as a Delaware business trust on May 20, 1997, and
is registered with the SEC. The Fund's principal business is investing its
assets by purchasing and selling securities on an ongoing basis, as described
in this Prospectus. The Fund does not issue redeemable shares (shares that
you may redeem at any time). The Fund is a non-diversified investment
company. This means the Fund is not limited in the amount of assets that it
may invest in any single issuer of securities except to the extent any
adverse tax consequences would arise. See "Information About the Fund."

CONTINUOUS OFFERING The Fund began offering its Common Shares on October 10,
1997. The Fund engages in a continuous offering of Common Shares, at a price
equal to the Net Asset Value per share next determined after a purchase order
is received. No front-end sales charge is imposed on Common Shares.

The minimum initial purchase of Common Shares is $1,000 and the minimum
subsequent investment is $50. The Fund reserves the right to waive or modify
the minimum investment requirements at any time. Any purchase order may be
rejected by Distributors or the Fund. Distributors or the Fund also may
suspend the continuous offering of Common Shares at any time.

No market presently exists for Common Shares and it is not currently
anticipated that a secondary market will develop for Common Shares. The Fund
does not intend to list Common Shares on any national securities exchange or
arrange for quotation of Common Shares on any over-the-counter market. Common
Shares are not readily marketable. The Fund intends to make quarterly Tender
Offers to repurchase Common Shares from shareholders. The Fund imposes a 1%
Early Withdrawal Charge on the repurchase proceeds of Common Shares purchased
after March 31, 1998, that are held for less than twelve months. Certain
waivers of this charge may apply. See "How to Buy Common Shares" and "Early
Withdrawal Charge."

INVESTMENT OBJECTIVE AND POLICIES The Fund's investment goal is to provide as
high a level of current income and preservation of capital as is consistent
with investment primarily in senior secured Corporate Loans and Corporate
Debt Securities with Floating Interest Rates, as described below.

Corporate Loans are loans made to corporations. In return, the corporation
pays interest and principal to the Lenders. Corporate Loans include
Participation Interests in Corporate Loans or Assignments of Corporate Loans,
as more fully described below. Corporate Debt Securities, as more fully
described below, are investments by securityholders in obligations issued by
corporations. In exchange for their investment in the corporation,
securityholders receive income from the corporation and the return of their
investments in the corporation.

The Corporate Loans and Corporate Debt Securities will, in most instances, be
secured by collateral, as more fully described below, which has been pledged
by the corporation to the Lenders or securityholders. This means that the
corporation has entered into a written promise to deliver, or has actually
delivered, to the Lenders or securityholders property that will legally
become the property of the Lenders or securityholders in case the corporation
Defaults in paying interest or principal.

In most instances, the Corporate Loans and Corporate Debt Securities will
hold the most senior position in the capitalization structure of the
corporation. This means that, in case the corporation becomes insolvent, the
Lenders or securityholders will be paid before other creditors of the
corporation from the assets of the corporation. Advisers, the Fund's
investment manager, uses its credit analysis to select Corporate Loans and
Corporate Debt Securities that are suitable investments for the Fund.

The Fund's investments may be either unrated or rated by one or more NRSROs,
which are independent rating organizations such as S&P or Moody's. These
organizations rate obligations by grading the company issuing the obligations
based upon its financial soundness. If the Fund is going to invest in an
obligation that is unrated, Advisers will determine its quality. The
Corporate Loans and Corporate Debt Securities in which the Fund invests
generally are currently not rated by any NRSRO.

The Fund will invest at least 65% of its total assets in Corporate Loans and
Corporate Debt Securities that are rated B or higher by an NRSRO or, if
unrated, determined to be of comparable quality by Advisers. The Fund may
invest up to 35% of its total assets in Corporate Loans and Corporate Debt
Securities that are rated less than B by an NRSRO or, if unrated, determined
to be of comparable quality by Advisers. However, the Fund will make such an
investment only after Advisers determines that the investment is suitable for
the Fund based on Advisers' independent credit analysis. Generally, this
means that Advisers has determined that the likelihood that the corporation
will meet its obligations is acceptable. See "Advisers' Credit Analysis."

Lists of these ratings are shown in the Appendix to this Prospectus.
Generally, the lower the rating category, the more risky is the investment.
Debt securities rated BBB or lower by S&P or Moody's are considered to be
high yield, high risk investments, commonly known as "junk bonds."

The Fund may invest up to 100% of its portfolio in high yield, high risk,
lower-rated, debt securities. These entail Default and other risks greater
than those associated with higher-rated securities. You should carefully
assess the risks associated with an investment in the Fund in light of the
securities in which the Fund invests. See "Prospectus Summary - Special
Considerations and Risk Factors - Credit Risks Associated with Corporate
Loans and Corporate Debt Securities." The Corporate Loans and Corporate Debt
Securities in which the Fund primarily invests are not junk bonds. They have
features that junk bonds generally do not have. Corporate Loans and Corporate
Debt Securities are senior obligations of the Borrower and are secured by
collateral. They generally are subject to certain restrictive covenants in
favor of the Lenders or securityholders that invest in the Corporate Loans or
Corporate Debt Securities. For more information about restrictive covenants,
see the section in the SAI entitled "How Does the Fund Invest Its Assets -
Restrictive Covenants."

Under normal market conditions, the Fund will invest at least 65% of its
total assets in Corporate Loans and Corporate Debt Securities of U.S.
companies and U.S. subsidiaries of non-U.S. entities that have Floating
Interest Rates. Floating Interest Rates are: (i) variable interest rates
which adjust to a base interest rate, such as LIBOR or the CD Rate on set
dates; or (ii) interest rates that float at a margin above a generally
recognized base lending interest rate such as the Prime Rate of a designated
U.S. bank. Corporate Loans and Corporate Debt Securities with Floating
Interest Rates may have the additional feature of converting into a fixed
rate instrument after certain periods of time or under certain circumstances.
Upon conversion of any such Corporate Loans or Corporate Debt Securities to
fixed rate instruments, the Fund will rebalance its investments to meet the
65% level described above, as promptly as is reasonable.

OTHER DEBT OBLIGATIONS. Under normal market conditions, the Fund may invest
up to 35% of its total assets in certain other types of debt obligations, as
described below, or in cash. The Fund may invest in Unsecured Corporate Loans
and Unsecured Corporate Debt Securities. This means that the Corporate Loans
and Corporate Debt Securities are not backed by collateral. Thus, if a
Borrower Defaults on an Unsecured Corporate Loan or Unsecured Corporate Debt
Security, it is unlikely that the Fund would be able to recover the full
amount of the principal and interest due. Advisers will determine that the
Borrowers in such transactions are creditworthy, under the same analysis that
Advisers uses for Corporate Loans and Corporate Debt Securities. The Fund may
also invest in secured or unsecured short-term debt obligations. These
include commercial paper, CDs, or bankers' acceptances. These short-term debt
obligations will be rated within the four highest rating categories assigned
by an NRSRO, or, if unrated, determined to be of comparable quality by
Advisers. The Fund may also invest in fixed rate obligations of U.S.
companies or U.S. subsidiaries of non-U.S. companies. Advisers will determine
that the companies issuing these obligations are creditworthy. When the Fund
invests in fixed rate obligations, it may also enter into an interest rate
swap in order to limit the exposure of such obligations against fluctuations
in interest rates. See "Other Investment Policies - Interest Rate and Hedging
Transactions."

MATURITIES. The Fund has no restrictions on portfolio maturity. However, the
Fund anticipates that a majority of the Corporate Loans and Corporate Debt
Securities in which it will invest will have stated maturities ranging from
three to ten years. This means that the Borrower is required to fully repay
the obligation within that time period. The Fund also anticipates that the
Corporate Loans and Corporate Debt Securities will have an expected average
life of three to five years. The expected average life of the Corporate Loans
and Corporate Debt Securities is less than their stated maturities because
the Borrowers may choose to pay off such obligations early. Such obligations
usually permit the Borrower to elect to prepay. Also, prepayment is likely
because such Corporate Loans provide that the Lenders will have priority in
prepayment in case of sales of assets of the Borrowers.

MORE ABOUT CORPORATE LOANS AND CORPORATE DEBT SECURITIES Before the Fund
invests in a Corporate Loan or Corporate Debt Security, Advisers will analyze
whether the Borrower can make the required payments on the Corporate Loan or
Corporate Debt Security.

A Corporate Loan in which the Fund may invest typically is structured by a
group of Lenders. This means that the Lenders participate in the negotiations
with the Borrower and in the drafting of the terms of the Corporate Loan. The
group of Lenders often consists of commercial banks, thrift institutions,
insurance companies, finance companies or other financial institutions. The
Fund will not act as the sole negotiator or sole structuror for a Corporate
Loan. One or more of the Lenders usually administers the Loan on behalf of
all the Lenders. This Lender is referred to as the Agent Bank. For more
information about the activities of an Agent Bank, see "Description of
Participation Interests and Assignments."

The Fund may invest in a Corporate Loan in one of three ways. It may make a
direct investment in the Corporate Loan by participating as one of the
Lenders. It may purchase a Participation Interest or it may purchase an
Assignment. Participation Interests are interests issued by a Lender or other
financial institution which represent a fractional interest in a Corporate
Loan. The Fund may acquire Participation Interests from a Lender or other
holders of Participation Interests. Holders of Participation Interests are
referred to as Participants. An Assignment represents a portion of a
Corporate Loan previously attributable to a different Lender. Unlike a
Participation Interest, the Fund will generally become a "Lender" for the
purposes of the relevant loan agreement by purchasing an Assignment.

It can be advantageous to the Fund to make a direct investment in a Corporate
Loan as one of the Lenders. Such an investment is typically made at par. This
means that the Fund receives a return at the full interest rate for the
Corporate Loan. On the other hand, when the Fund invests in a Participation
Interest or Assignment, it will normally pay a fee or forego a portion of the
interest payment. Consequently, the Fund's return on such an investment may
be lower than it would have been if the Fund had made a direct investment in
the underlying Corporate Loan. However, the Fund often may not be able to
invest in Corporate Loans other than through Participation Interests or
Assignments, because of the reduced direct investment opportunities in
Corporate Loans that may exist.

If the Fund purchases an Assignment from a Lender, the Fund will generally
have direct contractual rights against the Borrower in favor of the Lenders.
On the other hand, if the Fund purchases a Participation Interest either from
a Lender or a Participant, the Fund typically will have established a direct
contractual relationship with the seller of the Participation Interest, but
not with the Borrower. Consequently, the Fund is subject to the credit risk
of the Lender or Participant who sold the Participation Interest to the Fund,
in addition to the usual credit risk of the Borrower. Therefore, when the
Fund invests in Corporate Loans through the purchase of Participation
Interests, Advisers must consider the creditworthiness of the Agent Bank and
any Lenders and Participants interposed between the Fund and a Borrower.
These parties are referred to as Intermediate Participants. At the time of
investment, the Intermediate Participant's outstanding debt obligations must
be investment grade. That is, they must be rated in the four highest rating
categories assigned by an NRSRO, such as BBB, A-3 or higher by S&P or Baa,
P-3 or higher by Moody's. If unrated, Advisers must determine that the
obligations are of comparable quality. See "What Kinds of Securities Does the
Fund Purchase?"

Corporate Debt Securities typically are in the form of notes or bonds. They
may be issued in a public or private offering in the securities markets.
Corporate Debt Securities will have terms similar to Corporate Loans, but
will not be in the form of Participation Interests or Assignments. Unlike
Corporate Loans, Corporate Debt Securities often are part of a large issue of
securities which are held by a large group of investors.

The terms of each secured Corporate Loan and Corporate Debt Security require
that collateral have a fair market value at least equal to 100% of the amount
of such Corporate Loan or Corporate Debt Security. Advisers generally will
determine the value of the collateral by customary valuation techniques that
it considers appropriate. However, the value of the collateral may decline
following the Fund's investment. Also, collateral may be difficult to sell
and there are other risks which may cause the collateral to be insufficient
in the event of a Default. Consequently, the Fund might not receive payments
to which it is entitled. See "Credit Risks Associated with Corporate Loans
and Corporate Debt Securities - Nonpayment of Scheduled Interest or Principal
Payments."

The collateral may consist of various types of assets or interests including
intangible assets. It may include working capital assets, such as accounts
receivable or inventory, or tangible fixed assets, such as real property,
buildings and equipment. It may include intangible assets, such as
trademarks, copyrights and patent rights, or security interests in securities
of subsidiaries or affiliates. The company's owners may provide additional
security.

A significant portion of the Fund's Corporate Loans and Corporate Debt
Securities (which may be as much as 100% of the Fund's total assets) may be
issued in highly leveraged transactions. Such Corporate Loans and Corporate
Debt Securities are subject to greater credit risks, including, but not
limited to, the Default or bankruptcy of the Borrower. See "Prospectus
Summary - Special Considerations and Risk Factors - Credit Risks Associated
with Corporate Loans and Corporate Debt" and "What Are the Risks of Investing
in the Fund? - Credit Risks" and "- Collateral Impairment."

INVESTMENT MANAGER Advisers manages the Fund's assets and makes all
investment decisions. Advisers provides similar services to other funds.
Advisers is wholly-owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Together, Advisers
and its affiliates manage over $222 billion in assets. See "Who Manages the
Fund?"

ADMINISTRATOR FT Services provides administrative services and facilities for
the Fund. FT Services prepares and maintains the Fund's books, records, and
tax and financial reports, and monitors compliance with regulatory
requirements. See "Who Manages the Fund?"

SHAREHOLDER SERVICING AND TRANSFER AGENT Investor Services is the Fund's
shareholder servicing and transfer agent. Investor Services provides services
to the holders of Common Shares and acts as the Fund's transfer agent and
dividend-paying agent. See "Who Manages the Fund?"

FEES AND EXPENSES Under its management agreement, the Fund is obligated to
pay Advisers a monthly management fee at an annual rate of 0.80% of the
average daily net assets of the Fund. The management fee, while higher than
the fees paid by other investment companies, is comparable to the fees paid
by other closed-end investment companies with investment goals and policies
similar to the Fund's. Advisers has agreed to limit its management fees
and/or to make certain expense reimbursements to the Fund as described in
"Expense Summary" above. FT Services and Investor Services are also entitled
to receive fees from the Fund. See "Who Manages the Fund?"

DISTRIBUTIONS The Fund declares daily and pays monthly dividends from the
Fund's net investment income. Capital gains, if any, will be distributed
annually, usually in December. Dividend payments are not guaranteed, are
subject to the Board's discretion and may vary with each payment. The Fund
does not pay "interest" or guarantee any fixed rate of return on an
investment in the Fund. You may elect to have distributions automatically
reinvested in additional Common Shares. See "Dividends and Distributions to
Shareholders" and "How Taxation Affects the Fund and Its Shareholders."

PERIODIC OFFERS TO REPURCHASE COMMON SHARES FROM SHAREHOLDERS The Fund does
not intend to list Common Shares on any securities exchange or arrange for
their quotation on any over-the-counter market. Because a secondary market
for Common Shares likely will not develop, the Fund has adopted a fundamental
policy to offer each quarter to repurchase a portion of the Common Shares
outstanding. In response to each Tender Offer, shareholders may choose to
tender their Common Shares to the Fund for repurchase. Tender Offers occur at
a price per share equal to the Net Asset Value per share of the Common Shares
determined as of the close of business (1:00 p.m. Pacific Time) on the day
the Tender Offer ends or within a maximum of fourteen days after the Tender
Offer ends as described in "Periodic Offers By the Fund to Repurchase Common
Shares From Shareholders." Each Tender Offer will last for between six weeks
and three weeks. Shareholders will be notified in writing at the beginning of
each Tender Offer.

Common Shares purchased after March 31, 1998, that have been held for less
than twelve months and that are repurchased by the Fund in a Tender Offer
will be subject to an Early Withdrawal Charge of 1%. The Early Withdrawal
Charge will be imposed against the lesser of the then current Net Asset Value
or the original purchase price of the tendered Common Shares. Certain waivers
of this charge may apply. See "Periodic Offers By the Fund To Repurchase
Common Shares From Shareholders" and "Early Withdrawal Charge."

SPECIAL CONSIDERATIONS AND RISK FACTORS

FOREIGN INVESTMENTS. The Fund may invest in Corporate Loans and Corporate
Debt Securities that are made to or issued by U.S. subsidiaries of non-U.S.
Borrowers. Advisers will evaluate the creditworthiness of non-U.S. Borrowers
by using the same analysis that it uses for U.S. Borrowers. The Fund may also
invest in Corporate Loans to and Corporate Debt Securities issued by U.S.
Borrowers that have significant non-U.S. dollar-denominated revenues.
However, the Fund will only invest in loans or securities that are U.S.
dollar-denominated or otherwise provide for payment in U.S. dollars. Where
Corporate Loans or Corporate Debt Securities are not denominated in U.S.
dollars, the Fund may arrange for payment in U.S. dollars by entering into a
foreign currency swap. See "What Kinds of Securities Does the Fund Purchase -
Foreign Currency Swaps."

These obligations may involve risks not typically involved in domestic
investment. The political, economic and social structures of some countries
in which the Fund invests may be less stable and more volatile than those in
the U.S. The risks of investing in these countries include the possibility of
the imposition of exchange controls, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed that 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. In addition, the Fund may have more
difficulty pursuing legal remedies and enforcing judgments in foreign
countries.

INTEREST RATE FLUCTUATIONS. In general, the Net Asset Value of the shares of
an investment company, like the Fund, that invests primarily in fixed-income
securities changes as the general level of interest rates fluctuates. Because
the Fund will invest primarily in Corporate Loans and Corporate Debt
Securities with Floating Interest Rates and, to a lesser extent, short-term
fixed-rate instruments, Advisers expects the value of Common Shares to
fluctuate less as a result of interest rate changes than would a portfolio of
medium or long-term fixed-rate obligations.

However, some Floating Interest Rates reset only periodically. This means
that there are periods during which the interest rate does not change. During
such periods, prevailing interest rates and the interest rates on some
obligations with Floating Interest Rates held by the Fund (including the
variable interest rates on nominal amounts in the Fund's interest rate swap
transactions) will not move precisely in the same direction or amount, i.e.,
there will be an imperfect correlation between these rates. These imperfect
correlations may cause the Net Asset Value of Common Shares to fluctuate.
Also, a decline in the Net Asset Value could result from a Borrower
Defaulting on a Corporate Loan or Corporate Debt Security and from changes in
the creditworthiness of a Borrower. In the case of Corporate Loans, a decline
in the Net Asset Value may also result from changes in the creditworthiness
of Intermediate Participants interposed between the Fund and the Borrowers.

ILLIQUIDITY. An investment in Common Shares of the Fund should be considered
Illiquid. The Fund does not intend to list its Common Shares for trading on
any securities exchange. The Fund expects that there will be no secondary
market for Common Shares. The Fund is designed primarily for long-term
investors. It should not be considered a vehicle for short-term trading
purposes, given its lack of a secondary market and its Early Withdrawal
Charge. See "Early Withdrawal Charge."

Under certain limited circumstances, the Fund may suspend or postpone a
quarterly Tender Offer for the repurchase of Common Shares from the Fund's
shareholders. (The Fund must meet certain regulatory requirements and must
give notice to shareholders in order to suspend or postpone a Tender Offer.)
In that event, shareholders will likely be unable to sell their Common
Shares. The Fund, Advisers and Distributors are prohibited from making a
market in Common Shares as long as the Fund continues to publicly offer
Common Shares.

Even if a secondary market for Common Shares develops, the shares of
closed-end funds, such as the Fund, frequently trade at a discount from (a
price below) their Net Asset Value in the secondary market. This means that
the market price of the Common Shares will probably be less than the Net
Asset Value, should a secondary market develop. It is unlikely that Common
Shares would trade at a premium to (a price above) Net Asset Value should a
secondary market for Common Shares develop. A premium is unlikely since
investors may purchase Common Shares at Net Asset Value from the Fund.

NON-DIVERSIFICATION. The Fund is non-diversified under the 1940 Act. This
means that there is no limit on the amount of assets that the Fund may invest
in the securities of any one issuer except to the extent any adverse tax
consequences would arise.

Since the Fund may invest a large portion of its assets in the obligations of
a limited number of issuers, the value of Common Shares may fluctuate more
widely, and the Fund may present greater risk, than other investments. Also,
the Fund may be more susceptible than a more widely diversified fund to any
single economic, political or regulatory event. However, the Fund does not
currently intend to invest more than 15% of its assets in the obligations of
any single Borrower. Advisers has taken measures which it believes
significantly reduce the Fund's exposure to such risk. See "What Kinds of
Securities Does the Fund Purchase? - The Fund's Non-Diversified
Classification."

