FRANKLIN PREMIER RETURN FUND, 497, 1995-02-21

FRANKLIN PREMIER RETURN FUND
497, 1995-02-21

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SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN PREMIER RETURN FUND
DATED MAY 1, 1994 AS AMENDED SEPTEMBER 8, 1994

The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:

1. EXPENSE TABLE

Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month
following such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."

2. MANAGEMENT OF THE FUND

Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.

3. HOW TO BUY SHARES OF THE FUND

a) Add the following language as paragraph two:

The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.

b) Substitute the following for the sales charge table and the ensuing two
paragraphs:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
Less than $100,000................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000...... 3.75% 3.90% 3.25%
$250,000 but less than $500,000...... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000.... 2.25% 2.30% 2.00%
$1,000,000 or more .................. none none (see below)**
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.

**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less $2 million, plus
0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of
$3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.

***At the discretion of Distributors, all sales charges may at times
be allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that term
is defined in the Securities Act of 1933, as amended.

No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."

<PAGE>

may not be subject to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton
Funds are collectively referred to as the "Franklin Templeton Funds.") Sales
charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount. References
throughout the Prospectus, for purposes of aggregating assets or describing the
exchange privilege, refer to the above descriptions.

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA rollovers), certain
non-designated plans, certain trust company and trust departments of banks and
certain retirement plans of organizations with collective retirement plan
assets of $10 million or more. See definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, trustees, directors, and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton Group,
and by their spouses and family members; (2) companies exchanging shares with
or selling assets pursuant to a merger, acquisition or exchange offer; (3)
insurance company separate accounts for pension plan contracts; (4) accounts
managed by the Franklin Templeton Group; (5) Shareholders of Templeton
Institutional Funds, Inc. reinvesting redemption proceeds from that fund under
an employee benefit plan qualified under Section 401 of the Internal Revenue
Code of 1986, as amended, in shares of the Fund; (6) certain unit investment
trusts and unit holders of such trusts reinvesting their distributions from the
trusts in the Fund; (7) registered securities dealers and their affiliates, for
their investment account only, and (8) registered personnel and employees of
registered broker-dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing
securities dealer.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another of
the Franklin Templeton Funds which were purchased with a front-end sales charge
or assessed a contingent deferred sales charge on redemption. An investor may
reinvest an amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares redeemed, a
new contingency period will begin. Shares of the Fund redeemed in connection
with an exchange into another fund (see "Exchange Privilege") are not
considered "redeemed" for this privilege. In order to exercise this privilege,
a written order for the purchase of shares of the Fund must be received by the
Fund or the Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on redemption proceeds
placed immediately after redemption in a Franklin Bank Certificate of Deposit
("CD") until the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and the SAI.

Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton Funds
at net asset value and without the imposition of a contingent deferred sales
charge within 120 days of the payment date of such distribution. To exercise
this privilege, a written request to reinvest the distribution must accompany
the purchase order. Addi-

<PAGE>

tional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton Profit
Sharing 401(k) plan), to the extent of such distribution. In order to exercise
this privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free at 1-800/DIAL
BEN (1-800/342-5236).

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resources, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code ("non-
designated plans") may be afforded the same privilege if they meet the above
requirements as well as the uniform criteria for qualified groups previously
described under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related expenses.

Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount in-

<PAGE>

vested or to be invested during the subsequent 13-month period in this Fund
or any of the Franklin Templeton Investments must total at least $1,000,000.
Orders for such accounts will be accepted by mail accompanied by a check or by
telephone 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 such order.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, without regard
to where such assets are currently invested.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

a) Add the following paragraph under "Exchanges by Telephone":

The automatic TeleFACTS(R) system at 1-800/247-1753 is available for processing
exchanges (day or night.) During periods of drastic economic or market changes,
however, this option may not be available, in which event the shareholder
should follow other exchange procedures discussed in the section.

b) Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":

A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton money market
fund. See also "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts attributable to
capital appreciation of those shares held less than 12 months; (ii) shares
purchased with reinvested dividends and capital gain distributions; and (iii)
other shares held longer than 12 months; and followed by any shares held less
than 12 months, on a "first in, first out" basis.

The contingent deferred sales charge is waived for: exchanges; distributions to
participants in Trust Company retirement plan accounts due to death, disability
or attainment of age 59 1/2; tax-free returns of excess contributions to
employee benefit plans; distributions from employee benefit plans, including
those due to plan termination or plan transfer; redemptions through a
Systematic Withdrawal Plan set up prior to February 1, 1995 and, for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually); and
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size.

Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares will
result in the applicable contingent deferred sales charge being deducted from
the total dollar amount redeemed.

FRANKLIN
PREMIER
RETURN FUND

PROSPECTUS MAY 1, 1994
AS AMENDED SEPTEMBER 8, 1994

[LOGO]

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

Franklin Premier Return Fund (the "Fund") is a diversified, open-end management
investment company with the primary investment objective of high current return
and, secondarily, relative stability of principal. The Fund will seek to
achieve its primary objective of high current return by investing in common
stocks, investment grade corporate and U.S. government bonds and short-term
money market instruments. For hedging purposes, in an effort to stabilize
principal fluctuations, the Fund may engage in transactions in stock options,
stock index options, financial futures, and options thereon.

This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

A Statement of Additional Information ("SAI") concerning the Fund, dated May 1,
1994, as may be amended from time to time, provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest to
some investors. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors") at the address or telephone number listed
above.

This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

<PAGE>

<TABLE>
<CAPTION>
Contents Page
<S> <C>
Expense Table.................................... 2
Financial Highlights............................. 4
About the Fund................................... 4
Investment Objectives and
Policies of the Fund........................... 5
Management of the Fund......................... 11
Distributions to Shareholders.................. 12
Taxation of the Fund and
Its Shareholders............................... 14
How to Buy Shares of the Fund.................. 15
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments............. 21
Other Programs and Privileges
Available to Fund Shareholders................. 23
Exchange Privilege............................. 24
How to Sell Shares of the Fund................. 27
Telephone Transactions......................... 29
Valuation of Fund Shares....................... 30
How to Get Information Regarding
an Investment in the Fund.................... 31
Performance.................................... 32
General Information............................ 33
Account Registrations.......................... 34
Important Notice Regarding
Taxpayer IRS Certifications.................... 35
Portfolio Operations........................... 35
</TABLE>

EXPENSE TABLE

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on the
aggregate operating expenses of the Fund for the fiscal year ended December 31,
1993, restated to reflect the higher sales charge and distribution expenses as
though both had been in effect at the beginning of the fiscal period.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).......................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends.......... NONE+
Deferred Sales Charge......................................... NONE
Redemption Fees............................................... NONE
Exchange Fee (per transaction)................................ $5.00*
</TABLE>

<PAGE>

ANNUALIZED FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fees..................................................... 0.63%
12b-1 Fees.......................................................... 0.21%+
Other Expenses:
Professional Fees......................................... 0.11%
Reports to Shareholders................................... 0.09%
Other..................................................... 0.17%
Total Other Expenses................................................ 0.37%
-----
Total Fund Operating Expenses....................................... 1.21%
</TABLE> =====

+Shareholders of the Fund have approved a plan of distribution (the "Plan")
pursuant to Rule 12b-1 of the Investment Company Act of 1940 (the "1940 Act"),
which provides for payments made by the Fund in connection with the
distribution of its shares (see "Plan of Distribution" under "Management of the
Fund." At the same time, the sales charge on reinvested dividends is being
eliminated. Consistent with National Association of Securities Dealers, Inc.'s
rules, it is possible that the combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules. See "Management of the Fund - Plan of Distribution."

*$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.

Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.

EXAMPLE

As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the table above,
the Fund charges no redemption fees:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$57 $82 $109 $185
</TABLE>

THIS EXAMPLE IS BASED ON THE RESTATED AGGREGATE ANNUAL OPERATING EXPENSES SHOWN
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES,
WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are paid by
the Fund and are borne by shareholders as a result of their investment in the
Fund. (See "Management of the Fund" for a description of the Fund's expenses.)
In addition, federal regulations require the example to assume an annual return
of 5%, but the Fund's actual return may be more or less than 5%. No deduction
was made for sales charges on reinvested dividends; the expenses would be
increased if they were reflected.