LIMITED AVAILABILITY OF CORPORATE LOANS, PARTICIPATION INTERESTS, ASSIGNMENTS
AND CORPORATE DEBT SECURITIES. Direct investments in Corporate Loans and, to
a lesser degree, investments in Participation Interests or Assignments have
only limited availability. There is a risk that the Fund may not be able to
invest 65% or more of its total assets in Corporate Loans, Participation
Interests, Assignments and Corporate Debt Securities, as described above. The
limited availability of these investments may be due to a number of factors.
There may be more willing purchasers of direct Corporate Loans compared to
the available loans. Direct Lenders may also allocate only a small number of
Corporate Loans to new investors, such as the Fund. Also, the Lenders or the
Agent Bank may have an incentive to market the less desirable Corporate
Loans, Participation Interests or Assignments to investors such as the Fund
while retaining the more attractive investments for themselves. This reduces
the availability of the more desirable investments.

The Fund intends to invest the net proceeds from the sale of Common Shares in
accordance with the Fund's investment goal and policies as soon as
practicable, based on market conditions, as described above. The Fund has
reached an average operating asset level of $50,105,377 in its initial five
months of operation and anticipates reaching an average operating asset level
of approximately $100 million by the end of its first year of operation.
Furthermore, if the Fund were to experience a large inflow of assets during
any period, the problem of investing the assets promptly and effectively may
recur. Finally, the Fund has no current intention of investing more than 20%
of its assets in the obligations of Borrowers in any single industry.
However, the Fund regards the issuer of a Corporate Loan to include the Agent
Bank and any Intermediate Participant, as well as the Borrower. This means
that the Fund will invest more than 25% of its total assets in the securities
of the following issuers as a group: commercial banks, thrift institutions,
insurance companies and finance companies. The limited availability of
Corporate Loans, Participation Interests, Assignments and Corporate Debt
Securities may reduce the Fund's ability to readily invest 20% or less of its
assets in the obligations of Borrowers in any single industry. See "Other
Investment Policies - Non-Concentration in a Single Industry." To the extent
that the Fund is not investing its assets primarily in Corporate Loans,
Participation Interests, Assignments and Corporate Debt Securities due to the
foregoing risks, the Fund may be unable to achieve its investment goal.

CREDIT RISKS ASSOCIATED WITH CORPORATE LOANS AND CORPORATE DEBT SECURITIES.
The following describes the various credit risks associated with investments
in Corporate Loans and Corporate Debt Securities.

NONPAYMENT OF SCHEDULED INTEREST OR PRINCIPAL PAYMENTS. The Fund is subject
to the risk that the scheduled interest or principal payments on Corporate
Loans, Corporate Debt Securities and other debt obligations in its portfolio
will not be paid. The Fund may own Corporate Loans and Corporate Debt
Securities of a Borrower that is on the verge of bankruptcy. The Fund may
also purchase Corporate Loans and Corporate Debt Securities that are issued
in connection with a restructuring pursuant to Chapter 11 of the U.S.
Bankruptcy Code. The Fund will purchase these obligations only if they hold a
senior position in the Borrower's capitalization structure. Also, Advisers
will determine that such obligations are a suitable investment by the Fund.

In the event that a nonpayment occurs, the value of that debt obligation may
decline. In turn, the Net Asset Value of the Common Shares may decline. The
terms of the Corporate Loans and Corporate Debt Securities require that
collateral be maintained at a value at least equal to 100% of the amount of
such Corporate Loan or Corporate Debt Security. However, the value of the
collateral may decline after the Fund invests in the Corporate Loan or
Corporate Debt Security. If this happens, there is a risk that the value of
the collateral may not be sufficient to cover the amount owed to the Fund.

In the event that a Borrower Defaults, the Fund's access to the collateral
may be limited by bankruptcy and other insolvency laws. There is also the
risk that the collateral may be difficult to liquidate. In fact, a majority
of the collateral may be Illiquid. As a result, the Fund might not receive
payments to which it is entitled.

Advisers will determine the value of the collateral by customary valuation
techniques that it considers appropriate. These valuation techniques may
include reference to financial statements of the Borrower, an independent
appraisal, or obtaining the market value of such collateral (e.g., cash or
securities) if it is readily ascertainable. The value assigned to the
collateral by Advisers may be higher than the value at which the Borrower
values the collateral on the Borrower's books. The Agent Bank may rely on
independent appraisals as to the value of specific collateral. The Agent
Bank, however, may not obtain an independent appraisal in all cases.
Borrowers are required to comply with the terms of the Corporate Loans and
Corporate Debt Securities, including various restrictive covenants with
respect to such Corporate Loans or Corporate Debt Securities. Acceleration in
the repayment of such Corporate Loans or Corporate Debt Securities may result
in the breach of such terms or covenants. For more information about
restrictive covenants, see the section in the SAI entitled "How Does the Fund
Invest Its Assets - Restrictive Covenants."

CREDIT RISKS, DEFAULT AND BANKRUPTCY. A significant portion of the Fund's
Corporate Loans and Corporate Debt Securities may be issued in connection
with highly leveraged transactions. Such transactions include leveraged
buyout loans, leveraged recapitalization loans, and other types of
acquisition financing, as further described below. These obligations are
subject to greater credit risks than other Corporate Loans and Corporate Debt
Securities. These credit risks include a greater possibility that the
Borrower may Default or go into bankruptcy. In addition, collateral securing
the loan may be found invalid or may be used to pay other outstanding
obligations of the Borrower, under applicable law. The Fund may also have
more difficulty selling highly leveraged Corporate Loans and Corporate Debt
Securities than other Corporate Loans and Corporate Debt Securities.

PREPAYMENTS. Borrowers may pay back principal before the scheduled due date.
Borrowers may find it advantageous to prepay principal due to a decline in
interest rates or an excess in cash flow. Such prepayments may require the
Fund to replace a Corporate Loan, Corporate Debt Security or other investment
with a lower yielding security. This may adversely affect the Net Asset Value
of Common Shares.

COMMITMENTS OF THE FUND TO MAKE ADDITIONAL PAYMENTS TO BORROWERS. Corporate
Loans may be structured to include both term loans and revolving credit
facilities. Unlike term loans, revolving credit facilities would require the
Fund to loan additional amounts at the demand of the Borrower. Where the Fund
purchases a Participation Interest, the Intermediate Participant may have the
obligation to make such future advances to the Borrower. The Fund currently
intends to limit investments in such Corporate Loans or Participation
Interests to amounts that would not require commitments for future advances
to exceed 20% of the Fund's total assets. In addition, the Fund intends to
set aside in a separate account amounts that are earmarked to meet such
future advances. These amounts will be invested in high quality, short-term,
liquid instruments.

ILLIQUIDITY OF CORPORATE LOANS AND CORPORATE DEBT SECURITIES. Some or all of
the Corporate Loans and Corporate Debt Securities in which the Fund may
invest will be considered to be Illiquid. Highly leveraged Corporate Loans
and Corporate Debt Securities also may be less liquid than other Corporate
Loans and Corporate Debt Securities. In the event that the Fund voluntarily
or involuntarily liquidates these assets, it may not get the full value of
the assets. The Fund may have difficulty disposing of Illiquid portfolio
securities. This may make it difficult for the Fund to raise proceeds
necessary to repurchase Common Shares in a Tender Offer. The Board will
consider liquidity when it determines the percentage of the Fund's
outstanding Common Shares that the Fund will offer to repurchase in a Tender
Offer. The Board will also consider the liquidity of the Fund's portfolio
securities when it determines whether to suspend or postpone a Tender Offer.
See "How Are Common Shares Valued" in the SAI for information on the
valuation of Illiquid Corporate Loans and Corporate Debt Securities.

LEVERAGE AND BORROWINGS. The Fund is authorized to borrow money in an amount
up to 331U3% of its total assets (measured by adding the amount borrowed to
the Fund's other assets). However, the Fund will only borrow money for
temporary, extraordinary or emergency purposes. While it has no current
intention of doing so, the Fund may also borrow for the purpose of financing
additional investments or making Tender Offers for Common Shares.

Leverage creates certain risks for holders of Common Shares. During periods
when the Fund is using leverage, the Net Asset Value of Common Shares may be
more volatile. Under certain conditions, leverage could result in a lower
rate of return to holders of Common Shares than if the Fund were not
leveraged. When the Fund borrows money, the lender will have the right to
receive scheduled interest and principal payments. The lender's right to such
payments will be senior to those of the holders of Common Shares. The terms
of any such borrowings may limit certain activities of the Fund, including
the payment of dividends to holders of Common Shares. Furthermore, the
lenders may be granted certain voting rights if the Fund Defaults in the
payment of interest or repayment of principal. Subject to its ability to
liquidate its relatively Illiquid portfolio securities, the Fund intends to
repay the borrowings in the event that the borrowings would impair the Fund's
status as a regulated investment company under the Code. Interest payments
and fees paid by the Fund on any borrowings will reduce the amount of income
it has available to pay as dividends to the Fund's shareholders.

CERTAIN INVESTMENT PRACTICES. The Fund may use various investment practices
that involve special considerations, including lending its portfolio
securities, entering into when-issued and delayed delivery transactions and
entering into repurchase agreements. In addition, the Fund has the authority
to engage in interest rate swaps and other hedging and risk management
transactions. For further discussion of these practices and associated
special considerations, see "What Kinds of Securities Does the Fund Purchase."

ANTI-TAKEOVER PROVISIONS. The Declaration of Trust contains terms that limit
the ability of other entities to acquire control of the Fund or to change the
Board. These provisions may prevent you from selling your Common Shares at a
premium because a third party will be discouraged from attempting to obtain
control of the Fund. See "Description of Common Shares - Certain
Anti-Takeover Provisions of the Declaration of Trust."

INFORMATION ABOUT THE FUND

The Fund is a continuously offered, closed-end management investment company.
The Fund was organized as a Delaware business trust on May 20, 1997, and is
registered with the SEC. The Fund began offering its Common Shares and began
investment operations on October 10, 1997. The Fund engages in a continuous
offering of Common Shares through Distributors.

USE OF PROCEEDS FROM SALES OF COMMON SHARES

The net proceeds from the sale of Common Shares will be invested in
accordance with the Fund's investment goal and policies as soon as
practicable. The Fund's immediate ability to pursue its investment goal will
depend on economic and market conditions, including the availability of
Corporate Loans and Corporate Debt Securities. If Advisers determines that
market conditions are not favorable, Advisers will initially invest the
proceeds in short-term debt obligations or instruments which the Fund may
normally purchase. Investments in these short-term investments will reduce
the Fund's yield. The Fund has reached an average operating asset level of
$50,105,377 in its initial five months of operation and anticipates reaching
an average operating asset level of approximately $100 million by the end of
its first year of operation. See "Special Considerations and Risk Factors -
Limited Availability of Corporate Loans, Participation Interests, Assignments
and Corporate Debt Securities" and "What Kinds of Securities Does the Fund
Purchase?"

WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?

The Fund's investment goal is to provide as high a level of current income
and preservation of capital as is consistent with investment primarily in
senior secured Corporate Loans and Corporate Debt Securities. Advisers uses
its credit analysis to select Corporate Loans and Corporate Debt Securities
that are suitable for investment by the Fund. This is a fundamental policy of
the Fund. This means that it may not be changed without a vote of a majority
of the outstanding shares of the Fund. There can be no assurance that the
investment objective of the Fund will be achieved.

Under normal conditions, the Fund will invest at least 65% of its total
assets in Corporate Loans and Corporate Debt Securities made to, or issued
by, Borrowers that are U.S. companies and U.S. subsidiaries of non-U.S.
companies, and that have Floating Interest Rates. Floating Interest Rates
are: (i) variable rates which adjust to a base rate, such as LIBOR or the CD
Rate on set dates, typically every 30 days but not to exceed one year; (ii)
interest rates that vary at a set margin above a generally recognized base
lending interest such as the Prime Rate of a designated U.S. bank; or (iii)
one of the foregoing interest rates and are convertible to fixed rate
instruments. Upon conversion of any such loans or securities to fixed rate
instruments, the Fund will as promptly as is reasonable rebalance its
investments to meet the 65% level described above. The Fund may not meet the
65% level during periods pending investment of the proceeds from the offering
of the Fund's Common Shares. It also may not meet the 65% level during
temporary defensive periods when Advisers believes that suitable Corporate
Loans and Corporate Debt Securities are not available or prevailing market or
economic conditions warrant.

At least 65% of the Fund's total assets will be invested in Corporate Loans
or Corporate Debt Securities that are rated B or higher by an NRSRO or, if
unrated, determined to be of comparable quality by Advisers. The Fund may,
however, invest up to 35% of its total assets in Corporate Loans or Corporate
Debt Securities that are rated less than B by an NRSRO or, if unrated,
determined to be of comparable quality by Advisers. The Fund will make such
an investment only after Advisers determines that the investment is suitable
for the Fund based on Advisers' independent credit analysis. See "Advisers'
Credit Analysis."

A list of the ratings categories of S&P and Moody's is presented in the
Appendix. Generally, the lower the rating category, the more risky is the
investment. Debt securities rated BBB or lower by S&P or Moody's are
considered to be high yield, high risk investments, commonly known as "junk
bonds."

Under normal conditions, the Fund may invest up to 35% of its total assets in
certain other types of debt obligations, as described below, or in cash. The
Fund may invest in Unsecured Corporate Loans and Unsecured Corporate Debt
Securities. This means that the Corporate Loans and Corporate Debt Securities
are not backed by collateral. Advisers will only make such investments if it
determines that the Borrowers in such transactions are creditworthy, under
the same analysis that Advisers uses for Corporate Loans and Corporate Debt
Securities. The Fund may also invest in secured or unsecured short-term debt
obligations. These include U.S. Government securities, U.S. Government agency
securities (some of which may not be backed by the full faith and credit of
the United States), bank money market instruments (such as CDs), corporate
and commercial obligations (such as commercial paper and medium-term notes)
and repurchase agreements. None of these short-term debt obligations are
required to be backed by collateral. However, short-term debt obligations
purchased by the Fund will be (or counterparties associated therewith will
be) investment grade. This means that they will be rated Baa, P-3 or higher
by Moody's or BBB, A-3 or higher by S&P or, if unrated, determined to be of
comparable quality by Advisers. The Fund may also invest in fixed rate
obligations of U.S. companies or U.S. subsidiaries of non-U.S. companies.
Advisers will determine that the companies issuing these obligations are
creditworthy. When the Fund invests in fixed rate obligations, it may also
enter into an interest rate swap in order to limit the exposure of such
obligations against fluctuations in interest rates.

Securities rated Baa, BBB, P-3 or A-3 are considered to have adequate
capacity for payment of principal and interest, but are more susceptible to
adverse economic conditions than higher rated securities and, in the case of
securities rated BBB or Baa (or comparable unrated securities), have
speculative characteristics. Such securities or cash will not exceed 35% of
the Fund's total assets except (i) during interim periods pending investment
of the net proceeds of public offerings of the Fund's securities, (ii)
pending reinvestment of proceeds of the sale of a security, and (iii) during
temporary defensive periods when, in the opinion of Advisers, suitable
Corporate Loans and Corporate Debt Securities are not available or prevailing
market or economic conditions warrant. Investments in Unsecured Corporate
Loans and Unsecured Corporate Debt Securities will be made on the same basis
as investments in Corporate Loans and Corporate Debt Securities as described
herein, except with respect to collateral requirements. To a limited extent,
the Fund also may acquire Warrants and other Equity Securities. The Fund will
only acquire such Warrants and Equity Securities to the extent that they are
acquired in connection with or incidental to the Fund's lending activities.

MATURITIES The Fund has no restrictions on portfolio maturity. The Fund
anticipates that a majority of the Corporate Loans and Corporate Debt
Securities in which it will invest will have stated maturities ranging from
three to ten years. This means that the Borrower is required to fully repay
the obligation within that time period. The Fund also anticipates that the
Corporate Loans and Corporate Debt Securities will have an average expected
life of three to five years.

The expected average life of the Corporate Loans and Corporate Debt
Securities is less than their stated maturity because it is anticipated that
some Borrowers will pay off their obligations early. Corporate Loans usually
will require the Borrower to prepay the Corporate Loan if the Borrower has
excess cash flow. Also, Corporate Loans usually permit the Borrower to prepay
at its election. The degree to which Borrowers prepay Corporate Loans and
Corporate Debt Securities, whether as a contractual requirement or at their
election, cannot be predicted with accuracy. General business conditions, the
financial condition of the Borrower and competitive conditions among Lenders
are all factors that affect prepayments.

BENEFITS OF INVESTING IN THE FUND Investment in Common Shares of the Fund
offers several benefits. The Fund offers investors the opportunity to receive
a high level of current income by investing in a professionally managed
portfolio comprised primarily of Corporate Loans. Corporate Loans are not
typically available to individual investors. In managing the Fund, Advisers
provides the Fund and its shareholders with professional credit analysis. The
Fund also relieves the investor of the burdensome administrative details
involved in managing a portfolio of such investments. The benefits are at
least partially offset by the expenses involved in operating an investment
company. Such expenses primarily consist of the management and administrative
fees and operational costs.

RISKS FROM FLUCTUATIONS IN GENERAL INTEREST RATES Changes in interest rates
in the national and international markets generally affect the market value
of fixed-income securities and debt obligations. In turn, the Net Asset Value
of the shares of an investment company which invests primarily in
fixed-income securities fluctuates. When interest rates decline, the value of
a fixed-income portfolio can be expected to decline. However, Advisers
expects the Fund's Net Asset Value to be relatively stable during normal
market conditions, because the Fund's investments will consist primarily of:
(i) Corporate Loans and Corporate Debt Securities with Floating Interest
Rates; (ii) fixed rate Corporate Loans and Corporate Debt Securities hedged
by interest rate swap transactions; and (iii) short-term instruments. Because
the Fund will invest primarily in these instruments, Advisers expects the Net
Asset Value of the Fund to fluctuate less as a result of interest rate
changes than would a portfolio comprised mostly of medium or long-term
fixed-rate obligations.

However, some Floating Interest Rates reset only periodically. This means
that there are periods during which the interest rate does not change. During
such periods, prevailing interest rates and the interest rates on some
obligations with Floating Interest Rates held by the Fund (including the
interest rates on nominal amounts in the Fund's interest rate swap
transactions) will not move precisely in the same direction or amount, in
other words, there will be an imperfect correlation between these rates.
These imperfect correlations may cause the Fund's Net Asset Value to
fluctuate. A sudden and extreme increase in prevailing interest rates may
cause a decline in the Fund's Net Asset Value. Conversely, a sudden and
extreme decline in interest rates could result in an increase in the Fund's
Net Asset Value.

THE FUND'S NON-DIVERSIFIED CLASSIFICATION The Fund is non-diversified under
the 1940 Act. This means that there is no limit on the amount of assets that
the Fund may invest in the securities of any one issuer. However, under the
Code, the Fund will limit its investments so that, at the close of each
quarter of its taxable year: (i) not more than 25% of its total assets will
be invested in the securities (including Corporate Loans but excluding U.S.
Government securities or the securities of other regulated investment
companies) of a single issuer, and (ii) with respect to 50% of its total
assets, not more than 5% of the Fund's assets will be invested in the
securities of any one issuer and will not consist of more than 10% of any
single issuer's outstanding voting securities.

To the extent the Fund invests a large portion of its assets in the
securities of a small number of issuers, the Fund's Net Asset Value may
fluctuate more than if the Fund were a diversified company. Also, the Fund
may be more susceptible than a more widely diversified company to any single
economic, political or regulatory event or to changes in the financial
condition or in the market's assessment of a single issuer. However, the Fund
does not intend to invest more than 15% of its total assets in the
obligations of any single Borrower. For purposes of the diversification
requirements, the term issuer includes both the Borrower involved in a
Corporate Loan and a single Lender selling a Participation Interest to the
Fund. In addition, it also includes any Intermediate Participants
interpositioned between the Lender and the Fund with respect to a
Participation Interest.

HIGHLY LEVERAGED TRANSACTIONS The Corporate Loans and Corporate Debt
Securities in which the Fund invests primarily consist of capital
restructurings. This means that a Borrower has undertaken the obligations in
order to finance the growth of the Borrower's business through product
development or marketing, or to finance changes in the way the Borrower
utilizes its assets and invested or borrowed financial resources. Corporate
Loans and Corporate Debt Securities may also include senior obligations of a
Borrower issued in connection with a restructuring pursuant to Chapter 11 of
the U.S. Bankruptcy Code, provided that such senior obligations are
determined by Advisers upon its credit analysis to be a suitable investment
by the Fund. A significant portion of such Corporate Loans and Corporate Debt
Securities (which may be as much as 100% of the Fund's total assets) may be
issued in highly leveraged transactions. This means that the Borrower is
assuming large amounts of debt in order to have large amounts of financial
resources to attempt to achieve its business objectives. Such business
objectives may include: management's taking over control of a company
(leveraged buyout); reorganizing the assets and liabilities of a company
(leveraged recapitalization); or acquiring another company. Such Corporate
Loans and Corporate Debt Securities present special risks. See "Prospectus
Summary - Special Considerations and Risk Factors - Credit Risks Associated
With Corporate Loans and Corporate Debt" and "What Are the Risks of Investing
in the Fund? - Credit Risk" and " - Collateral Impairment." Such Corporate
Loans may be structured to include both term loans, which are generally fully
funded at the time of the Fund's investment, and revolving credit facilities,
which would require the Fund to make additional investments in the Corporate
Loans as required under the terms of the credit facility at the Borrower's
demand. Such Corporate Loans may also include receivables purchase
facilities, which are similar to revolving credit facilities secured by a
Borrower's receivables.

U.S. SUBSIDIARIES OF NON-U.S. BORROWERS The Fund may invest in Corporate
Loans and Corporate Debt Securities that are made to U.S. subsidiaries of
non-U.S. Borrowers, provided that the loans and securities are U.S.
dollar-denominated. This means that the Fund pays for the Corporate Loans and
Corporate Debt Securities in U.S. dollars and that the Borrower pays
principal, interest, dividends or distributions in U.S. dollars. Advisers
will evaluate the creditworthiness of non-U.S. Borrowers by using the same
analysis it uses for U.S. Borrowers. The Fund may also invest in Corporate
Loans and Corporate Debt Securities made to U.S. Borrowers that have
significant revenues paid in foreign currency. The Corporate Loans and
Corporate Debt Securities must be U.S. dollar-denominated or otherwise
provide for payment to the Fund in U.S. dollars. In cases where a Corporate
Loan or Corporate Debt Security is not denominated in U.S. dollars, the Fund
may arrange for payment in U.S. dollars by entering into a foreign currency
swap. See "Foreign Currency Swaps."

Loans to and securities issued by such U.S. subsidiaries of non-U.S.
Borrowers or U.S. Borrowers may involve risks not typically involved in
domestic investment. See "What Are the Risks of Investing in the Fund? -
Foreign Investments."

ADVISERS' CREDIT ANALYSIS Advisers generally will determine the value of the
collateral backing a Corporate Loan or Corporate Debt Security by customary
valuation techniques that it considers appropriate. Such valuation techniques
may include reference to financial statements of the Borrower, independent
appraisal, or obtaining the market value of such collateral (e.g., cash or
securities) if it is readily ascertainable. The value assigned to the
collateral by Advisers may be higher than the value at which the Borrower
values the collateral on the Borrower's books. The Agent Bank may rely on
independent appraisals as to the value of specific collateral. The Agent
Bank, however, may not obtain an independent appraisal in all cases. However,
there are risks that the collateral may not be sufficient in the event that a
Borrower or issuer Defaults in paying interest or principal. See "What Are
the Risks of Investing in the Fund? - Collateral Impairment."

The collateral may consist of various types of assets or interests. It may
include working capital assets, such as accounts receivable or inventory.
Inventory is the goods a company has in stock, including finished goods,
goods in the process of being manufactured and the supplies used in the
process of manufacturing. Accounts receivable are the monies due to a company
for merchandise or securities that it has sold, or for the services it has
provided. It may also include tangible fixed assets, such as real property,
buildings and equipment or intangible assets, such as trademarks, copyrights
and patent rights, or securities of subsidiaries or affiliates. Where the
Borrower is a privately held company, the company's owners may provide
additional security. They may do this by giving personal guarantees of
performance or by agreeing to transfer other securities that they own to the
Lenders in the event that the obligations are not repaid. In addition, the
Fund may invest in Corporate Loans which are fully collateralized by assets
of such shareholders or owners, rather than by assets of the Borrower.
However, such guarantees will be fully secured.

The Fund will invest in a Corporate Loan or Corporate Debt Security only if
Advisers judges that the Borrower can meet the scheduled payments on the
obligation. In addition, Advisers will consider other factors it believes are
appropriate to the analysis of the Borrower and the Corporate Loan or
Corporate Debt Security. Such factors may include financial ratios of the
Borrower, such as the Interest Coverage Ratio and Leverage Ratio. Advisers
also will consider the nature of the industry in which the Borrower is
engaged, the nature of the Borrower's assets and the general quality of the
Borrower. The Board will review and approve factors used by Advisers. The
Corporate Loans and Corporate Debt Securities in which the Fund invests
generally are not rated by an NRSRO.

When Advisers selects Corporate Loans and Corporate Debt Securities for
investment by the Fund, it primarily considers the creditworthiness of the
Borrower. Advisers will not base its selection upon the quality ratings of
other debt obligations of a Borrower. These other debt obligations are often
subordinated to the Corporate Loans or Corporate Debt Securities. Instead,
Advisers will perform its own independent credit analysis of the Borrower,
and of the collateral structure for the Corporate Loan or Corporate Debt
Security. In making its analysis, Advisers will utilize any offering
materials and, in the case of Corporate Loans, information prepared and
supplied by the Agent Bank, Lender or Participant from whom the Fund
purchases its Participation Interest. After the Fund invests in a Corporate
Loan and Corporate Debt Security, Advisers will continue to evaluate the
Corporate Loan or Corporate Debt Security on an ongoing basis.

DESCRIPTION OF FLOATING INTEREST RATES The rate of interest payable on
Corporate Loans or Corporate Debt Securities with Floating Interest Rates is
established as the sum of a base lending rate plus a specified margin. These
base lending rates generally are LIBOR, the Prime Rate of a designated U.S.
bank, the CD Rate, or another base lending rate used by lenders loaning money
to companies, so-called commercial lenders. The interest rate on Prime
Rate-based Corporate Loans and Corporate Debt Securities floats daily as the
Prime Rate changes, while the interest rate on LIBOR-based and CD-based
Corporate Loans and Corporate Debt Securities is reset periodically,
typically at regular intervals ranging between 30 days and one year.

Certain of the Floating Interest Rate Corporate Loans and Corporate Debt
Securities in which the Fund will invest may permit the Borrower to select an
interest rate reset period of up to one year. A portion of the Fund's
investments may consist of Corporate Loans with interest rates that are fixed
for the term of the loan. Investment in Corporate Loans and Corporate Debt
Securities with longer interest rate reset periods or fixed interest rates
may increase fluctuations in the Fund's Net Asset Value as a result of
changes in interest rates. The Fund may attempt to limit the exposure of its
fixed rate Corporate Loans and Corporate Debt Securities against fluctuations
in interest rates by entering into interest rate swap transactions. The Fund
also will attempt to maintain a portfolio of Corporate Loans and Corporate
Debt Securities that will have a dollar weighted average period to the next
interest rate adjustment of no more than 90 days.

Borrowers have increasingly selected the LIBOR-based pricing option,
resulting in a yield on Corporate Loans and Corporate Debt Securities that is
consistently lower than the yield available from the Prime Rate-based pricing
option. This trend will significantly limit the ability of the Fund to
achieve a net return to shareholders that consistently approximates the
average published Prime Rate of leading U.S. banks. For more information
about this trend, see the section in the SAI entitled "How Does the Fund
Invest its Assets? - Description of Floating or Variable Interest Rates."

FEES The Fund may receive and/or pay certain fees in connection with its
lending activities. These fees are in addition to interest payments received
and may include facility fees, commitment fees, commissions and prepayment
penalty fees. When the Fund buys a Corporate Loan or Corporate Debt Security,
it may receive a facility fee and when it sells a Corporate Loan or Corporate
Debt Security the Fund may pay a facility fee. In certain circumstances, the
Fund may receive a prepayment penalty fee on the prepayment of a Corporate
Loan or Corporate Debt Security by a Borrower.

CURRENCY CONVERSIONS Loans to U.S. subsidiaries of non-U.S. Borrowers and to
U.S. Borrowers with significant non-U.S. dollar-denominated revenues may
provide for conversion of all or part of the loan from a U.S.
dollar-denominated obligation into a foreign currency obligation at the
option of the Borrower. The Fund may invest in Corporate Loans and Corporate
Debt Securities which have been converted into non-U.S. dollar-denominated
obligations only when provision is made for payments to the Lenders in U.S.
dollars pursuant to foreign currency swap arrangements.

FOREIGN CURRENCY SWAPS Foreign currency swaps involve the exchange by the
Fund with another party of the right to receive foreign currency (paid under
a Corporate Loan or Corporate Dept Security) for the right to receive U.S.
dollars. The Fund will enter into a foreign currency swap only if, at the
time of entering into the transaction, the counterparty's outstanding debt
obligations are investment grade. This means they are rated BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's, or determined by Advisers
to be of comparable quality. The amounts of U.S. dollar payments to be
received by the Fund and the foreign currency payments to be received by the
counterparty are fixed at the time the swap arrangement is entered into. This
locks in the Fund's right to receive payments under a Corporate Loan or
Corporate Debt Security in a predetermined amount of U.S. dollars. In this
way, the swap protects the Fund from the fluctuations in exchange rates. For
more information about foreign currency swaps, see the section in the SAI
entitled "How Does the Fund Invest Its Assets? - Foreign Currency Swaps."

DESCRIPTION OF PARTICIPATION INTERESTS AND ASSIGNMENTS The Fund may invest in
a Corporate Loan in one of three ways: (1) a direct investment in the
Corporate Loan by the Fund serving as one of the Lenders; (2) Participation
Interests; or (3) an Assignment. Participation Interests are interests issued
by a Lender or other financial institution which represent a fractional
interest in a Corporate Loan. The Fund may acquire Participation Interests
from a Lender or other holders of Participation Interests. Holders of
Participation Interests are referred to as Participants. (For a general
description of Lenders and Agent Banks, see "Prospectus Summary - More About
Corporate Loans and Corporate Debt Securities.") An Assignment represents a
portion of a Corporate Loan. Unlike a Participation Interest, the Fund will
generally become a "Lender" for the purposes of the terms of the Corporate
Loan by purchasing an Assignment. It can be most advantageous to the Fund to
make a direct investment in a Corporate Loan as one of the Lenders. Such an
investment is typically made at par. This means that the Fund receives a
return at the full interest rate for the Corporate Loan. On the other hand,
when the Fund invests in a Participation Interest or Assignment, it will
normally pay a fee or forego a portion of the interest payment. Consequently,
the Fund's return on the investment may not be as great as it would have been
if the Fund had made a direct investment in the underlying Corporate Loan.

The opportunities for direct investments in Corporate Loans are currently
limited. The opportunities for investment through Participation Interests or
Assignments are greater. The Fund often may not be able to invest in
Corporate Loans other than through Participation Interests or Assignments.
There is a risk that the Fund may not be able to invest 65% or more of its
total assets as described above due to the limited supply of direct
investments in Corporate Loans and, to a lesser degree, of investments in
Participation Interests or Assignments.

The SEC is currently considering a proposal that would require that any
investment company, such as the Fund, whose name implies that the investment
company invests primarily in a given type of security must invest no less
than 80% of its total assets in that type of security, under normal market
conditions. The current requirement is that no less than 65% of an investment
company's total assets must be invested in that type of security. If the SEC
adopts this proposal, the Fund will be required to increase, from 65% to 80%,
the amount of its total assets invested in Corporate Loans and Corporate Debt
Securities. Due to the limited availability of these types of investments,
there is a risk that the Fund may not be able to meet such a high level of
investment in Corporate Loans and Corporate Debt Securities, as discussed
above.

The Lenders or the Agent Bank may have an incentive to market the less
desirable Corporate Loans, Participation Interests or Assignments to
investors such as the Fund while retaining the more desirable investments for
their own inventory. This reduces the availability of the more desirable
investments. See "Prospectus Summary - Special Considerations and Risk
Factors - Limited Availability of Corporate Loans, Participation Interests,
Assignments and Corporate Debt Securities."

The terms of the Participation Interests are privately negotiated between the
Fund and the seller. Typically, the Fund will not have established any direct
contractual relationship with the Borrower. The Fund will be required to rely
on the Lender or the Participant that sold the Participation Interest for the
enforcement of the Fund's rights against the Borrower. It also will have to
rely on that party for the receipt and processing of payments due to the Fund
under the Corporate Loans. Consequently, the Fund is subject to the credit
risk of both the Lender or Participant, in addition to the usual credit risk
of the Borrower. Lenders and Participants interposed between the Fund and a
Borrower, together with Agent Banks, are referred to as Intermediate
Participants.

On the other hand, if the Fund purchases an Assignment from a Lender, the
Fund will step into the shoes of the original Lender and will have direct
contractual rights against the Borrower. An Assignment from a Lender gives
the Fund the right to receive payments directly from the Borrower and to
enforce its rights as a Lender directly against the Borrower.

In the event the Borrower fails to pay principal and interest when due, the
Fund may have to assert rights against the Borrower through an Intermediate
Participant. This may subject the Fund to delays, expenses and risks that are
greater than those that would be involved if the Fund could enforce its
rights directly against the Borrower. Moreover, under the terms of a
Participation Interest, the Fund may be regarded as a creditor of the
Intermediate Participant rather than of the Borrower. This means that the
Fund does not have any direct contractual rights against the Borrower. Also,
in the event of the insolvency of the Lender selling the Participation
Interest, the Fund may not have any exclusive or senior claim with respect to
the Lender's interest in the Corporate Loan, or in the collateral securing
the Corporate Loan. Consequently, the Fund may not benefit directly from the
collateral supporting the underlying Corporate Loan. There is a risk that the
Intermediate Participant may become insolvent. Similar risks may arise with
respect to the Agent Bank, as described below.

Furthermore, in the event that a Borrower becomes bankrupt or insolvent, the
Borrower may attempt to assert certain legal defenses as a result of improper
conduct by the Agent Bank or Intermediate Participant. The Fund will invest
in Corporate Loans only if, at the time of investment, all outstanding debt
obligations of the Agent Bank and Intermediate Participants are investment
grade, i.e., rated BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's or determined to be of comparable quality in Advisers' judgment.

The Agent Bank is a Lender that administers the Corporate Loan. The Agent
Bank typically is responsible for collecting principal, interest and fee
payments from the Borrower. The Agent Bank then distributes these payments to
all Lenders which are parties to the Corporate Loan. The Fund will not act as
an Agent Bank. It generally will rely on the Agent Bank or an Intermediate
Participant to collect its portion of the payments. The Fund will also rely
on the Agent Bank to take appropriate actions against a Borrower that is not
making payments as scheduled. Typically, the Agent Bank is given broad
discretion in enforcing the terms of the Corporate Loan, and is required to
use only the same care it would use in the management of its own property.
The Borrower compensates the Agent Bank for these services. Such compensation
may include special fees paid at the start of Corporate Loans and other fees
paid on a continuing basis.

There is a risk that an Agent Bank may have financial difficulty. An Agent
Bank could even declare bankruptcy, or have a receiver, conservator, or
similar official appointed for it by a regulatory authority. If this happens,
assets held by the Agent Bank under the Corporate Loan should remain
available to holders of Corporate Loans, including the Fund. However, a
regulatory authority or court may determine that assets held by the Agent
Bank for the benefit of the Fund are subject to the claims of the Agent
Bank's general or secured creditors. The Fund might incur costs and delays in
realizing payment on a Corporate Loan or might suffer a loss of principal or
interest. Similar risks arise in situations involving Intermediate
Participants, as described above.

Intermediate Participants may have an obligation to make future advances to
the Borrower at the demand of the Borrower in connection with what are known
as revolving credit facilities and may have certain other obligations
pursuant to the terms of Corporate Loans. The Fund will set aside in a
separate account with its custodian bank amounts that are earmarked to meet
such future obligations. These amounts will be invested in high quality,
short-term, liquid instruments. Because the Fund will maintain sufficient
amounts in separate accounts for such contingent obligations, Advisers
believes that such obligations do not constitute senior securities under the
1940 Act as interpreted by the SEC. The Fund will not invest in Corporate
Loans that would require the Fund to make future advances that exceed in the
aggregate for all such Corporate Loans 20% of the Fund's total assets. The
Fund also will not invest in Corporate Loans that would cause the Fund to
fail to meet the diversification requirements previously described.

Other Investment Policies

The Fund has adopted certain other policies set forth below:

NON-CONCENTRATION IN A SINGLE INDUSTRY The Fund does not currently intend to
invest more than 20% of its assets in the obligations of Borrowers in any
single industry. The SEC takes the position that investing more than 25% of
the Fund's total assets in a single industry or group of industries
represents "concentration" in such industry or group of industries. However,
the Fund regards the issuer of a Corporate Loan to include the Agent Bank and
any Intermediate Participant, as well as the Borrower. This means that the
Fund will invest more than 25% of its total assets in the securities of the
following issuers as a group: commercial banks, thrift institutions,
insurance companies and finance companies. These types of issuers frequently
act as an Agent Bank or Intermediate Participant. As a result, the Fund is
subject to certain risks associated with such institutions, both individually
and as a group. See "What Are the Risks of Investing in the Fund? - Financial
Institutions."

LEVERAGE The Fund is authorized to borrow money in amounts of up to 331U3% of
the value of its total assets at the time of the borrowings. The Fund's
borrowings create an opportunity for greater total return to the Fund and,
ultimately, the Fund's shareholders, but, at the same time, increase exposure
to losses. In addition, interest payments and fees paid by the Fund on any
borrowings may offset or exceed the return earned on the borrowed funds. The
Fund does not currently intend to borrow funds to make additional
investments. The Fund may issue one or more series of preferred shares, but
it does not presently intend to do so. See "What Are the Risks of Investing
in the Fund? - Effects of Leverage."

REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with
respect to its permitted investments. The Fund currently intends to do so
only with financial institutions, such as broker-dealers and banks, which are
deemed creditworthy by Advisers. In a repurchase agreement transaction, the
Fund purchases a U.S. government security from a bank or broker-dealer. The
agreement provides that the security must be sold back to the bank or
broker-dealer at an agreed-upon price and date. The bank or broker-dealer
must transfer to the Fund's account collateral consisting of securities with
an initial value, including any earned but unpaid interest, equal to at least
102% of the dollar amount invested by the Fund in each repurchase agreement.
The value of the underlying U.S. government security is determined daily so
that the Fund has collateral of at least 100% of the value of the repurchase
agreement. There are certain risks associated with repurchase transactions
which are described in the SAI section entitled "How Does the Fund Invest Its
Assets? - Repurchase Agreements."

LENDING OF FUND SECURITIES The Fund may from time to time lend its portfolio
securities to qualified securities dealers or other institutional investors.
However, the Fund will limit such loans to a total value of all securities on
loan not exceeding 331U3% of its total assets. This limitation is a
fundamental policy, which means it may not be changed without the approval of
the holders of a majority of the Fund's Common Shares. For each loan, the
Fund must receive in return collateral with an initial market value of at
least 102% of the initial market value of the securities loaned, including
any accrued interest. The value of the collateral and loaned securities is
determined daily so that the Fund has collateral coverage of at least 100%.
The collateral will consist of cash, securities issued by the U.S.
Government, its agencies or instrumentalities, or irrevocable letters of
credit.

The Fund receives a premium for lending its portfolio securities or, if cash
collateral is received by the Fund, it is invested in short-term money market
securities, and the Fund retains a portion of the yield paid on the
investment. However, the Fund may pay reasonable finder's, administrative and
custodial fees in connection with such loans.

In the event that the borrower Defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities. For more information about the
lending of the Fund's securities see the section in the SAI entitled "How
Does the Fund Invest Its Assets - Securities Lending."

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase and sell
interests in Corporate Loans and Corporate Debt Securities and other debt
securities on a when-issued and delayed delivery basis. There is no limit on
the amount of assets which the Fund may invest in when-issued securities. A
when-issued obligation refers to an obligation whose price is fixed at the
time the commitment to purchase is made, but has not been issued. Delayed
delivery refers to the delivery of securities later than the customary time
for delivery of securities. The Fund will generally make commitments to
purchase interests or securities on a when-issued basis with the intention of
acquiring the interests or securities. For more information about when-issued
and delayed delivery transactions see the section in the SAI entitled "How
Does the Fund Invest Its Assets - When-Issued and Delayed Delivery
Transactions."

INTEREST RATE AND HEDGING TRANSACTIONS The Fund may enter into interest rate
swaps in order to limit the exposure of its fixed rate Corporate Loans and
Corporate Debt Securities against fluctuations in interest rates. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments or rights to pay or receive interest, such as an
exchange of fixed rate payments for Floating Interest Rate payments. For
example, if the Fund holds a Corporate Loan or Corporate Debt Security with
an interest rate that is reset only once each year, it may swap the right to
receive interest at this fixed rate for the right to receive interest at a
rate that is reset every week. Thus, if interest rates rise, the increased
interest received by the Fund would offset a decline in the value of the
Corporate Loan or Corporate Debt Security. On the other hand, if interest
rates fall, the Fund's benefit from falling interest rates would be decreased.

Except as noted above, there is no limit on the amount of interest rate
hedging transactions that may be entered into by the Fund. The risk of loss
with respect to interest rate hedges is limited to the net amount of interest
payments that the Fund is obligated to make. If the other party to an
interest rate swap Defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund is entitled to receive. The Fund
will only enter into an interest rate swap after Advisers has evaluated the
creditworthiness of the other party to the swap. The risks associated with
interest rate swaps are further described in the SAI under the title "How
Does the Fund Invest Its Assets? - Interest Rate Swaps."