<PAGE>

FINANCIAL HIGHLIGHTS

Set forth below is a table containing financial highlights for a share of the
Fund outstanding throughout the ten fiscal years ending December 31, 1993. The
information for each of the five fiscal years in the period ended December 31,
1993 has been audited by Coopers & Lybrand, independent auditors, whose audit
report appears in the financial statements in the Fund's Statement of
Additional information. A Statement of Additional Information as well as a copy
of the Annual Report, which contains further information regarding performance,
may be obtained without charge as noted on the front cover of this Prospectus.
The remaining figures, which are also audited, are not covered by the auditors'
current report.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE*
Net asset value at beginning of year. $ 5.40 $ 4.88 $ 4.21 $ 5.19 $ 5.12 $ 4.95 $ 5.93 $ 6.59 $ 6.17 $ 6.89
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income................ 0.13 0.15 0.14 0.16 0.15 0.15 0.15 0.11 0.12 0.14
Net realized and unrealized gains
(losses) on securities............. 0.860 0.530 0.780 (0.595) 0.599 0.705 0.031 0.360 1.255 0.020
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations..... 0.990 0.680 0.920 (0.435) 0.749 0.855 0.181 0.470 1.375 0.160
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment
income............................. (0.170) (0.160) (0.135) (0.155) (0.157) (0.162) (0.166) (0.125) (0.180) (0.050)
Distributions from realized
capital gains...................... - - (0.115) (0.390) (0.522) (0.523) (0.995) (1.005) (0.775) (0.830)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions.................. (0.170) (0.160) (0.250) (0.545) (0.679) (0.685) (1.161) (1.130) (0.955) (0.880)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of year....... $ 6.22 $ 5.40 $ 4.88 $ 4.21 $ 5.19 $ 5.12 $ 4.95 $ 5.93 $ 6.59 $ 6.17
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN**....................... 18.38 % 14.02 % 22.06 % (8.81)% 14.72 % 17.68 % 1.44 % 7.53 % 24.27 % 3.04 %
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in 000's). $22,877 $22,077 $28,189 $32,878 $44,516 $45,010 $39,790 $34,203 $11,312 $6,840
Ratio of expenses to average
net assets......................... 1.00 % 0.92 % 0.93 % 0.85 % 0.81 % 0.83 % 0.84 % 0.95 % 1.10 % 1.14 %
Ratio of net investment income to
average net assets................. 2.15 % 2.81 % 2.95 % 3.27 % 2.81 % 3.00 % 2.65 % 2.32 % 2.07 % 2.47 %
Portfolio turnover rate.............. 20.49 % 23.17 % 62.25 % 73.12 % 163.55 % 79.73 % 176.36 % 105.00 % 156.00 % 63.00 %
</TABLE>

*Selected data for a share of capital stock outstanding throughout the year.

**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the offering price and capital gains, if any, at
net asset value.

ABOUT THE FUND

The Fund is a California corporation, originally incorporated in Hawaii in
1951. It was reincorporated under the laws of the state of California in 1983
and registered with the SEC under the 1940 Act. The Fund has only one class of
capital stock, with no par value. The Fund is a diversified, open-end
management investment company, commonly called a "mutual fund." On April 12,
1991 shareholders approved a change in the Fund's investment objectives and
policies and the adoption of the Fund's current name. Formerly, the Fund was
known as the Franklin Option Fund.

Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.5% to less than 1.0% of the
offering price), depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES OF THE FUND

The investment objectives of the Fund are high current return and, secondarily,
relative stability of principal. The objectives are fundamental policies of the
Fund and may not be changed without shareholder approval.

Current return, also known as "total return," is made up of capital
appreciation and income distributions. The Fund's primary emphasis is growth of
capital, with income a secondary consideration. Distributions to shareholders
are expected to be derived primarily from common stock dividends, interest
income, and any net capital gains from the sale of securities.

The Fund will seek to achieve its primary objective of high current return by
investing in common stocks (a majority of which fall within the Standard &
Poor's ["S&P"] 500 or the S&P Mid-Cap 400), investment grade corporate and U.S.
government bonds, short-term money market instruments and securities of foreign
issuers. For hedging purposes, in an effort to stabilize principal
fluctuations, the Fund may engage in transactions in stock options, stock index
options, financial futures and options thereon. As with any investment,
however, there is no assurance that the Fund's objectives will be attained.

THE FUND'S INVESTMENTS AND STRATEGIES

It is anticipated that the Fund will primarily invest in common stock,
investment grade fixed-income securities, and money market instruments. The
percentage of assets invested in these types of securities will vary from time
to time, with equity securities representing a majority of the Fund's net
assets.

The Fund's investment manager uses a top-down approach based on the current and
future outlook for the economy and the business cycle to determine the Fund's
asset allocation mix and sector weightings. Quantitative, technical, and
fundamental analysis are all used to identify sectors, the industries within
those sectors, and the companies within those industries. Depending on the
stage of the business cycle, certain sectors perform better than others. The
investment manager attempts to position the Fund in the sectors exhibiting
strong price momentum. The same analytical tools are used to screen for
industries and companies.