TAXCONSIDERATIONS The Fund's investments in foreign currency and other
complex securities are subject to special tax rules that may affect the
amount, timing or character of the income earned by the Fund and distributed
to you. The Fund may also be subject to withholding taxes on earnings from
certain of its foreign securities. These special tax rules are discussed in
the "Additional Information on Distributions and Taxes" section of the SAI.

What Are the Risks of Investing in the Fund?

ILLIQUID SECURITIES The Fund does not limit the amount of its investments
that are not readily marketable or are subject to restrictions on resale.
Corporate Loans and Corporate Debt Securities in which the Fund invests are,
at present, not readily marketable and may be subject to significant
restrictions on resale. They do not have the liquidity of conventional
investment grade debt securities and may be considered Illiquid. As the
market for Corporate Loans and Corporate Debt Securities matures, Advisers
expects that liquidity will improve.

In the event that the Fund voluntarily or involuntarily liquidates these
assets, it may not get the full value of the assets. The Fund may have
difficulty disposing of Illiquid portfolio securities. This may make it
difficult for the Fund to raise proceeds to repurchase Common Shares in a
Tender Offer. See "How Are Common Shares Valued?" in the SAI for information
regarding valuation of Illiquid Corporate Loans and Corporate Debt Securities.

FINANCIAL INSTITUTIONS As discussed above, the Fund will invest more than 25%
of its total assets in the securities of the following issuers as a group:
commercial banks, thrift institutions, insurance companies and finance
companies. As a result, the Fund is subject to certain risks associated with
these institutions, both individually and as a group.

Banking and thrift institutions are subject to extensive governmental
regulations. These regulations may limit both the amounts and types of loans
and other financial commitments which the institutions may make and the
interest rates and fees which the institutions may 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.

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. Recent business
combinations have included insurance, finance and securities brokerage under
single ownership. The federal laws generally separating commercial and
investment banking are being reconsidered by Congress.

EFFECTS OF LEVERAGE The Fund is authorized to borrow money in an amount up to
331U3% of its total assets (after giving effect to the amount borrowed).
However, the Fund will only borrow money for temporary, extraordinary or
emergency purposes. While it has no current intention of doing so, the Fund
may also borrow for the purpose of financing additional investments or making
Tender Offers for Common Shares. See "Periodic Offers By the Fund to
Repurchase Common Shares From Shareholders."

The Fund also may issue one or more series of preferred shares, although it
has no current intention to do so. There is a risk that the costs of
borrowing or issuing additional classes of securities may exceed the income
and appreciation, if any, on assets acquired with the borrowed funds or
offering proceeds. If this occurs, the use of leverage will reduce the
investment performance of the Fund compared with what it would have been
without leverage. The costs associated with such borrowings or offerings
include interest payments, fees and dividends. The Fund also may be required
to maintain minimum average balances in connection with borrowings or to pay
a commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest
rate. The issuance of additional classes of preferred shares involves
offering expenses and other costs. Also, it may limit the Fund's freedom to
pay dividends on Common Shares or to engage in other activities.

Leverage creates certain risks for holders of Common Shares. Leveraging by
the Fund creates an opportunity for greater total return but, at the same
time, increases exposure to losses. The Net Asset Value of Common Shares may
be more volatile than if the Fund were not leveraged. These risks may be
reduced through the use of borrowings and preferred stock that have Floating
Interest Rates.

The Fund's willingness to borrow money for investment purposes, and the
amount it will borrow, will depend on many factors. The most important
factors are investment outlook, market conditions and interest rates.
Successful use of a leveraging strategy depends on Advisers' ability to
predict correctly interest rates and market movements. There is no assurance
that a leveraging strategy will be successful during any period in which it
is employed.

CREDIT RISK Corporate Loans and Corporate Debt Securities may constitute
substantially all of the Fund's investments. Corporate Loans and Corporate
Debt Securities are primarily dependent upon the creditworthiness of the
Borrower for payment of interest and principal. If the Borrower fails to pay
scheduled interest or principal on a Corporate Loan or Corporate Debt
Security, the income of the Fund or the value of its investments may be
adversely affected. In turn, this may reduce the amount of dividends or the
Net Asset Value of the Fund's Common Shares. The Fund's receipt of principal
and interest payments on a Corporate Loan or a Corporate Debt Security also
depends upon the creditworthiness of any Intermediate Participant. To reduce
credit risk, Advisers actively manages the Fund as described above.

Corporate Loans and Corporate Debt Securities made in connection with highly
leveraged transactions are subject to greater credit risks than other
Corporate Loans and Corporate Debt Securities in which the Fund may invest.
See "What Kinds of Securities Does the Fund Purchase - Advisers' Credit
Analysis." These credit risks include an increased possibility that the
Borrower may Default on the Corporate Loan or Corporate Debt Security, or may
go into bankruptcy. The Fund may have more difficulty selling highly
leveraged Corporate Loans and Corporate Debt Securities than other Corporate
Loans and Corporate Debt Securities because they are less liquid. The value
of such Corporate Loans and Corporate Debt Securities is more volatile in
response to interest rate fluctuations. The Corporate Loans and Corporate
Debt Securities in which the Fund invests generally are not rated by any
NRSRO.

Corporate Loans and Corporate Debt Securities in which the Fund invests will
generally hold the most senior position in the capitalization structure of
the Borrowers. However, many Borrowers will have non-investment grade
subordinated debt. During periods of deteriorating economic conditions, a
Borrower may have difficulty making its payments under such bonds and other
subordinated debt obligations. These difficulties may damage the Borrower's
credit rating or its ability to obtain financing for short-term cash flow
needs. This may force the Borrower into bankruptcy or other forms of credit
restructuring.

COLLATERAL IMPAIRMENT Corporate Loans and Corporate Debt Securities
(excluding Unsecured Corporate Loans and Unsecured Corporate Debt Securities)
will be secured unless (i) the Fund's security interest in the collateral is
invalidated for any reason by a court, or (ii) the collateral is fully
released with the consent of the Agent Bank and Lenders or under the terms of
a loan agreement as the creditworthiness of the Borrower improves.

There are risks which may cause the collateral to be insufficient in the
event that a Borrower Defaults on a Corporate Loan or Corporate Debt
Security. Although the terms of the Corporate Loans and Corporate Debt
Securities require that the collateral be maintained at a value at least
equal to 100% of the amount of such Corporate Loan or Corporate Debt
Security, the value of the collateral may decline subsequent to the Fund's
investment in the Corporate Loan or Corporate Debt Security. In most credit
agreements there is no formal requirement to pledge additional collateral.

There is also the risk that the collateral may be difficult to liquidate. In
fact, a majority of the collateral may be Illiquid. Consequently, the Fund
might not receive payments to which it is entitled. This may result in a
decline in the value of the investment and, in turn, a decline in the Net
Asset Value of the Fund's Common Shares.

If a Borrower becomes involved in bankruptcy proceedings, the Fund's access
to the collateral may be limited by bankruptcy and other laws. This risk is
increased when a Corporate Loan or Corporate Debt Security is made in
connection with a highly leveraged transaction. In the event that a court
decides that the Fund's access to the collateral is limited or void, it is
unlikely that the Fund would be able to recover the full amount of the
principal and interest due to it. The risks of collateral impairment are
further described in the SAI in the section entitled "What Are the Risks of
Investing in the Fund? - Collateral Impairment."

FOREIGN INVESTMENTS As noted above, the Fund may invest in Corporate Loans
and Corporate Debt Securities that are made to or issued by U.S. subsidiaries
of non-U.S. Borrowers or U.S. Borrowers that have significant non-U.S.
dollar-denominated revenues. Such Corporate Loans or Corporate Debt
Securities will be denominated in U.S. dollars or otherwise provide for
payment in U.S. dollars. These obligations may involve risks not typically
involved in domestic investment.

These risks include fluctuation in foreign exchange rates, for example,
changes in the value of the French franc as compared to the U.S. dollar. The
political, economic and social structures of some countries in which the Fund
invests may be less stable and more volatile than those in the U.S. The risks
of investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes. Political or
social instability, or diplomatic developments may affect the Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payment position. Foreign companies
are not generally subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
applicable to U.S. Borrowers. Therefore, information with respect to U.S.
subsidiaries of non-U.S. Borrowers may differ from that available with
respect to U.S. Borrowers. In addition, the Fund may have more difficulty
pursuing legal remedies and enforcing judgments in foreign countries with
respect to U.S. subsidiaries of non-U.S. Borrowers.

PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS In the event that short-term
interest rates increase or other market conditions change, the Fund's
leverage could adversely affect holders of Common Shares, as noted above. If
such changes occur or are anticipated, the Fund may attempt to shorten the
average maturity of its investment portfolio. This would tend to decrease the
negative impact of leverage on holders of Common Shares. To do this, the Fund
would purchase securities with generally shorter maturities.

Who Manages the Fund?

The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.

Investment Manager. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned holding company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisers and its affiliates manage over $222 billion in
assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Fund's Code of Ethics.

Portfolio Manager.

Chauncey F. Lufkin

Mr. Lufkin is a Vice President of the Fund and has been the portfolio manager
of the Fund since its inception. Mr. Lufkin has been a portfolio manager of
Advisers since 1990. He was formerly an employee of Manufacturers Hanover
Trust Co. (now The Chase Manhattan Bank), where he worked in the Acquisition
Finance Group specializing in structuring and negotiation of leveraged
transactions, and formerly an employee of Security Pacific National Bank (now
Bank of America).

Management Fees. The Fund pays its own operating expenses. These expenses
include Advisers' management fees; taxes, if any; custodian, legal and
auditing fees; the fees and expenses of Board members who are not members of,
affiliated with, or interested persons of Advisers; fees of any personnel not
affiliated with Advisers; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the Fund's Net Asset Value;
and printing and other expenses that are not expressly assumed by Advisers.

Under its management agreement, the Fund is obligated to pay Advisers a
monthly management fee equal to an annual rate of 0.80% of the average daily
net assets of the Fund. The fee is computed at the close of business on the
last business day of each month.

During the Fund's start-up period, Advisers has agreed in advance to limit
its management fees and make certain payments to reduce expenses so the
Fund's total operating expenses do not exceed 1.40% for the current fiscal
year. After July 31, 1998, Advisers may end this agreement at any time.

Administrative Services. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund
pays FT Services a monthly administration fee 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. Please see "Investment Management
and Other Services" in the SAI for more information.

Shareholder Servicing and Transfer Agent. Investor Services, a wholly owned
subsidiary of Resources, is the Fund's shareholder servicing agent and acts
as the Fund's transfer agent and dividend-paying agent. Investor Services is
compensated at an annual rate of 0.40% of the Fund's average daily net
assets. The Fund may also reimburse Investor Services for certain
out-of-pocket expenses.

Portfolio Transactions By the Fund

Advisers tries to obtain the best execution on all transactions. If Advisers
believes more than one broker or dealer can provide the best execution, it
may consider research and related services and the sale of Common Shares, as
well as shares of other funds in the Franklin Templeton Group of Funds, when
selecting a broker or dealer.

The Fund engages in trading when Advisers has concluded that the sale of a
security owned by the Fund and/or the purchase of another security can
enhance principal and/or increase income. A security may be sold to avoid any
prospective decline in market value, or a security may be purchased in
anticipation of a market rise. Consistent with the Fund's investment goal, a
security also may be sold and a comparable security purchased coincidentally
in order to take advantage of what is believed to be a disparity in the
normal yield and price relationship between the two securities.

The Fund's annual portfolio turnover rate is not expected to exceed 100%. The
rate may vary greatly from year to year and will not be a limiting factor
when Advisers deems portfolio changes appropriate. Although the Fund
generally does not intend to trade for short-term profits, the securities
held by the Fund will be sold whenever Advisers believes it is appropriate to
do so. Sales will be made without regard to the length of time the security
may have been held. Large Common Share repurchases by the Fund during the
quarterly or discretionary Tender Offers may require the Fund to liquidate
portions of its securities holdings for cash to repurchase the Common Shares.
The liquidation of such holdings may result in a higher than expected annual
portfolio turnover rate. A 100% annual portfolio turnover rate would occur if
the lesser of the value of purchases or sales of the Fund's securities for a
year (excluding purchases of U.S. Treasury and other securities with a
maturity at the date of purchase of one year or less) were equal to 100% of
the average monthly value of the securities, excluding short-term
investments, held by the Fund during such year. Higher portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs that the Fund will bear directly.

Please see "How Does the Fund Buy Securities for Its Portfolio" in the SAI
for more information.

Investment Performance Information

From time to time, the Fund advertises its performance. Performance
information may include its current yield, current distribution rate or total
return for specific time periods.

The current yield of the Fund shows the income generated by an investment in
the Fund over a stated period. The current distribution rate shows the
dividends or distributions paid to the Fund's shareholders. This rate is
usually computed by annualizing the monthly distribution paid per share
during a certain period and dividing that amount by the current maximum
offering price. Total return is the change in value of an investment over a
given period. Total return assumes any dividends and capital gains are
reinvested.

Performance figures will reflect the imposition of the Early Withdrawal
Charge but additional performance figures that are calculated without
reflecting the Early Withdrawal Charge may be presented.

Performance figures are always based on the Fund's past performance and do
not guarantee future results. The Fund's yield and distribution rate are
expected to fluctuate. Total return will also vary, depending on market
conditions, the Corporate Loans, Corporate Debt Securities and other
securities that the Fund owns, the Fund's operating expenses and the amount
of capital gains or losses during the period. For a more detailed description
of how the Fund calculates its performance figures, please see "How Does the
Fund Measure Performance?" in the SAI.

How to Buy Common Shares

Continuous Offering

The Fund continuously offers Common Shares through Distributors and other
Securities Dealers that have entered into dealer agreements with
Distributors. The Fund or Distributors may suspend the continuous offering of
Common Shares at any time without prior notice. Similarly, the Fund or
Distributors may resume the offering at any time. If there is a suspension of
the offering of Common Shares, shareholders who reinvest their distributions
in additional Common Shares will be permitted to continue to make those
reinvestments.

During the continuous offering, the Fund offers Common Shares at the public
offering price, which is the Net Asset Value per share next determined after
Distributors receives your purchase order and payment. As of March 10, 1998,
the Net Asset Value per share for Common Shares was $10.04. For purchase
orders and payments received by Distributors or Securities Dealers prior to
the close of business on the NYSE (generally, 1:00 p.m., Pacific time)
(including orders received after the close of business on the previous
business day), the offering price will be the Net Asset Value determined as
of the close of business on the NYSE on that day. For purchases by wire, if
the purchase order is received by 1:00 p.m.,Pacific time, and the bank
receives the wired payment by 3:00 p.m., Pacific time, on the dame day, the
offering price will be the Net Asset Value determined as of the close of
business on the NYSE on that day. If Distributors or a Securities Dealer
receives your purchase order and payment after the close of business on the
NYSE, the order is considered received on the next business day. Any order
may be rejected by Distributors or the Fund.

In the course of a Tender Offer, Distributors or an affiliate may
inadvertently acquire a small amount (expected to be less than 5%) of Common
Shares which it may wish to resell. The Common Shares repurchased in these
circumstances will not be subject to any investment restriction, and the
Common Shares may be resold. This inadvertent acquisition would result from
the administrative complexities that arise because a Tender Offer is confined
to a specific percentage of the outstanding Common Shares, and the Common
Shares tendered by shareholders during a particular Tender Offer may exceed
the percentage limit of that Tender Offer. In that situation, the Fund is
required to repurchase Common Shares on a pro rata basis, as described below.
See "Periodic Offers By the Fund to Repurchase Common Shares From
Shareholders."

Opening Your Account

To open your account, please follow the steps below. This will help avoid any
delays in processing your request. Please keep in mind that the Fund does not
currently allow investments by Market Timers. Additionally, the Fund does not
currently allow investments by retirement plans.

1. Read this prospectus carefully.

2. Determine how much you would like to invest. The Fund's minimum
investments are:

o To open your account: $1,000*

o To add to your account: $50*

*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy Common Shares.

3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to send
an additional application to add privileges later. It is important that we
receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.

4. Make your investment using the table below.

METHOD STEPS TO FOLLOW

By Mail For an initial investment:

Return the application to the Fund with your check made
payable to the Fund.

For additional investments:

Send a check made payable to the Fund.
Please include your account number on the check.

By Wire 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.

2. For initial investments you must also return your
signed shareholder application to the Fund.

Important Deadlines: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the Fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.

Through Your Dealer Call your investment representative

The Fund's minimum initial investment requirement will not apply to purchases
by:

o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement

o Accounts opened under your state's Uniform Gifts/Transfers to Minors Act,
subject to a $100 minimum investment requirement

o Accounts opened under the Automatic Investment Plan, subject to a $50
minimum

Payments to Securities Dealers

Distributors compensates selected Securities Dealers at a rate of 1.00% of the
dollar amount of Common Shares sold by the Securities Dealers. These payments
consist of 0.75% of sales commission and 0.25% of service fee (for the first
year's services). If Common Shares remain outstanding for at least twelve months
from the date of their original purchase, Distributors will, beginning in the
thirteenth month, compensate the Securities Dealers quarterly at an annual rate
of 0.50% of the value of Common Shares sold by the Securities Dealers and
remaining outstanding. These payments do not represent an additional expense to
you or the Fund since the payments are made from the assets of Distributors,
Advisers or Investor Services. The total compensation paid to selected
Securities Dealers and Distributors, including, but not limited to, the
compensation paid at the time of purchase, the quarterly payments mentioned
above and the Early Withdrawal Charge, will not amount to more than 8.00% of the
initial gross proceeds of the offering and will comply with the NASD Conduct
Rule regarding sales charges of open-end investment companies.

Periodic Offers By the Fund to Repurchase Common Shares From Shareholders

The Fund is not aware of any currently existing secondary market for Common
Shares and does not anticipate that a secondary market will develop for
Common Shares. A secondary market is a market, exchange facility or system
for quoting bid and asking prices where securities such as the Common Shares
can be readily bought and sold among holders of the securities after they are
initially distributed. Without a secondary market, Common Shares are not
liquid, which means that they are not readily marketable. However, the Fund
has taken action to provide liquidity to shareholders. The Fund has adopted
share repurchase policies as fundamental policies. This means the policies
may not be changed without the vote of the holders of a majority of the
Fund's outstanding voting securities. These policies provide that each
quarter, the Fund intends to make a Tender Offer to repurchase a portion of
the outstanding Common Shares from shareholders who request repurchases. The
price of the repurchases of Common Shares normally will be the Net Asset
Value per share determined as of the close of business (1:00 p.m. Pacific
Time) on the date the Tender Offer ends or within a maximum of fourteen days
after the Tender Offer ends as described below.

Repurchase Procedures. At the beginning of each Tender Offer, the Fund's
shareholders will be notified in writing about the Tender Offer, how they may
request that the Fund repurchase their Common Shares and the deadline for
shareholders to provide their repurchase requests to Investor Services (the
"Repurchase Request Deadline"), which is the date the Tender Offer ends. The
time between the notification of the shareholders and the Repurchase Request
Deadline may vary from no more than six weeks to no less than three weeks.
For each Tender Offer the Fund will establish the Repurchase Request Deadline
based on factors, such as market conditions, liquidity of the Fund's assets
and shareholder servicing considerations. The repurchase price of the Common
Shares will be the Net Asset Value as of the close of the NYSE on the date on
which the repurchase price of the Common Shares will be determined (the
"Repurchase Pricing Date"). It is anticipated that normally the Repurchase
Pricing Date will be the same date as the Repurchase Request Deadline, and if
so, the Repurchase Request Deadline will be set for a time no later than the
close of the NYSE on such date. The Fund has determined that the Repurchase
Pricing Date may occur no later than the fourteenth day after the Repurchase
Request Deadline or the next business day if the fourteenth day is not a
business day. Within such fourteen day period, the Fund may use an earlier
Repurchase Pricing Date under certain circumstances.

The Board may establish other policies for repurchases of Common Shares that
are consistent with the 1940 Act and other pertinent laws. Once every two
years, the Board may, if it chooses, make an additional Tender Offer for
repurchase of Common Shares in addition to regular quarterly Tender Offers.
Common Shares tendered by shareholders by any Repurchase Request Deadline
will be repurchased subject to the aggregate repurchase amounts established
for that Repurchase Request Deadline. Repurchase proceeds will be paid to
shareholders, in cash, within seven days after each Repurchase Pricing Date.
The end of the seven days is referred to as the "Repurchase Payment Deadline."

Repurchase Amounts. The Board, in its sole discretion, will determine the
number of Common Shares that the Fund will offer to repurchase (the
"Repurchase Offer Amount") for a given Repurchase Request Deadline. The
Repurchase Offer Amount will be at least 5% and no more than 25% of the total
number of Common Shares outstanding on the Repurchase Request Deadline. A
Tender Offer is expected to end near the end of June, 1998, and every three
months after June, 1998. Prior to the notification of the Repurchase Request
Deadline, the Board will determine in its sole discretion the percentage at
which the Repurchase Offer Amount will be set.

If shareholders tender more than the Repurchase Offer Amount for a given
Tender Offer, the Fund may repurchase an additional amount of Common Shares
of up to 2% of the Common Shares outstanding on the Repurchase Request
Deadline. If the Fund determines not to repurchase more than the Repurchase
Offer Amount, or if the Fund determines to repurchase the additional 2% of
the Common Shares outstanding, but Fund shareholders tender Common Shares in
an amount exceeding the Repurchase Offer Amount plus 2% of the Shares
outstanding on the Repurchase Request Deadline, the Fund will repurchase the
Common Shares on a pro rata basis. The Fund may, however, accept all Common
Shares tendered by shareholders who own less than one hundred Common Shares
and who tender all their Common Shares, before accepting on a pro rata basis
Common Shares tendered by other shareholders.

Notices to Shareholders. Notice of each quarterly Tender Offer (and any
additional discretionary repurchase offers) will be given to each beneficial
owner of Common Shares between twenty-one (21) and forty-two (42) days before
each Repurchase Request Deadline. The notice will contain information you
should consider in deciding whether or not to tender your Common Shares. The
notice will also include detailed instructions on how to tender Common
Shares. The notice will state the Repurchase Offer Amount. The notice will
also identify the dates of the Repurchase Request Deadline, scheduled
Repurchase Pricing Date, and scheduled Repurchase Payment Deadline. The
notice will describe the risk of fluctuation in the Net Asset Value between
the Repurchase Request Deadline and the Repurchase Pricing Date, if such
dates do not coincide, and the possibility that the Fund may use an earlier
Repurchase Pricing Date than the scheduled Repurchase Pricing Date under
certain circumstances. The notice will describe (i) the procedures for you to
tender your Common Shares, (ii) the procedures for the Fund to repurchase
Common Shares on a pro rata basis, (iii) the circumstances in which the Fund
may suspend or postpone a Tender Offer, and (iv) the procedures that will
enable you to withdraw or modify your tenders of Common Shares until the
Repurchase Request Deadline. The notice will set forth the Net Asset Value of
the Common Shares to be repurchased no more than seven days before the date
of notification, and how you may ascertain the Net Asset Value after the
notification date.

Repurchase Price. The current Net Asset Value of the Common Shares is
computed daily and will be computed daily on the five business days before a
Repurchase Request Deadline. The Board has determined that the time at which
the Net Asset Value will be computed will be as of the close of the NYSE. You
may call Investor Services at 1-800-DIAL BEN to learn the Net Asset Value per
share. The notice of the repurchase offer will also provide information
concerning the Net Asset Value per share, such as the Net Asset Value as of a
recent date or a sampling of recent Net Asset Values, and a toll-free number
for information regarding the Tender Offer. During the period from
notification to shareholders of a Tender Offer until the Repurchase Pricing
Date, the Fund will maintain liquid assets equal to 100% of the Repurchase
Offer Amount.

Suspension or Postponement of Repurchase Offer. The Fund will not suspend or
postpone a Tender Offer except if a majority of the Board, including a
majority of the Trustees who are not "interested persons" of the Fund, as
defined in the 1940 Act (the "Independent Trustees"), vote to do so. In
addition, the Fund will delay a Tender Offer only if certain regulatory
requirements described in the notice of the Tender Offer are met. You will
receive notice of any suspension or postponement and a notice of any renewed
repurchase offer after a suspension or postponement.

Special Considerations of Repurchases. As required by the 1940 Act, a
majority of the Board consists of Independent Trustees. In addition, the
Independent Trustees will select and nominate any additional Independent
Trustees.

The Fund may decide in the future to borrow money to finance the repurchase
of Common Shares through Tender Offers. Any borrowings will comply with the
Fund's investment restrictions on borrowing. See "What Are the Risks of
Investing in the Fund? - Effects of Leverage" above, and "Investment
Restrictions" in the SAI.

Because there likely will not be a secondary market for Common Shares,
quarterly and any additional discretionary Tender Offers will provide the
only source of liquidity for shareholders. If a secondary market were to
develop for Common Shares, however, the market price per share of the Common
Shares could, at times, vary from the Net Asset Value per share. A number of
factors could cause these differences, including relative demand and supply
of Common Shares and the performance of the Fund. Tender Offers for Common
Shares at Net Asset Value would be expected to reduce any spread or gap that
might develop between Net Asset Value and market price. However, there is no
guarantee that these actions would cause Common Shares to trade at a market
price that equals or approximates Net Asset Value per share.

Although the Board believes that Tender Offers will generally benefit
shareholders, the Fund's repurchase of Common Shares will decrease the Fund's
total assets. The Fund's expense ratio may also increase as a result of
Tender Offers (assuming the repurchases are not offset by the issuance of
additional Common Shares). In addition, if the Fund decides in the future to
borrow money for the purpose of financing a Tender Offer, interest on the
borrowings will reduce the Fund's net investment income. It is the Board's
announced policy (which the Board may change) not to repurchase Common Shares
in a Tender Offer over the minimum amount required by the Fund's fundamental
policies regarding Tender Offers if the Board determines that the repurchase
is not in the Fund's best interest.

Repurchases through Tender Offers may significantly reduce the asset coverage
of any borrowings or outstanding senior securities. The Fund may not
repurchase Common Shares if the repurchases result in its asset coverage
levels falling below the levels required by the 1940 Act. As a result, in
order to repurchase all Common Shares tendered, the Fund may have to repay
all or part of its outstanding borrowings or redeem all or part of its
outstanding senior securities to maintain the required asset coverage. See
"What Are the Risks of Investing in the Fund? - Effects of Leverage." Also,
the size of any particular Tender Offer may be limited (beyond the minimum
amount required for the Fund's fundamental policies) for the reasons
discussed above or as a result of liquidity concerns.

To complete a Tender Offer for the repurchase of Common Shares, the Fund may
be required to sell portfolio securities. This may cause the Fund to realize
gains or losses at a time when Advisers would otherwise not do so.

The Board will consider other means of providing liquidity for shareholders
if Tender Offers are ineffective in enabling the Fund to repurchase the
amount of Common Shares tendered by shareholders. These actions may include
an evaluation of any secondary market that may exist for Common Shares, and a
determination of whether that market provides liquidity for shareholders. If
the Board determines that a secondary market (if any) failed to provide
liquidity for shareholders, the Board intends to consider all available
options to provide liquidity. One possibility that the Board may consider is
listing the Common Shares on a major domestic stock exchange or arranging for
the quotation of Common Shares on an over-the-counter market. Alternatively,
the Fund might repurchase Common Shares periodically in open-market or
private transactions, provided the Fund can do so on favorable investment
terms. The Board will cause the Fund to take any action the Board deems
necessary or appropriate to provide liquidity for the shareholders in light
of the specific facts and circumstances.

The Fund's repurchase of tendered Common Shares is a taxable event. See "How
Taxation Affects the Fund and Its Shareholders." The Fund will pay all costs
and expenses associated with the making of any Tender Offer. An Early
Withdrawal Charge will be imposed on certain Common Shares that are purchased
after March 31, 1998, that have been held for less than twelve months and are
accepted for repurchase pursuant to a Tender Offer, subject to certain
waivers. See "Early Withdrawal Charge" below.

In accordance with applicable rules of the SEC in effect at the time of the
offer, the Fund may also make other offers to repurchase shares that it has
issued.

Early Withdrawal Charge

The Early Withdrawal Charge will be imposed on the proceeds payable to
shareholders from the Fund's repurchase of certain Common Shares tendered by
shareholders in a Tender Offer. Tendered Common Shares that were purchased by
the shareholder after March 31, 1998, and held by the shareholder for less
than twelve months are subject to the Early Withdrawal Charge. The Early
Withdrawal Charge will not be imposed on Common Shares that were acquired
through the reinvestment of distributions, or Common Shares that were
purchased more than one year prior to repurchase by the Fund in a Tender
Offer. The Early Withdrawal Charge is paid to Distributors and is imposed to
recover offering and distribution expenses incurred by Distributors. The
Early Withdrawal Charge is 1% of the Net Asset Value of the tendered Common
Shares on the Repurchase Pricing Date or the Net Asset Value of the Common
Shares at the time of purchase, whichever is less.

In determining whether an Early Withdrawal Charge is payable, the Fund will
repurchase Common Shares in the following order: first, Common Shares that
have been held more than twelve months or that are otherwise exempt from
imposition of the Early Withdrawal Charge; and second, if there are not
enough of these Common Shares to meet your request, Common Shares subject to
the Early Withdrawal Charge in the order they were purchased.

Waivers of the Early Withdrawal Charge. The Early Withdrawal Charge may be
waived under certain circumstances. Certain distributions, payments or
redemption proceeds that you receive and use to buy Common Shares of the Fund
will exempt those Common Shares from the Early Withdrawal Charge if you
invest them in those Common Shares within 365 days of their repurchase or
redemption date. They include:

1. Dividend and capital gain distributions from any Franklin Templeton
Fund (Class I, Advisor or Class Z only), or from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.

2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund the
Templeton Variable Products Series Fund. You should contact your tax advisor
for information on any tax consequences that may apply.

3. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund (Class I, Advisor or Class Z only) if you were originally subject to an
initial or Contingent Deferred Sales Charge at the time of purchase or
qualified to purchased shares at Net Asset Value and you reinvest the money
in Common Shares. If the proceeds are from the redemption of Class I shares,
you must have held the originally purchased Class I shares for 12 months or
more. This waiver does not apply to exchanges.

The Early Withdrawal Charge will not be waived if the shares were subject
to an Early Withdrawal Charge or a Contingent Deferred Sales Charge when they
were repurchased or redeemed. We will, however, credit your account in Common
Shares, at the current Net Asset Value, in proportion to the amount
reinvested for any Early Withdrawal Charge or Contingent Deferred Sales
Charge paid in connection with the earlier repurchase or redemption, but
barring any other applicable waivers, your Common Shares will be subject to
the Early Withdrawal Charge if you tender them for repurchase and the
repurchase occurs within twelve months.

If you immediately placed your repurchase or redemption proceeds in a
Franklin Bank CD, you may reinvest them as described above. The proceeds must
be reinvested within 365 days from the date the CD matures, including any
rollover.

Also, various individuals and institutions may buy Common Shares of the Fund
without being subject to the Early Withdrawal Charge, including:

1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or other means of electronic data transfer directly
from the bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order;

2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is permissible
and suitable for you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations;

3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs;

4. Registered Securities Dealers and their affiliates, for their
investment accounts only;

5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer;

6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies;

7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer;

8. Accounts managed by the Franklin Templeton Group; and

9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts.

We also waive the Early Withdrawal Charge for:

o Account Fees

o Redemptions following the death of the shareholder or beneficial owner

NOTE: If you qualify for a waiver from the Early Withdrawal Charge, please
fill in the applicable blank on the Transmittal Letter you receive in your
notification of the Tender Offer or, if your Common Shares are held in street
name or nominee name, include a written statement with your instructions to
the broker, dealer or other institution holding such Common Shares for you
regarding the Tender Offer, explaining which privilege described above
applies. If you do not fill in the applicable blank or include this
statement, the Fund cannot guarantee you will receive the waiver.

You may reinvest the proceeds that you receive from the Fund's repurchase of
your Common Shares in a Tender Offer within 365 days of receiving payment
from the Fund. If you paid an Early Withdrawal Charge on the repurchased
Common Shares, your Fund account will be credited in Common Shares, at the
current Net Asset Value, in proportion to the amount reinvested, for such
Early Withdrawal Charge. However, the Common Shares that you purchase through
such reinvestment will be considered, for purposes of the applicability of
any Early Withdrawal Charge, to have a purchase date corresponding to the
reinvestment date.

Exchanges

We offer a wide variety of funds. If you would like, you can move your
investment in Common Shares from your Fund account to an existing or new
account in another Franklin Templeton Fund (an "exchange"). Because it is
technically a sale and purchase of shares, an exchange is a taxable
transaction. You may request an exchange into another Franklin Templeton Fund
in conjunction with submitting your Common Shares for repurchase by the Fund
during a quarterly or discretionary Tender Offer. YOU MAY EXCHANGE YOUR
COMMON SHARES FOR SHARES OF ANOTHER FRANKLIN TEMPLETON FUND ONLY IN
CONJUNCTION WITH TENDER OFFERS. SHAREHOLDERS OF ANOTHER FRANKLIN TEMPLETON
FUND MAY, HOWEVER, EXCHANGE THEIR SHARES FOR COMMON SHARES OF THE FUND ON A
CONTINUOUS BASIS EACH BUSINESS DAY.

Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums.

Exchanges will be completed at Net Asset Value. Shareholders in Class I
shares of other Franklin Templeton Funds may exchange their shares for Common
Shares. We will not assess a Contingent Deferred Sales Charge at the time you
exchange shares of such other funds. Any such shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will be subject to
the Early Withdrawal Charge for any remaining time such shares would have
been subject to the Contingent Deferred Sales Charge up to one year after the
original purchase.

Appropriate written instructions, signed by all account owners, must
accompany your exchange request. When you submit your repurchase request
during a Tender Offer, please be sure to fill in the applicable blank on the
Transmittal Letter you receive in your notification of the Tender Offer, or
if your Common Shares are held in street name or nominee name, include a
written request with your instructions to the broker, dealer or other
institution holding such Common Shares for you regarding the Tender Offer.
You must also include any outstanding share certificates for the Common
Shares you want to exchange.

Exchange Restrictions

Please be aware that the following restrictions apply to exchanges from the
Fund to another Franklin Templeton Fund:

o You may exchange your Common Shares only for Class I shares of another
Franklin Templeton Fund.

o You must have owned the Common Shares that you wish to exchange into
another Franklin Templeton Fund for twelve months before you may exchange
shares.

o YOU MAY EXCHANGE YOUR COMMON SHARES ONLY IN CONJUNCTION WITH A TENDER OFFER.

o The accounts must be identically registered. You may, however, exchange
Common Shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account. Additional procedures may apply. See
"Transaction Procedures and Special Requirements."

o The fund you are exchanging into must be eligible for sale in your state.

o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.

o Currently, the Fund does not allow investment by Market Timers.

Because excessive trading can hurt Fund performance and shareholders, we may
refuse an exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (i) the Fund receives or anticipates
simultaneous orders that may affect the Fund.

Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange Common Shares.

Dividends and Distributions to Shareholders

The Fund declares dividends from its net investment income. The Fund's net
investment income is reduced by interest on the Fund's borrowings, and
dividends or interest on any senior securities issued by the Fund. Dividends
are declared daily (on business days) and paid monthly to holders of Common
Shares. Capital gains, if any, are distributed at least annually to
shareholders, usually in December. Common Shares accrue dividends as long as
they are issued and outstanding (i.e., from the date the Net Asset Value is
determined for the purchase order for the Common Shares to the Repurchase
Pricing Date of the Tender Offer in which the Common Shares are accepted for
repurchase by the Fund).

Under the 1940 Act, the Fund may not incur indebtedness unless the Fund has
asset coverage of at least 300% of the aggregate outstanding indebtedness
immediately after the borrowing. Also, the Fund may not declare any dividend
or other distribution on any class of its capital stock or purchase any of
its capital stock, unless the Fund has, at the time of either the declaration
or the purchase, asset coverage of at least 300% of the aggregate
indebtedness, after deducting the amount of the distribution or purchase
price, as applicable. This latter limitation - and a limitation on the Fund's
ability to declare cash dividends or other distributions on Common Shares
while any shares of preferred stock are outstanding - may impair the Fund's
ability to maintain its qualification for taxation as a regulated investment
company. See "What Are the Risks of Investing in the Fund? - Effects of
Leverage" and "How Taxation Affects the Fund and Its Shareholders."

Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.

If you buy shares shortly before the Fund deducts a capital gain distribution
from its Net Asset Value, please keep in mind that you will receive a portion
of the price you paid back in the form of a taxable distribution.

Dividends and other distributions will be taxable to shareholders whether
they are reinvested in Common Shares or received in cash. See "How Taxation
Affects the Fund and Its Shareholders."

Distribution Options

You may receive your distributions from the Fund in any of these ways:

1. Buy additional Common Shares of the Fund - You may buy additional Common
Shares of the Fund (without imposition of an Early Withdrawal Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional Common
Shares and maintain or increase your earnings base.

2. Buy Class I shares of other Franklin Templeton Funds - You may direct your
distributions to buy Class I shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.

3. Receive distributions in cash - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your Account."

TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN COMMON
SHARES OF THE FUND. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days before the
reinvestment date for us to process the new option.

How Taxation Affects the Fund and Its Shareholders

On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). This new law makes sweeping changes in the Code.
Because many of these changes are complex they are discussed in the SAI.

Taxation of the Fund's Investments. The Fund invests your money primarily in
loans, bonds and other securities that are described in the section "How Does
the Fund Invest Its Assets?" Special tax rules may apply in determining the
income and gains that the Fund earns on its investments. These rules may, in
turn, affect the amount of distributions that the Fund pays to you. These
special tax rules are discussed in the SAI.

Taxation of the Fund. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.

How Does the Fund Earn Income and Gains?

The Fund earns interest (the Fund's "income") on its investments. When the
Fund sells a security for a price that is higher than it paid, it has a gain.
When the Fund sells a security for a price that is lower than it paid, it has
a loss. If the Fund has held the security for more than one year, the gain or
loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the
Fund has a net gain (the Fund's "gains"), that gain will generally be
distributed to you.

Foreign Taxes. Foreign governments may impose taxes on the income and gains
from the Fund's investments in foreign bonds. These taxes will reduce the
amount of the Fund's distributions to you.

Taxation of Shareholders

Distributions. Distributions from the Fund, whether you receive them in cash
or in additional Common Shares of the Fund, are generally subject to income
tax. The Fund will send you a statement in January of the current year that
reflects the amount of ordinary dividends, capital gain distributions and
non-taxable distributions you received from the Fund in the prior year. This
statement will include distributions declared in December and paid to you in
January of the current year, but which are taxable as if paid on December 31
of the prior year. The IRS requires you to report these amounts on your
income tax return for the prior year. The Fund's statement for the prior year
will tell you how much of your capital gain distribution represents 28% rate
gain. The remainder of the capital gain distribution represents 20% rate gain.

What is a Distribution?

As a shareholder, you will receive your share of the Fund's income and gains
on its investments in loans, bonds and other securities. The Fund's income
and short term capital gains are paid to you as ordinary dividends. The
Fund's long-term capital gains are paid to you as capital gain distributions.
If the Fund pays you an amount in excess of its income and gains, this excess
will generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.

Dividends-Received Deduction. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.

Tender Offers and Exchanges. If you tender your Common Shares for repurchase
or if you exchange your Common Shares in the Fund for shares in another
Franklin Templeton Fund, you will generally have a gain or loss that the IRS
requires you to report on your income tax return. If you hold your Common
Shares for six months or less, any loss you have will be treated as a
long-term capital loss to the extent of any capital gain distributions
received by you from the Fund. All or a portion of any loss on the repurchase
or exchange of your Common Shares will be disallowed by the IRS if you
purchase other Common Shares in the Fund within 30 days before or after your
tender of Common Shares for repurchase or exchange.

If, however, you tender less than all of your Common Shares for repurchase or
if you exchange less than all of your Common Shares in the Fund, the
repurchase proceeds may be treated as a deemed dividend distribution. There
is also a risk that nontendering shareholders may be considered to have
received a deemed dividend distribution. The notice provided with each Tender
Offer will discuss any tax consequences.

What is a Tender Offer?

A tender of Common Shares for repurchase is generally considered a sale by
you to the Fund of some or all of your Common Shares in the Fund. The price
per share you receive when you tender your Common Shares for repurchase may
be more or less than the price at which you purchased those Common Shares. An
exchange of Common Shares in the Fund for shares of another Franklin
Templeton Fund is generally treated as a sale by you to the Fund of your
Common Shares and then a purchase of shares of the other fund. When you
tender your Common Shares for repurchase or exchange, you will generally have
a gain or loss, depending upon whether the repurchase proceeds are more or
less than your cost or other basis in the Common Shares. If, however, a
tender of less than all of your Common Shares does not qualify for sale or
exchange treatment, the repurchase proceeds may be treated as a deemed
dividend distribution. Call Fund Information for a free shareholder Tax
Information Handbook if you need more information in calculating the gain or
loss on the redemption or exchange of your shares.

Non-U.S. Investors. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from tender of your Common
Shares for repurchase or exchange. Common Shares of the Fund held by the
estate of a non-U.S. investor may be subject to U.S. estate tax. You may wish
to contact your tax advisor to determine the U.S. and non-U.S. tax
consequences of your investment in the Fund.

State Taxes. Ordinary dividends and capital gain distributions that you
receive from the Fund, and gains arising from tender of your Common Shares of
the Fund for repurchase or exchange will generally be subject to state and
local income tax. The holding of Common Shares of the Fund may also be
subject to state and local intangibles taxes. You may wish to contact your
tax advisor to determine the state and local tax consequences of your
investment in the Fund.

Backup Withholding. When you open an account, IRS regulations require that
you provide your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper tax certifications,
the Fund is required to withhold 31% of all the distributions (including
ordinary dividends and capital gain distributions), and repurchase proceeds
paid to you. The Fund is also required to begin backup withholding on your
account if the IRS instructs the Fund to do so. The Fund reserves the right
not to open your account, or, alternatively, to close your account if you
fail to provide a correct TIN, fail to provide the proper tax certifications,
or the IRS instructs the Fund to begin backup withholding on your account.

What is a Backup Withholding?

Backup withholding occurs when the Fund is required to withhold and pay over
to the IRS 31% of your distributions and repurchase proceeds. You can avoid
backup withholding by providing the Fund with your TIN, and by completing the
tax certifications on your shareholder application that you were asked to
sign when you opened your account. However, if the IRS instructs the Fund to
begin backup withholding, it is required to do so even if you provided the
Fund with your TIN and these tax certifications, and backup withholding will
remain in place until the Fund is instructed by the IRS that it is no longer
required.

This tax discussion is for general information only. Prospective investors
should consult their own tax advisors concerning the federal, state, local or
foreign tax consequences of an investment in the Fund. A more complete
discussion of these rules and related matters is contained in the section
entitled "Additional Information on Distributions and Taxes" in the SAI. The
tax treatment to you of dividends, capital gain distributions, foreign taxes
paid and income taxes withheld is also discussed in a free Franklin Templeton
Tax Information Handbook, which you may request by contacting Fund
Information.

Description of Common Shares

The Fund is authorized to issue an unlimited number of its shares of
beneficial interest, the Common Shares. The Fund's Common Shares may be
offered in multiple classes. Although the Board does not presently intend to
do so, it may classify and reclassify any unissued Common Shares at any time.
For example, the Board is permitted to set or change the preferences,
conversion or other rights, voting powers, restrictions, dividend limitations
or terms and conditions of repurchase of the Fund's Common Shares. The
description of Common Shares and the discussion under "Certain Anti-Takeover
Provisions of the Declaration of Trust" below are subject to the terms of the
Trust's Declaration of Trust and Bylaws.

Common Shares

Common Shares do not have preemptive, conversion, exchange or redemption
rights. Each Common Share has equal voting, dividend, distribution and
liquidation rights. Both the outstanding Common Shares (i.e., the Common
Shares issued prior to the date of this Prospectus) and the Common Shares
offered by this Prospectus (once they are issued) are fully paid and
nonassessable. Shareholders are entitled to one vote per share.

The Fund has noncumulative voting rights. This gives holders of more than 50%
of the Common Shares the ability to elect all the members of the Board. If
this happens, holders of the remaining Common Shares will not be able to
elect anyone to the Board.

As of the date of this Prospectus, Resources and Templeton Investment
Counsel, Inc. (a subsidiary of Resources) together own 100% of the issued and
outstanding Common Shares. As a result, Resources and Templeton Investment
Counsel, Inc. are deemed to control the Fund under the 1940 Act.

The Board has approved the offering of Common Shares that are being offered
by this Prospectus. The 1940 Act requires that Common Shares be sold at a
price equal to the then-current Net Asset Value (not including underwriting
discounts and commissions, which do not apply to the Common Shares). There
are exceptions to this requirement, such as an offering to existing
shareholders or if a majority of the holders of the Fund's outstanding
securities approve it. Common Shares will usually be held in book-entry form.
However, a shareholder may request physical share certificates by writing to
the Fund. See "Transaction Procedures and Special Requirements - Share
Certificates" below.

Certain Anti-Takeover Provisions in the Declaration of Trust

The Declaration of Trust includes provisions that limit (i) the ability of
other entities or persons to acquire control of the Fund and (ii) the Fund's
freedom to engage in certain transactions. These terms may be regarded as
"anti-takeover" provisions. Under Delaware law and the Declaration of Trust,
the affirmative vote of the holders of at least a majority of the Common
Shares entitled to be cast is required to approve the Fund's consolidation
with another business entity, a merger of the Fund with or into another
business trust, a statutory share exchange and the dissolution of the Fund.
In addition, the affirmative vote of the holders of at least 662U3% (which is
higher than the vote required under Delaware law or the 1940 Act) of the
Fund's outstanding Common Shares is required generally to authorize any of
the following transactions:

o merger, consolidation or statutory share exchange of the Fund with or into
any other business trust;

o issuance of any securities of the Fund to any person or entity for cash;

o sale, lease or exchange of all or any substantial part of the Fund's assets
to any entity or person (except assets having an aggregate market value of
less than $1,000,000); or

o sale, lease or exchange to the Fund, in exchange for Fund securities, of
any assets of any entity or person (except assets having an aggregate fair
market value of less than $1,000,000).

However, this type of vote is not required when, under certain conditions,
the Board approves the transaction. Although in certain cases involving
merger, consolidation or statutory share exchange, the affirmative vote of
the holders of a majority of the Fund's outstanding Common Shares would
nevertheless be required. The Declaration of Trust is on file with the SEC
and you may request a copy from the SEC for a more detailed explanation of
these terms.

The provisions of the Declaration of Trust described above and the Fund's
right to make a Tender Offer for its Common Shares may deprive shareholders
of opportunities to sell their Common Shares at a premium over Net Asset
Value. This is because a third party will be discouraged from attempting to
obtain control of the Fund by making a tender offer for shares of the Trust
or similar transaction. The overall impact of these provisions is to reduce
the possibility of a merger or of a shareholder that is the beneficial owner
of more than 5% of the outstanding shares of the Fund assuming control of the
Fund either directly or indirectly through affiliates. These terms, at the
same time, present advantages. The provisions likely will require persons
seeking control of the Fund to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Fund's management,
investment goal and policies. The Board has considered these anti-takeover
provisions and concluded that they are in the best interest of the Fund and
its shareholders.

Net Asset Value and Shares Outstanding

The following table sets forth, since the commencement of the Fund's
investment operations, for the quarterly periods ending on the dates set
forth below, the high and low Net Asset Value per share for Common Shares
during the periods:

QUARTERLY PERIOD ENDING HIGH LOW

October 31, 1997 $10.02 $10.00
January 31, 1998 $10.03 $10.01

As of March 10, 1998, the Net Asset Value per share for Common Shares was
$10.04.

The following table sets forth certain information with respect to Common
Shares as of March 10, 1998:
<TABLE>
<CAPTION>

(4) AMOUNT OUTSTANDING
(3) AMOUNT HELD BY EXCLUSIVE OF AMOUNT
(1) TITLE OF CLASS (2) AMOUNT AUTHORIZED FUND FOR OWN ACCOUNT SHOWN UNDER (3)

<S> <C> <C>
Common Shares of beneficial interest Unlimited 0 5,000,000

</TABLE>
Transaction Procedures
and Special Requirements

Share Price

You buy Common Shares at the Net Asset Value per share. The Net Asset Value
we use when you buy Common Shares is the one next calculated after we receive
your purchase request in proper form. If you buy Common Shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. The Net Asset Value we use when you tender Common
Shares for repurchase by the Fund is the Net Asset Value per share determined
as of the scheduled close of the NYSE on the Repurchase Pricing Date.

Neither Distributors nor Securities Dealers are permitted to withhold placing
orders to benefit themselves by a price change. Distributors is required to
advise the Fund promptly of all purchase orders and cause payments for Common
Shares to be delivered promptly to the Fund.

How and When Shares are Priced

The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time on each day the NYSE is open.

To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of Common Shares outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.

Written Instructions

Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:

o Your name,

o The Fund's name,

o A description of the request,

o For exchanges, the name of the fund you are exchanging into,

o Your account number,

o The dollar amount or number of Common Shares, and

o A telephone number where we may reach you during the day, or in the evening
if preferred.

Written instructions with respect to your tender of Common Shares in a Tender
Offer must be completed in the manner described, and on the appropriate forms
included, in the notification to shareholders of the Tender Offer.

Signature Guarantees

For our mutual protection, we require a signature guarantee in the following
situations:

1) You wish to sell over $50,000 worth of Common Shares,

2) You want the proceeds to be paid to someone other than the registered
owners,

3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,

4) We receive instructions from an agent, not the registered owners, or

5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.

A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A notarized signature is not sufficient.

Share Certificates

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

Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange the Common Shares represented by the share certificates.
The share certificates should be properly endorsed. You can do this either by
signing the back of the certificate or by completing a share assignment form.
For your protection, you may prefer to complete a share assignment form and
to send the certificate and assignment form in separate envelopes.

Account Registrations and Required Documents

When you open an account, we need you to tell us how you want your Common
Shares registered. How you register your account will affect your ownership
rights and ability to make certain transactions. If you have questions about
how to register your account, you should consult your investment
representative or legal advisor. Please keep the following information in
mind when registering your account.

Joint Ownership. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.

Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.

Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.

Required Documents. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.

TYPE OF ACCOUNT DOCUMENTS REQUIRED

Corporation Corporate Resolution

Partnership 1. The pages from the partnership agreement that identify
the general partners, or

2. A certification for a partnership agreement

Trust 1. The pages from the trust document that identify the
trustees, or

2. A certification for trust

Street or Nominee Accounts. If you have Common Shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
Common Shares to the street or nominee name account of another Securities
Dealer. Both dealers must have an agreement with Distributors or we cannot
process the transfer. Contact your Securities Dealer to initiate the
transfer. We will process the transfer after we receive authorization in
proper form from your delivering Securities Dealer. Accounts may be
transferred electronically through the NSCC. For accounts registered in
street or nominee name, we may take instructions directly from the Securities
Dealer or your nominee.

Important Information If You Have an Investment Representative

If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept electronic instructions directly from your
dealer or representative, including instructions to exchange or redeem your
shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund.

Services to Help You Manage Your Account

Automatic Investment Plan

Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional Common Shares. If
you are interested in this program, please refer to the automatic investment
plan application included with this Prospectus or contact your investment
representative. The Net Asset Value and, if any, the market value, of the
Fund's Common Shares may fluctuate and an automatic investment plan such as
this will not assure a profit or protect against a loss. You may discontinue
this program at any time by notifying Investor Services by mail or phone.

Cumulative Quantity Discounts

You may include the cost or current value (whichever is higher) of your
Common Shares when determining if you may buy Class I shares of another
Franklin Templeton Fund at a discount. You may also include the cost or
current value (whichever is higher) of your Common Shares towards the
completion of a Letter of Intent established in connection with the purchase
of Class I shares of another Franklin Templeton Fund at a discount.

Electronic Fund Transfers

You may choose to have dividend and capital gain distributions from the Fund
sent directly to a checking account. If the checking account is with a bank
that is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.

TeleFACTS(R)

From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:

o obtain information about your account;

o obtain price and performance information about any Franklin Templeton Fund;
or

o request duplicate statements and deposit slips for Franklin Templeton
accounts.

You will need the Fund's code number to use TeleFACTS(R). The Fund's code
number is 020.

Statements and Reports to Shareholders

We will send you the following statements and reports on a regular basis:

o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.

o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.

Institutional Accounts

Additional methods of buying or exchanging Common Shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.

Availability of These Services

The services above are available to most shareholders. If, however, your
Common Shares are held by a financial institution, in a street name account,
or networked through the NSCC, the Fund may not be able to offer these
services directly to you. Please contact your investment representative.

What If I Have Questions About My Account?

If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.

HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)

Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.

Additional General Information

Legal Matters. Certain legal matters in connection with the Common Shares
offered by this Prospectus will be passed on for the Fund by Stradley, Ronon,
Stevens & Young, LLP.

Further Information. Further information concerning Common Shares and the
Fund may be found in the Fund's Registration Statement, filed electronically
with the SEC.

Table of Contents of Statement of Additional Information

How Does the Fund Invest Its Assets? ............. 2
What Are the Risks of Investing in the Fund? ..... 5
Investment Restrictions .......................... 5
Officers and Trustees ............................ 6
Investment Management and Other Services ......... 10
How Does the Fund Buy Securities for Its Portfolio? 11
How Do I Buy and Exchange Common Shares? ......... 12
How Are Common Shares Valued? .................... 12
Additional Information on Distributions and Taxes 13
The Fund's Underwriter ........................... 17
How Does the Fund Measure Performance? ........... 17
Miscellaneous Information ........................ 20
Glossary - Useful Terms and Definitions .......... 21
Financial Statements ............................. 22

GLOSSARY

Useful Terms and Definitions

1940 Act - The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Fund.

Advisers - Franklin Advisers Inc., the Fund's investment manager

Agent Bank - A Lender that administers a Corporate Loan on behalf of all
Lenders on a Corporate Loan. The Agent Bank typically is responsible for the
collection of principal and interest and fee payments from the Borrower, and
distributes these payments to the other Lenders. The Agent Bank is usually
responsible for enforcing the terms of the Corporate Loan. The Agent Bank is
compensated for these services.

Assignment - An interest in a portion of a Corporate Loan. The purchaser of
an Assignment steps into the shoes of the original Lender. An Assignment from
a Lender gives the Fund the right to receive payments directly from the
Borrower and to enforce its rights as a Lender directly against the Borrower.

Board - The Board of Trustees of the Trust

Borrower - A corporation that borrows money under a Corporate Loan or issues
Corporate Debt Securities. The Borrower is obligated to make interest and
principal payments to the Lender of a Corporate Loan or to the holder of a
Corporate Debt Security.

CD - Certificate of deposit

CD Rate - The interest rate currently available on certificates of deposit

Class I, Class II, Advisor Class and Class Z - Certain funds in the Franklin
Templeton Funds offer multiple classes of shares. The different classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans.

Code - Internal Revenue Code of 1986, as amended

Common Shares - Shares of beneficial interest in the Fund

Contingent Deferred Sales Charge - A sales charge of 1% that may apply if you
sell Class I shares of a Franklin Templeton Fund within twelve months.

Corporate Debt Securities - Obligations issued by corporations in return for
investments by securityholders. In exchange for their investment in the
corporation, securityholders receive income from the corporation and the
return of their investments. The corporation typically pledges to the
securityholders collateral which will become the property of the
securityholders in case the corporation Defaults in paying interest or in
repaying the amount of the investments to securityholders.

Corporate Loan - A loan made to a corporation. In return, the corporation
makes payments of interest and principal to the Lenders. The corporation
typically pledges collateral which becomes the property of the Lenders, in
case the corporation Defaults in paying interest or principal on the loan.
Corporate Loans include Participation Interests in Corporate Loans and
Assignments of Corporate Loans.

Declaration of Trust - The Agreement and Declaration of Trust of the Trust,
which is the basic charter document of the Fund.

Default - Failure to pay an obligation that is owed. For example, a Borrower
that has Defaulted on a Corporate Loan has failed to make interest or
principal payments that were due to the Lender.

Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."

Early Withdrawal Charge - A charge of 1% that may apply to Common Shares
purchased after March 31, 1998, and that are repurchased by the Fund in a Tender
Offer within twelve months of the purchase of the Common Shares. Certain waivers
of this charge may apply.

Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the Fund is a legally permissible investment.

Equity Securities - Securities which entitle the holder to participate in a
company's general operating success or failure. Public trading for Equity
Securities is typically a stock exchange but trading can also take place
between broker-dealers. Equity Securities generally take the form of common
stock or preferred stock.

Floating Interest Rate(s) - One of the following: (i) a variable interest
rate which adjusts to a base interest rate, such as LIBOR or the CD Rate on
set dates; or (ii) an interest rate that floats at a margin above a generally
recognized base lending interest rate such as the Prime Rate of a designated
U.S. bank.

Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund

Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries

Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds

FT Services - Franklin Templeton Services, Inc., the Fund's administrator

Fund - The sole investment portfolio or series of the Trust

Illiquid - Illiquid property or securities cannot be sold within seven days,
in the ordinary course of business, at approximately the valued price.

Interest Coverage Ratio - A ratio which is used to show how many times
interest has been earned. This is of use particularly to long-term lenders.
It is the sum of the pre-tax net income and interest expense, divided by the
interest expense.

Intermediate Participant - A Lender, Participant or Agent Bank interposed
between the Fund and a Borrower, when the Fund invests in a Corporate Loan
through a Participation Interest or an Assignment.

Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent

IRS - Internal Revenue Service

Lender - The party that loans money to a corporation under a Corporate Loan.
A Corporate Loan in which the Fund may invest is often negotiated and
structured by a group of Lenders. The Lenders typically consist of commercial
banks, thrift institutions, insurance companies, finance companies or other
financial institutions. The Fund acts as a Lender when it directly invests in
a Corporate Loan or when it purchases an Assignment.

Leverage Ratio - A ratio of a company's debt to equity. This ratio is
commonly used by lenders to determine the amounts they are willing to lend to
a borrower.

LIBOR - The London InterBank Offered Rate, the interest rate that the most
creditworthy international banks charge each other for large loans.

Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.

Moody's - Moody's Investors Service, Inc.

NASD - National Association of Securities Dealers, Inc.

Net Asset Value (NAV) - The net asset value of a mutual fund is determined by
deducting the fund's liabilities from the total assets of the fund. The net
asset value per share is determined by dividing the net asset value of the
fund by the number of shares outstanding.

NRSRO - a nationally recognized statistical rating organization, such as S&P
or Moody's

NSCC - National Securities Clearing Corporation

NYSE - New York Stock Exchange

Participant - A holder of a Participation Interest in a Corporate Loan

Participation Interest - An interest which represents a fractional interest
in a Corporate Loan. The Fund may acquire Participation Interests from a
Lender or other holders of Participation Interests.

Prime Rate - The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers

Repurchase Payment Deadline - The date by which the Fund must pay
shareholders for Common Shares repurchased in a Tender Offer, as stated in
the shareholder notification. The Repurchase Payment Deadline may be no later
than seven days after the Repurchase Pricing Date.

Repurchase Pricing Date - The date on or after the Repurchase Request
Deadline on which the Fund determines the Net Asset Value applicable to the
repurchase of Common Shares in a Tender Offer, as scheduled in the
shareholder notification or, under certain circumstances, an earlier date
than the scheduled date, but not earlier than the Repurchase Request
Deadline. As set by fundamental policy of the Fund, the Repurchase Pricing
Date must occur not later than the fourteenth day after the Repurchase
Request Deadline or the next business day, if the fourteenth day is not a
business day.

Repurchase Request Deadline - The date by which Investor Services, on behalf
of the Fund, must receive the shareholders' requests for repurchase of their
Common Shares in conjunction with a Tender Offer, as stated in the
shareholder notification.

Resources - Franklin Resources, Inc.

SAI - Statement of Additional Information

S&P - Standard & Poor's Corporation

SEC - U.S. Securities and Exchange Commission

Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.

TeleFACTS(R) - Franklin Templeton's automated customer servicing system

Tender Offers - The quarterly offers by the Fund to repurchase a designated
percentage of the outstanding Common Shares owned by the Fund's shareholders.
Once every two years the Board may determine in its sole discretion to have
one additional Tender Offer in addition to the regular quarterly Tender
Offers.

Trust - the Franklin Floating Rate Trust

U.S. - United States

Unsecured Corporate Loans and Unsecured Corporate Debt Securities - Corporate
Loans and Corporate Debt Securities that are not backed by collateral. Thus,
if a Borrower Defaults on an Unsecured Corporate Loan or Unsecured Corporate
Debt Security, it is unlikely that the Fund would be able to recover the full
amount of the principal and interest due.

Warrant - A security that gives the holder the right, but not the obligation,
to subscribe for newly created securities of the issuer or a related company
at a fixed price either at a certain date or during a set period.

We/Our/Us - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.

APPENDIX

Description of Ratings

Corporate Bond Ratings

Moody's

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

Aa - Bonds rated Aa are judged to be of 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 which 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
which 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. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.

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

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

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

Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such 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.

S&P

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

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

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

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

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

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

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

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

Commercial Paper Ratings

Moody's

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, 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.
However, the relative degree of safety 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.

FRANKLIN
FLOATING RATE
TRUST

STATEMENT OF
ADDITIONAL INFORMATION
APRIL 1, 1998

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

TABLE OF CONTENTS

How Does the Fund Invest Its Assets? ............................. 2
What Are the Risks
of Investing in the Fund? ....................................... 5

Investment Restrictions .......................................... 5

Officers and Trustees ............................................ 6

Investment Management
and Other Services .............................................. 10

How Does the Fund Buy
Securities for Its Portfolio? ................................... 11

How Do I Buy
and Exchange Common Shares? ..................................... 12

How Are Common Shares Valued? .................................... 12

Additional Information
on Distributions and Taxes ...................................... 13

The Fund's Underwriter ........................................... 17

How Does the Fund
Measure Performance? ............................................ 17

Miscellaneous Information ........................................ 20

Glossary - Useful Terms and Definitions .......................... 21

Financial Statements ............................................. 22

When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."

Franklin Floating Rate Trust (the "Fund") is a non-diversified closed-end
management investment company. Its goal is to provide as high a level of
current income and preservation of capital as is consistent with investment
primarily in senior secured Corporate Loans and Corporate Debt Securities
with Floating Interest Rates. Franklin Advisers, Inc., the Fund's investment
manager, uses its credit analysis to select suitable investments for the
Fund. The Fund seeks to achieve its goal by investing at least 65% of its
total assets in such loans, interests, assignments or debt securities that
are rated B or higher by an NRSRO or, if unrated, determined to be of
comparable quality by Advisers.

The Prospectus, dated April 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the Fund.
For a free copy, call 1-800/DIAL BEN.

THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.

HOW DOES THE FUND INVEST ITS ASSETS?

The following gives more detailed information about the Fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "What Kinds of Securities Does the Fund
Purchase?" in the Prospectus.

INVESTMENT GOAL AND POLICIES The Fund's investment goal is described in the
Prospectus in the section entitled "What Kinds of Securities Does The Fund
Purchase?"

RESTRICTIVE COVENANTS The Borrower under a Corporate Loan and the issuer of a
Corporate Debt Security must comply with various restrictive covenants
contained in any Corporate Loan agreement between the Borrower and the
lending syndicate or in any trust indenture or comparable document in
connection with a Corporate Debt Security. A restrictive covenant is a
promise by the Borrower to not take certain actions which may impair the
rights of Lenders. These covenants, in addition to requiring the scheduled
payment of interest and principal, may include restrictions on dividend
payments and other distributions to shareholders, provisions requiring the
Borrower to maintain specific financial ratios or relationships and limits on
total debt. In addition, a covenant may require the Borrower to prepay the
Corporate Loan or Corporate Debt Security with any excess cash flow. Excess
cash flow generally includes net cash flow after scheduled debt service
payments and permitted capital expenditures, among other things, as well as
the proceeds from asset dispositions or sales of securities. A breach of a
covenant (after giving effect to any cure period) in a Corporate Loan
agreement which is not waived by the Agent Bank and the lending syndicate
normally is an event of acceleration. This means that the Agent Bank has the
right to demand immediate repayment in full of the outstanding Corporate
Loan. Acceleration may also occur in the case of the breach of a covenant in
a Corporate Debt Security document.

DESCRIPTION OF FLOATING OR VARIABLE INTEREST RATES The rate of interest
payable on floating or variable rate Corporate Loans or Corporate Debt
Securities is established as the sum of a base lending rate plus a specified
margin. These base lending rates generally are LIBOR, the Prime Rate of a
designated U.S. bank, the CD Rate, or another base lending rate used by
commercial lenders. The interest rate on Prime Rate-based Corporate Loans and
Corporate Debt Securities floats daily as the Prime Rate changes, while the
interest rate on LIBOR-based and CD-based Corporate Loans and Corporate Debt
Securities is reset periodically, typically between 30 days and one year.

Certain of the floating or variable rate Corporate Loans and Corporate Debt
Securities in which the Fund will invest may permit the Borrower to select an
interest rate reset period of up to one year. A portion of the Fund's
investments may consist of Corporate Loans with interest rates that are fixed
for the term of the loan. Investment in Corporate Loans and Corporate Debt
Securities with longer interest rate reset periods or fixed interest rates
may increase fluctuations in the Fund's Net Asset Value as a result of
changes in interest rates. However the Fund may attempt to hedge all of its
fixed rate Corporate Loans and Corporate Debt Securities against interest
rate fluctuations by entering into interest rate swap transactions. The Fund
also will attempt to maintain a portfolio of Corporate Loans and Corporate
Debt Securities that will have a dollar weighted average period to the next
interest rate adjustment of no more than 90 days.

Corporate Loans and Corporate Debt Securities traditionally have been
structured so that Borrowers pay higher margins when they elect LIBOR and
CD-based borrower options, in order to permit Lenders to obtain generally
consistent yields on Corporate Loans and Corporate Debt Securities,
regardless of whether Borrowers select the LIBOR or CD-based options, or the
Prime-based option. In recent years, however, the differential between the
lower LIBOR and CD base rates and the higher Prime Rate base rates prevailing
in the commercial bank markets has widened to the point where the higher
margins paid by Borrowers for LIBOR and CD-based pricing options do not
currently compensate for the differential between the Prime Rate and the
LIBOR and CD base rates. Consequently, Borrowers have increasingly selected
the LIBOR-based pricing option, resulting in a yield on Corporate Loans and
Corporate Debt Securities that is consistently lower than the yield available
from the Prime Rate-based pricing option. This trend will significantly limit
the ability of the Fund to achieve a net return to shareholders that
consistently approximates the average published Prime Rate of leading U.S.
banks. As of the date of this SAI, Advisers cannot predict any significant
change in this market trend.

FOREIGN CURRENCY SWAPS Foreign currency swaps involve the exchange by the
Fund with another party of the right to receive the foreign currency (paid
under a Corporate Loan or Corporate Debt Security) for the right to receive
U.S. dollars. The Fund will enter into a foreign currency swap only if, at
the time of entering into the transaction, the outstanding debt obligations
of the counterparty are investment grade. This means they are rated BBB or
A-3 or higher by S&P or Baa or P-3 or higher by Moody's, or determined by
Advisers to be of comparable quality. The amounts of U.S. dollar payments to
be received by the Fund and the foreign currency payments to be received by
the counterparty are fixed at the time the swap arrangement is entered into.
This locks in the Fund's right to receive payments under the loan in a
predetermined amount of U.S. dollars. In this way, the swap protects the Fund
from fluctuations in exchange rates.

If there is a counterparty default, the Fund will have contractual remedies
pursuant to the swap arrangements. However, if a replacement swap arrangement
is unavailable or if the Fund is unable to recover damages from the
defaulting counterparty, the Fund's right to foreign currency payments under
the loan will be subject to fluctuations based upon changes in the applicable
exchange rate. If the Borrower defaults on or prepays the underlying
Corporate Loan or Corporate Debt Security, the Fund may be required pursuant
to the swap arrangements to compensate the counterparty for fluctuations in
exchange rates adverse to the counterparty. In the event of such a default or
prepayment, the Fund will set aside in a segregated account an amount of cash
or high-grade liquid debt securities at least equal to the amount of
compensation that must be paid to the counterparty.

REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with
respect to its permitted investments. The Fund currently intends to do so
only with financial institutions such as broker-dealers and banks that are
deemed creditworthy by Advisers. In a repurchase agreement transaction, the
Fund purchases a U.S. government security from a bank or broker-dealer. The
agreement provides that the security must be sold back to the bank or
broker-dealer at an agreed-upon price and date. The repurchase date usually
is within seven days of the original purchase date. The bank or broker-dealer
must transfer to the Fund's account collateral consisting of securities with
an initial value, including any earned but unpaid interest, equal to at least
102% of the dollar amount invested by the Fund in each repurchase agreement.
The value of the underlying U.S. government security is determined daily so
that the Fund has collateral of at least 100% of the value of the repurchase
agreement.

A repurchase agreement is considered to be a loan by the Fund under the 1940
Act. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Fund might also incur costs in liquidating the collateral. In the event
of the bankruptcy (or other insolvency proceeding) of the other party to a
repurchase agreement, the Fund might experience delays in recovering its
cash. Also, the Fund could experience a loss to the extent that the value of
these securities falls below the purchase price.

SECURITIES LENDING The Fund may from time to time lend its portfolio
securities to qualified securities dealers or other institutional investors.
However, the Fund will limit such loans to a value not exceeding 331/3% of
its total assets. This limitation is a fundamental policy, which means it may
not be changed without the approval of the holders of a majority of the
Fund's Common Shares. For each loan, the Fund must receive in return
collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest. The
value of the collateral and loaned securities is determined daily so that the
Fund has collateral coverage of at least 100%. The collateral shall consist
of cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit.

If cash collateral is received by the Fund, it is invested in short-term
money market securities, and the Fund retains a portion of the yield paid on
such investment. On the other hand, if securities are delivered to the Fund
as collateral, the Fund and the borrower negotiate a premium to be paid to
the Fund for lending its portfolio securities. In either event, the total
yield on the Fund is increased by loans of its securities. While a security
is on loan, the Fund continues to receive all dividends or interest on the
loaned security. Also, the Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights, such as voting
rights and subscription rights. Such loans may be terminated at any time. The
Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS There is no limit on the amount
of assets which the Fund may invest in on a when-issued basis. For a general
description of "when-issued" and "delayed delivery" transactions, see the
Prospectus.

No income accrues to the Fund prior to the date the Fund actually takes
delivery of the interests or securities. These interests and securities are
subject to market fluctuation before delivery to the Fund. The value of the
interests or securities at delivery may be more or less than their purchase
price. By the time delivery occurs, better yields may be generally available
than the yields on the interests or securities obtained pursuant to such
transactions.

In when-issued and delayed delivery transactions, the Fund relies on the
buyer or seller, as the case may be, to complete the transaction. Therefore,
if the other party fails to complete the transaction the Fund may miss an
advantageous price or yield. When the Fund is the buyer in such a
transaction, it will maintain, in a separate account, an amount equal to the
purchase price, until it makes payment. This amount will be in the form of
cash or other liquid assets. The Fund will generally make commitments to
purchase such interests or securities on a when-issued basis with the
intention of acquiring such interests or securities. However, the Fund may
find it advisable to sell them before the settlement date. The Fund will not
engage in when-issued and delayed delivery transactions for the purpose of
investment leverage.

INTEREST RATE SWAPS The Fund may enter into interest rate swaps in order to
limit the exposure of its fixed rate Corporate Loans and Corporate Debt
Securities against fluctuations in interest rates. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. For example, if the Fund holds a
Corporate Loan or Corporate Debt Security with an interest rate that is reset
only once each year, it may swap the right to receive interest at this fixed
rate for the right to receive interest at a rate that is reset every week.
Thus, if interest rates rise, the increased interest received by the Fund
would offset a decline in the value of the Corporate Loan or Corporate Debt
Security. On the other hand, if interest rates fall, the Fund's benefit from
falling interest rates would be decreased.

To the extent that the Fund enters into these transactions for hedging
purposes, Advisers believes that such obligations do not constitute senior
securities under the 1940 Act. Accordingly, the Fund will not include hedging
transactions in its limitation on borrowing. The Fund usually will enter into
interest rate swaps on a net basis. This means that the Fund will receive or
pay, as the case may be, only the difference between the two payments. The
net amount of the Fund's obligations over its entitlements, if any, with
respect to each interest rate swap will be accrued on a daily basis. The Fund
will then set aside in a segregated account an amount at least equal to the
accrued net obligation. If the interest rate swap transaction is entered into
on other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the Fund will segregate an amount equal to the
Fund's full obligations.

The Fund will not enter into any interest rate hedging transaction unless
Advisers considers the credit quality of the unsecured senior debt or the
claims-paying ability of the other party to be investment grade. If there is
a default by the counterparty, to such a transaction, bankruptcy and
insolvency laws could affect the Fund's rights as a creditor. In recent
years, the swap market has grown substantially and many portions of the swap
market have become relatively liquid, in comparison with other similar
instruments traded in the interbank market. However, there can be no
assurance that the Fund will be able to terminate an interest rate swap or be
able to sell or offset interest rate caps or floors that it has purchased.

The use of interest rate hedges is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio transactions. If Advisers is incorrect in its forecasts of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would have been
if these investment techniques were not used.

Except as noted above, there is no limit on the amount of interest rate
hedging transactions that the Fund may enter. The risk of loss on interest
rate hedges is limited to the net amount of interest payments that the Fund
is obligated to make. If the Corporate Loan underlying an interest rate swap
is prepaid and the Fund continues to be obligated to make payments to the
swap counterparty, the Fund would have to make such payments from another
source. If the other party to an interest rate swap defaults, the Fund's risk
of loss consists of the net amount of interest payments that the Fund is
entitled to receive. Since interest rate transactions are individually
negotiated, Advisers expects to achieve an acceptable degree of correlation
between the Fund's rights to receive interest on Participation Interests and
its rights and obligations to receive and pay interest pursuant to interest
rate swaps.

WHAT ARE THE RISKS OF INVESTING IN THE FUND?

The following provides more detailed information about some of the Fund's
risks. You should read it together with the section in the Prospectus
entitled "What Are the Risks of Investing in the Fund?"

COLLATERAL IMPAIRMENT Corporate Loans and Corporate Debt Securities
(excluding Unsecured Corporate Loans and Unsecured Corporate Debt Securities)
will be secured unless (i) the Fund's security interest in the collateral is
invalidated for any reason by a court or (ii) the collateral is fully
released with the consent of the Agent Bank and Lenders or under the terms of
a loan agreement as the creditworthiness of the Borrower improves.

There are risks which may cause the collateral to be insufficient in the
event that a Borrower defaults on a loan. Although the terms of Corporate
Loans and Corporate Debt Securities require that collateral be maintained at
a value at least equal to 100% of the amount of such loan or debt security,
the value of the collateral may decline subsequent to the Fund's investment.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that
this stock will decline in value. Such a decline, whether as a result of
bankruptcy proceedings or otherwise, could cause the Corporate Loan or
Corporate Debt Security to be under collateralized or unsecured. In most
credit agreements, there is no formal requirement to pledge additional
collateral.

There may be temporary periods when the principal asset held by a Borrower is
the stock of a related company, which may not legally be pledged to secure a
Corporate Loan or Corporate Debt Security. On occasions when the stock cannot
be pledged, the Corporate Loan or Corporate Debt Security will be temporarily
unsecured until the stock can be pledged or is exchanged for or replaced by
other assets, which will be pledged as security for the Corporate Loan or
Corporate Debt Security. However, the Borrower's ability to dispose of such
securities, other than in connection with a pledge or replacement, will be
strictly limited for the protection of the holders of Corporate Loans.

If a Borrower becomes involved in bankruptcy proceedings, the Fund's access
to the collateral may be limited by bankruptcy and other laws. A court may
find that the Fund's interest in the collateral is invalid or it may find
that other creditors of the Borrower should be paid before the Fund. Such
action by a court could be based on a number of legal theories. For example,
faulty loan documentation or faulty official filings could lead to an
invalidation by a court. Corporate Loans or Corporate Debt Securities made in
connection with a highly leveraged transaction are at increased risk. In the
event that a court reaches such a decision, it is unlikely that the Fund
would be able to recover the full amount of the principal and interest due on
the Corporate Loan or Corporate Debt Security.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions as fundamental policies.
Prior to issuance of any preferred stock, these restrictions may not be
changed without the approval of a majority of the Fund's outstanding Common
Shares. Under the 1940 Act, this means the lesser of (i) 67% of the Common
Shares represented at a meeting at which more than 50% of the outstanding
Common Shares are represented or (ii) more than 50% of the outstanding Common
Shares. Following the issuance of a class of preferred stock, the following
investment restrictions may not be changed without the approval of a majority
of the outstanding Common Shares and of the preferred stock, voting together
as a class, and the approval of a majority of the outstanding shares of
preferred stock, voting separately by class. None of the following
restrictions shall be construed to prevent the Fund from investing all of its
assets in another management investment company with an investment goal,
policies and restrictions that are substantially the same as the investment
goal, policies and restrictions of the Fund. The Fund MAY NOT:

1. Borrow money or issue senior securities, except as permitted by Section 18
of the 1940 Act and except to the extent that the Fund's investment in
foreign currency swaps, when-issued and delayed delivery securities, interest
rate hedging transactions and Corporate Loans in connection with revolving
credit facilities may be deemed senior securities.

2. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the 1933 Act in selling portfolio securities.

3. Make loans to other persons, except that the Fund may invest in loans
(including Assignments and Participation Interests, and including secured or
unsecured corporate loans), purchase debt securities, enter into repurchase
agreements, and lend its portfolio securities.

4. Invest more than 25% of its total assets in the securities of issuers in
any one industry; provided that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities; and provided further that the Fund will invest more
than 25% and may invest up to 100% of its assets in securities of issuers in
the industry group consisting of financial institutions and their holding
companies, including commercial banks, thrift institutions, insurance
companies and finance companies. For purposes of this restriction, the term
"issuer" includes the Borrower, the Agent Bank and any Intermediate
Participant (as defined under "What Kinds of Securities Does the Fund
Purchase? - Description of Participation Interests and Assignments" in the
Prospectus).

5. Purchase any securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of portfolio securities. The purchase of Corporate Loans, Corporate
Debt Securities, and other investment assets with the proceeds of a permitted
borrowing or securities offering will not be deemed to be the purchase of
securities on margin.

6. Buy or sell real estate (other than (i) interests in real estate
investment trusts, (ii) loans or securities that are secured, directly or
indirectly, by real estate, or (iii) securities issued by companies that
invest or deal in real estate), provided that the Fund may hold for prompt
sale and sell real estate or interests in real estate to which the Fund may
gain an ownership interest through the forfeiture of collateral securing
loans or debt securities held by the Fund.

7. Buy or sell commodities or commodity contracts (other than financial
futures), provided that forward foreign currency exchange contracts shall not
be deemed to be commodity contracts.

If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions, except that with
respect to borrowing, if the borrowing exceeds the Fund's percentage
restriction on borrowing, the Fund will reduce its borrowing within three
days to no more than the percentage restriction.

OFFICERS AND TRUSTEES

The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).

POSITIONS AND
NAME, AGE OFFICES WITH PRINCIPAL OCCUPATION
AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS

Frank H. Abbott, III (77) Trustee
1045 Sansome Street
San Francisco, CA 94111

President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.

Harris J. Ashton (65) Trustee
191 Clapboard Ridge
Greenwich, CT 06830

Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 52 of the
investment companies in the Franklin Templeton Group of Funds; and formerly
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).

S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945

Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 54 of the investment companies in the Franklin
Templeton Group of Funds; and formerly Director, General Host Corporation
(nursery and craft centers).

Edith E. Holiday (46) Trustee
3239 38th Street, N.W.
Washington, DC 20016

Director (1993-present) of Amerada Hess Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present); trustee or director of 25 of the investment companies in the
Franklin Templeton Group of Funds; formerly, chairman (1995-1997) and trustee
(1993-1997) of National Child Research Center, assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), general counsel to the
United States Treasury Department (1989-1990) and counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989).

*Charles B. Johnson (65) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee

President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc. officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).

*Rupert H. Johnson, Jr. (57) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404

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

Frank W.T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014

General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.

Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817

Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.

Harmon E. Burns (53) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of the investment
companies in the Franklin Templeton Group of Funds.

Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer

Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.

Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.

Diomedes Loo-Tam (59) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer

Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.

Chauncey F. Lufkin (40) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Employee of Franklin Advisers, Inc. since 1990; formerly, an employee of
Manufacturers Hanover Trust Co. and Security Pacific National Bank; and
officer of two of the investment companies in the Franklin Templeton Group of
Funds.

Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.

The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not
currently paid by the Fund although they may receive fees in the future. As
shown above, the nonaffiliated Board members also serve as directors or
trustees of other investment companies in the Franklin Templeton Group of
Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members
by other funds in the Franklin Templeton Group of Funds.

NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
RECEIVED FROM THE TEMPLETON GROUP
FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME GROUP OF FUNDS* EACH SERVES**

Frank H. Abbott, III .......... $165,937 28
Harris J. Ashton .............. $344,642 52
S. Joseph Fortunato ........... $361,562 54
Edith Holiday ................. $ 72,875 25
Frank W.T. LaHaye ............. $141,433 28
Gordon S. Macklin ............. $337,292 52

*For the calendar year ended December 31, 1997.

**We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 57 registered investment companies, with
approximately 170 U.S. based funds or series.

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

Many of the Board members own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

INVESTMENT MANAGEMENT AND OTHER SERVICES

INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.

Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."

MANAGEMENT AGREEMENT. The management agreement is in effect until September
16, 1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the Fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.

ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of
Resources.

CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets
of the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.

AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors.

SHAREHOLDER SERVICING AGENT. The fund may reimburse Investor Services for
certain out-of-pocket expenses, which may include payments by Investor
Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services may not exceed the fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.

HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?

Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.

When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Advisers 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. Advisers 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 Advisers, 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.

Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers 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 Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.

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

Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing 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 Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.

If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers 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 Advisers, 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 and to negotiate lower
brokerage commissions will be beneficial to the Fund.HOW DO I BUY AND
EXCHANGE COMMON SHARES?

The Fund continuously offers Common Shares through Securities Dealers who
have an agreement with Distributors.

Securities laws of states where the Fund offers Common Shares may differ from
federal law. Banks and financial institutions that sell Common Shares of the
Fund may be required by state law to register as Securities Dealers.

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

ADDITIONAL INFORMATION ON
EXCHANGING COMMON SHARES

As described in "Exchanges" in the Prospectus, the ability to exchange Common
Shares is subject to certain qualifications. If you request the exchange of
the total value of your account, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the Fund at the Net Asset
Value on the date of the exchange, and then the entire share balance will be
exchanged into the new fund. Backup withholding and information reporting may
apply. Information regarding the possible tax consequences of an exchange is
included in the tax section in this SAI and in the Prospectus.

If a substantial number of shareholders should tender their Common Shares in
a Tender Offer with a request for an exchange, the Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objective exists immediately. This money will then be withdrawn
from the short-term money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.

The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The tender of Common Shares to effect an
exchange will be effected at Net Asset Value as of the close of the NYSE on
the Repurchase Pricing Date of the repurchase Tender Offer if the request for
exchange is received in proper form so long as such request is received prior
to the close of the NYSE on the Repurchase Request Deadline. The exchange of
Common Shares is subject to certain restrictions. See "Exchanges" in the
Prospectus.

GENERAL INFORMATION

If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional Common Shares at Net Asset Value until we receive
new instructions.

Distribution or repurchase checks sent to you by the Fund do not earn
interest or any other income during the time the checks remain uncashed.
Neither the Fund nor its affiliates will be liable for any loss caused by
your failure to cash such checks.

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

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

SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for
their services directly to their clients.

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

HOW ARE COMMON SHARES VALUED?

We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the Fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

For the purposes of determining the Net Asset Value of Common Shares, the
Fund's uninvested assets plus its share of the value of the securities and
any cash or other assets (including interest accumulated but not yet
received) held by the Fund minus all liabilities (including accrued expenses)
of the Fund and its share of all liabilities (including accrued expenses) of
the Fund is divided by the total number of Common Shares outstanding at such
time. Expenses, including the fees payable to Advisers, are accrued daily.

Advisers, subject to guidelines adopted and periodically reviewed by the
Board, values the Corporate Loans and Corporate Debt Securities at fair
value, which approximates market value. In valuing a Corporate Loan or
Corporate Debt Security, Advisers considers, among other factors, (i) the
creditworthiness of the Borrower and any Intermediate Participants, (ii) the
current interest rate period until next interest rate reset and maturity of
the Corporate Loan or Corporate Debt Security, (iii) recent prices in the
market for instruments of similar quality, rate, and period until next
interest rate reset and maturity. Advisers believes that Intermediate
Participants selling Corporate Loans or otherwise involved in a Corporate
Loan transaction may tend, in valuing Corporate Loans for their own accounts,
to be less sensitive to interest rate and credit quality changes and,
accordingly, Advisers may not rely solely on such valuations in valuing the
Corporate Loans for the Fund's account. In addition, because a secondary
trading market in Corporate Loans and Corporate Debt Securities has not yet
fully developed, in valuing Corporate Loans and Corporate Debt Securities,
Advisers may not rely solely on but may consider prices or quotations
provided by banks, dealers or pricing services with respect to secondary
market transactions in Corporate Loans and Corporate Debt Securities. To the
extent that an active secondary market in Corporate Loans and Corporate Debt
Securities develops to a reliable degree, or exists in respect of other loans
or instruments deemed to be similar to Corporate Loans and Corporate Debt
Securities, Advisers may rely to an increasing extent on such market prices
and quotations in valuing the Corporate Loans and Corporate Debt Securities
held by the Fund.

Other portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. In certain circumstances,
portfolio securities are valued at the last sale price on the exchange that
is the primary market for such securities, or the last quoted bid price for
those securities for which the over-the-counter market is the primary market
or for listed securities in which there were no sales during the day. The
value of interest rate swaps, caps and floors is determined in accordance
with a formula and then confirmed periodically by obtaining a bank quotation.
Positions in options are valued at the last sale price on the market where
any such option is principally traded. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock or stock acquired
pursuant to the exercise of a right or warrant, may be valued taking into
account various factors such as original cost to the Fund, earnings and net
worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third
party transactions involving the issuer's securities. Securities for which
there exist no price quotations or valuations and all other assets are valued
at fair value as determined in good faith by or on behalf of the Board.

ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of interest, original issue, market and acquisition discount, and
other income derived from its investments. This income, less expenses
incurred in the operation of the Fund, constitutes its net investment income
from which dividends may be paid to you. Any distributions by the Fund from
such income will be taxable to you as ordinary income, whether you take them
in cash or in additional Common Shares.

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

Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required
to report the capital gain distributions paid to you from gains realized on
the sale of portfolio securities using the following categories:

"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997, that were held for more than one year but not more than 18 months,
and securities sold by the Fund before May 7, 1997, that were held for more
than one year. These gains will be taxable to individual investors at a
maximum rate of 28%.

"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997, that were held for more than 18 months, and under a transitional
rule, securities sold by the Fund between May 7 and July 28, 1997,
(inclusive) that were held for more than one year. These gains will be
taxable to individual investors at a maximum rate of 20% for individual
investors in the 28% or higher federal income tax brackets, and at a maximum
rate of 10% for investors in the 15% federal income tax bracket.

The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000 and are held for more than 5 years. Taxpayers subject to tax at the
higher rates may also make an election for shares held on January 1, 2001 to
recognize gain on their shares in order to qualify such shares as qualified
5-year property.

The Fund will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to
include 1997 Act tax law changes. Please call Fund Information to request a
copy. Questions concerning each investor's personal tax reporting should be
addressed to the investor's personal tax advisor.

CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The Fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.

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

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

TAXES

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the Fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such case,
the Fund will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the Fund's available earnings and
profits.

In order to qualify as a regulated investment company for tax purposes, the
Fund must meet certain specific requirements, including:

o The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the Fund's total assets;

o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and

o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.

EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The Fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.

TENDER OFFERS OF FUND SHARES. A tender of your Common Shares for repurchase
and exchanges of your Common Shares for shares in another Franklin Templeton
Fund are taxable transactions for federal and state income tax purposes. In
general, the tax law requires that you recognize a gain or loss in an amount
equal to the difference between your tax basis and the repurchase proceeds
you receive in exchange for your Common Shares, subject to the rules
described below. If you hold your Common Shares as a capital asset, the gain
or loss that you realize will be capital gain or loss, and will be long-term
for federal income tax purposes if you have held your Common Shares for more
than one year at the time of repurchase or exchange. Any loss incurred on the
repurchase or exchange of Common Shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the Fund on those Common Shares. The holding
periods and categories of capital gain that apply under the 1997 Act are
described above in the "Distributions" section. All or a portion of any loss
that you realize upon the repurchase or exchange of your Common Shares will
be disallowed to the extent that you purchase other Common Shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or
after you tender your Common Shares for repurchase or exchange. Any loss
disallowed under these rules will be added to your tax basis in the new
Common Shares you purchase.

If, however, you tender for repurchase or exchange less than all of your
Common Shares in the Fund, other rules may apply. In general, a tender or
exchange of less than all of your Common Shares in the Fund will not qualify
for sale or exchange treatment unless either (i) you reduce by more than 20%
(measured before and after the Tender Offer) your percent ownership in the
Fund, or (ii) the receipt by you of the repurchase proceeds is not
essentially equivalent to a dividend under a facts and circumstances test.
Under attribution rules, you may be considered to own stock owned by certain
members of your family and others in making these determinations. If a
repurchase or exchange does not qualify for sale or exchange treatment, the
repurchase proceeds will be taxable to you as an ordinary dividend to the
extent of the Fund's earnings and profits. Distributions in excess of
earnings and profits will be a nontaxable distribution to the extent of, and
will be applied against and reduce, your basis in your Common Shares.
Distributions in excess of earnings and profits and basis will be taxable as
capital gain distributions.

There is also a risk that nontendering shareholders may be considered to have
received a deemed dividend distribution in the event that repurchase proceeds
paid to shareholders participating in a Tender Offer do not qualify for sale
or exchange treatment. The notice provided with each Tender Offer will
discuss any tax consequences.

U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the Fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax advisor
to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that because the Fund's income is derived primarily from
interest rather than dividends, no portion of its distributions will
generally be eligible for the dividends-received deduction. It is anticipated
that none of the current year's dividends will qualify for the deduction.

INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:

Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the Fund's net investment company taxable income,
which, in turn, will affect the amount of income to be distributed to you by
the Fund.

If the Fund's section 988 losses exceed the Fund's other net investment
company taxable income during a taxable year, the Fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as
capital gain to you.

INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
The Fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The Fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the Fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the Fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the Fund may elect to accrue market
discount on a current basis, in which case the Fund will be required to
distribute any such accrued discount. If the Fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.

DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of Common Shares of the Fund.

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of Common Shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 60 days' written notice.

Distributors pays the expenses of the distribution of Common Shares,
including advertising expenses and the costs of printing sales material and
prospectuses used to offer Common Shares to the public. The Fund pays the
expenses of preparing and printing amendments to its registration statements
and prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.

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

Pursuant to the Fund's agreement with the NASD regarding compensation to
Distributors and Securities Dealers, the Fund has established procedures to
monitor such compensation on a share by share basis to ensure that the total
of such compensation does not exceed the limits described in the Fund's
Prospectus.

HOW DOES THE FUND MEASURE PERFORMANCE?

Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
Fund are based on the standardized methods of computing performance mandated
by the SEC. An explanation of these and other methods used by the Fund to
compute or express performance follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.

TOTAL RETURN

AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portions thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. The quotation assumes the account was
completely redeemed at the end of each period and the deduction of all
applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.

Total return figures are calculated according to the SEC formula:

n
P(1+T) = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the Fund's actual return for a specified period rather than on the average
return over the applicable periods.

YIELD

CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.

The Fund's yield figure is obtained by using the following SEC formula:

6
Yield = 2 [(a-b + 1) - 1]
----
cd

where:

a = dividends and interest earned during the period

b = expenses accrued for the period (net of reimbursements)

c = the average daily number of shares outstanding during the period that
were entitled to receive dividends

d = the maximum offering price per share on the last day of the period

CURRENT DISTRIBUTION RATE

Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is usually computed
by annualizing the dividends paid per share during a certain period and
dividing that amount by the current maximum offering price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time.

VOLATILITY

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

OTHER PERFORMANCE QUOTATIONS

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

COMPARISONS

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

a) LIBOR - The London Interbank Offered Rate - the interest rate that the
most creditworthy international banks dealing in Eurodollars charge each
other for large loans.

b) Federal Funds Rate - the interest rate charged by banks with excess
reserves at a Federal Reserve district bank to banks needing overnight loans
to meet reserve requirements.

c) Discount Rate - the interest rate charged by the Federal Reserve to member
banks for loans, using government securities or eligible paper as collateral.
This number provides a floor for interest rates since banks set their loan
rates at a notch above the discount rate.

d) The Goldman Sachs / Loan Pricing Corporation Liquid Leveraged Loan Index -
a performance benchmark for the leveraged loan market. The index is a liquid
issues index, designed to measure the performance of a diversified portfolio
of the most actively traded issues in the performing loan sectors of the
leveraged loan market.

e) The NationsBanc Capital Markets, Inc. Leveraged Loan Index - measures the
total return and volatility of syndicated loans. The index captures a broad
cross section of the leveraged loan market. The index includes syndicated
loans issued by either below-investment grade or non-rated companies of at
least $100 million dollars that are actively traded on the secondary market.

f) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.

g) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.

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

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

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

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

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

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

n) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.

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

p) Historical data supplied by the research departments of CS FIRST BOSTON
Corporation, the J. P. Morgan companies, SALOMON BROTHERS, Merrill Lynch,
Lehman Brothers, Payden & Rygel, Goldman Sachs, Standard and Poors, Handy and
Harmon and Bloomberg L.P.

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

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

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

t) IBC/Donoghue's Money Fund Report(R) - industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and government money
funds.

u) Bank Rate Monitor - a weekly publication that reports various bank
investments such as CD rates, average savings account rates and average loan
rates.

v) Salomon Brothers Bond Market Roundup - a weekly publication that reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and
reserve aggregates.

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

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

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.

MISCELLANEOUS INFORMATION

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

The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 2.9 million shareholder accounts. In 1992,
Franklin, a leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $222 billion in
assets under management for more than 5.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
120 U.S. based open-end investment companies to the public. The Fund may
identify itself by its CUSIP number.

Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, Common Shares of the Fund may be sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.

As of March 10, 1998, the principal shareholders of the Fund, beneficial or
of record, were as follows:

SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE

Franklin Resources, Inc. 2,500,000 50%

Templeton Investment
Counsel Inc. 2,500,000 50%

From time to time, the number of Common Shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.

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

SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.

GLOSSARY

USEFUL TERMS AND DEFINITIONS

1940 ACT - The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Fund.

1933 ACT - The Securities Act of 1933, as amended

ADVISERS - Franklin Advisers, Inc., the Fund's investment manager

AGENT BANK - A Lender that administers a Corporate Loan on behalf of all
Lenders on a Corporate Loan. The Agent Bank typically is responsible for the
collection of principal and interest and fee payments from the Borrower, and
distributes these payments to the other Lenders. The Agent Bank is usually
responsible for enforcing the terms of the Corporate Loan. The Agent Bank is
compensated for these services.

ASSIGNMENT - An interest in a portion of a Corporate Loan. The purchaser of
an Assignment steps into the shoes of the original Lender. An Assignment from
a Lender gives the Fund the right to receive payments directly from the
Borrower and to enforce its rights as a Lender directly against the Borrower.

BOARD - The Board of Trustees of the Trust

BORROWER - A corporation that borrows money under a Corporate Loan or issues
Corporate Debt Securities. The Borrower is obligated to make interest and
principal payments to the Lender of a Corporate Loan or to the holder of a
Corporate Debt Security.

CD - Certificate of deposit

CD RATE - The interest rate currently available on certificates of deposit

CODE - Internal Revenue Code of 1986, as amended

COMMON SHARES - Shares of beneficial interest in the Fund

CONTINGENT DEFERRED SALES CHARGE - A sales charge of 1% that may apply if you
sell Class I shares in a Franklin Templeton Fund within twelve months.

CORPORATE DEBT SECURITIES - Obligations issued by corporations in return for
investments by securityholders. In exchange for their investment in the
corporation, securityholders receive income from the corporation and the
return of their investments. The corporation typically pledges to the
securityholders collateral which will become the property of the
securityholders in case the corporation defaults in paying interest or in
repaying the amount of the investments to securityholders.

CORPORATE LOAN - A loan made to a corporation. In return, the corporation
makes payments of interest and principal to the Lenders. The corporation
typically pledges collateral which becomes the property of the Lenders, in
case the corporation defaults in paying interest or principal on the loan.
Corporate Loans include Participation Interests in Corporate Loans and
Assignments of Corporate Loans.

DECLARATION OF TRUST - The Agreement and Declaration of Trust of the Trust,
which is the basic charter document of the Trust

DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. This SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."

EARLY WITHDRAWAL CHARGE - A charge of 1% that may apply to Common Shares
purchased after March 31, 1998, and that are repurchased by the Fund in a
Tender Offer within twelve months of the purchase of the Common Shares.
Certain waivers of this charge may apply.

FLOATING INTEREST RATE - One of the following: (i) a variable interest rate
which adjusts to a base interest rate, such as LIBOR or the CD Rate on set
dates; or (ii) an interest rate that floats at a margin above a generally
recognized base lending interest rate such as the Prime Rate of a designated
U.S. bank.

FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund

FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries

FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds

FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator

FUND - The sole investment portfolio or series of the Trust

ILLIQUID - Illiquid property or securities cannot be sold within seven days,
in the ordinary course of business, at approximately the valued price.

INTERMEDIATE PARTICIPANT - A Lender, Participant or Agent Bank interposed
between the Fund and a Borrower, when the Fund invests in a Corporate Loan
through a Participation Interest or an Assignment

INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent

IRS - Internal Revenue Service

LENDER - The party that loans money to a corporation under a Corporate Loan.
A Corporate Loan in which the Fund may invest is often negotiated and
structured by a group of Lenders. The Lenders typically consist of commercial
banks, thrift institutions, insurance companies, finance companies or other
financial institutions. The Fund acts as a Lender when it directly invests in
a Corporate Loan or when it purchases an Assignment.

LIBOR - The London InterBank Offered Rate, the interest rate that the most
creditworthy international banks charge each other for large loans.

MOODY'S - Moody's Investors Service, Inc.

NASD - National Association of Securities Dealers, Inc.

NET ASSET VALUE (NAV) - The net asset value of a mutual fund is determined by
deducting the fund's liabilities from the total assets of the fund. The net
asset value per share is determined by dividing the net asset value of the
fund by the number of shares outstanding.

NRSRO - a nationally recognized statistical rating organization, such as S&P
or Moody's

NYSE - New York Stock Exchange

PARTICIPANT - A holder of a Participation Interest in a Corporate Loan

PARTICIPATION INTEREST - An interest which represents a fractional interest
in a Corporate Loan. The Fund may acquire Participation Interests from a
Lender or other holders of Participation Interests.

PRIME RATE - The interest rate charged by leading U.S. banks on loans to
their most creditworthy customers

PROSPECTUS - The prospectus for the Fund dated April 1, 1998, as may be
amended from time to time

REPURCHASE REQUEST DEADLINE - The date by which Investor Services, on behalf
of the Fund, must receive the shareholders' request for repurchase of their
Common Shares in conjunction with a Tender Offer, as stated in the
shareholder notification.

REPURCHASE PAYMENT DEADLINE - The date by which the Fund must pay
shareholders for Common Shares repurchased in a Tender Offer, as stated in
the shareholder notification. The Repurchase Payment Deadline may be no later
than seven days after the Repurchase Pricing Date.

REPURCHASE PRICING DATE - The date after the Repurchase Request Deadline on
which the Fund determines the Net Asset Value applicable to the repurchase of
Common Shares in a Tender Offer, as stated in the shareholder notification
or, under certain circumstances, an earlier date than the scheduled date, but
not earlier than the Repurchase Request Deadline. As set by fundamental
policy of the Fund, the Repurchase Pricing Date must occur not later than the
fourteenth day after the Repurchase Request Deadline or the next business
day, if the fourteenth day is not a business day.

RESOURCES - Franklin Resources, Inc.

SAI - Statement of Additional Information

S&P - Standard & Poor's Corporation

SEC - U.S. Securities and Exchange Commission

SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.

TENDER OFFERS - The quarterly offers by the Fund to repurchase a designated
percentage of the outstanding Common Shares owned by the Fund's shareholders.
Once every two years the Board may determine in its sole discretion to have
one additional Tender Offer in addition to the regular quarterly Tender
Offers.

U.S. - United States

UNSECURED CORPORATE LOANS AND UNSECURED CORPORATE DEBT SECURITIES - Corporate
Loans and Corporate Debt Securities that are not backed by collateral. Thus,
if a Borrower Defaults on an Unsecured Corporate Loan or Unsecured Corporate
Debt Security, it is unlikely that the Fund would be able to recover the full
amount of the principal and interest due.

WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.

FINANCIAL STATEMENTS

Following are the audited financial statements for the initial capitalization
of the Fund and the report of Coopers & Lybrand L.L.P., independent
accountants of the Fund, dated September 19, 1997.

FRANKLIN FLOATING RATE TRUST

STATEMENT OF ASSETS AND LIABILITIES

SEPTEMBER 8, 1997

ASSETS:

Cash held by custodian ............................................. $100,000
Unamortized organization costs ..................................... 124,000
Unamortized offering costs ......................................... 51,103
----------
Total assets ..................................................... 275,103
----------

LIABILITIES:

Accrued expenses:
Organization Costs ................................................ 124,000
Offering Costs .................................................... 51,103
----------
Total liabilities ................................................ 175,103
----------

Net assets .......................................................... $100,000
==========
Computation of net asset value and offering price per share:
Net assets, at value ............................................... $100,000
==========
Shares outstanding ................................................. 10,000
==========
Net asset value per share* ......................................... $10.00
==========

*Redemption price per share is equal to net asset value less any applicable
early withdrawal charge.

Note: Franklin Floating Rate Trust (the "Fund") is a closed-end,
non-diversified management investment company registered under the Investment
Company Act of 1940 and organized as a Delaware Business Trust on May 20,
1997. Organization expenses are being amortized over a five-year period from
the effective date of the Fund's registration under the Securities Act of
1933. Initial offering costs will be charged to paid in capital at the end of
the initial offering period to the public. As part of their organization, the
Fund has issued, in a private placement, 10,000 shares of beneficial interest
to Franklin Resources, Inc., at $10.00 per share. These shares have been
designated as "initial shares." In the event that any of the initial shares
of the fund are redeemed during the organization cost amortization period,
the redemption proceeds will be reduced by any unamortized organization and
registration expenses in the same proportion as the number of shares being
redeemed bears to the number of initial shares outstanding at the time of
such redemption.

020 SAI 04/98

FRANKLIN FLOATING RATE TRUST
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF THE FRANKLIN FLOATING RATE TRUST:

We have audited the accompanying statement of assets and liabilities of the
Franklin Floating Rate Trust (the Fund) as of September 8, 1997. The
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of September 8,
1997, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California
September 19, 1997