Investments in debt securities will be in one of the four highest ratings of
either S&P or Moody's Investors Service ("Moody's"). The four highest rating
categories are AAA, AA, A or BBB by S&P or Aaa, Aa, A, or Baa by Moody's. Debt
securities rated BBB by S&P or Baa by Moody's are regarded as having an
adequate capacity to pay principal and interest but with greater vulnerability
to adverse economic conditions and some speculative characteristics. As with
other debt instruments, the price of the debt securities in which the Fund
invests are likely to decrease in times of rising interest rates. Conversely,
when rates fall, the value of the Fund's debt investments may rise. Price
changes of debt securities held by the Fund have a direct impact on the net
asset value per share of the Fund. The Fund's investments in derivative
instruments (options and futures) will be for portfolio hedging purposes in an
effort to stabilize principal fluctuations to achieve the Fund's secondary
investment objective and not for speculation.

Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents. Such temporary investments will only be made
with cash held to maintain

<PAGE>

liquidity or pending investment. In addition, for temporary defensive purposes
in the event of or when the investment manager anticipates a general decline in
the market prices of stocks in which the Fund invests, the Fund may invest an
unlimited amount of its assets in short-term debt instruments.

Convertible Securities. A portion of the Fund's assets may be invested in
convertible securities. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the
same or a different issuer. Convertible securities are senior to common stocks
in a corporation's capital structure, but are usually subordinated to similar
nonconvertible debt securities. Convertible securities provide a fixed-income
stream and the opportunity, through its conversion feature, to participate in
the capital appreciation resulting from a market price advance in the
convertible security's underlying common stock. As a fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and tends to decrease in value when interest rates rise. However, the
price of a convertible security is also influenced by the market value of the
security's underlying common stock and tends to increase as the market value of
the underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines.

Synthetic Convertibles. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which possess the two principal characteristics
of a true convertible, i.e., fixed income and the right to acquire the
underlying equity security. This combination is achieved by investing in
nonconvertible fixed-income securities and in warrants, stock or stock index
call options which grant the holder the right to purchase a specified quantity
of securities within a specified period of time at a specified price or to
receive cash in the case of stock index options.

Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the
values of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the Fund's investment
manager, Franklin Advisers, Inc. ("Advisers" or "Manager"), expects normally to
select synthetic convertibles whose two components represent one issuer, the
character of a synthetic convertible allows the investment adviser to combine
components representing distinct issuers, or to combine a fixed-income security
with a call option on a stock index, when Advisers determines that such a
combination would better promote the Fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component, will decline.

Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options which trade on securities exchanges and in
the over-the-counter market. The Fund may purchase and sell futures and options
on futures with respect to securities and currencies. Additionally, the Fund
may sell futures and options to "close out" futures and options it may have
purchased. The Fund will not engage in futures transactions for speculation but
only as a hedge against changes resulting from market conditions in the value
of its securities or securities

<PAGE>

which it intends to purchase. In addition, the Fund will not enter into any
futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Fund's total
assets (taken at current value). The Fund will not engage in any stock options
or stock index options if the option premiums paid regarding its open option
positions exceed 5% of the value of the Fund's total assets.

RISK FACTORS AND CONSIDERATIONS REGARDING
OPTIONS, FUTURES AND OPTIONS ON FUTURES

The Fund's option and futures investments involve certain risks. Such risks
include the risk that the effectiveness of an options and futures strategy
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. The Fund bears the risk that the prices of its portfolio securities
will not move in the same amount as the option or future it has purchased, or
that there may be a negative correlation which would result in a loss on both
such securities and the option or futures contracts or investment.

The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indexes, stock index futures,
financial futures and related options depends on the degree to which price
movements in the underlying index or underlying debt securities correlate with
price movements in the relevant portion of the Fund's securities. Inasmuch as
such securities will not duplicate the components of any index or such
underlying debt securities, the correlation will not be perfect. Consequently,
the Fund bears the risk that the prices of the securities being hedged will not
move in the same amount as the hedging instrument. It is also possible that
there may be a negative correlation between the index or other securities
underlying the hedging instrument and the hedged securities which would result
in a loss on both such securities and the hedging instrument. Accordingly,
successful use by the Fund of options on stock indexes, stock index futures,
financial futures and related options will be subject to the Manager's ability
to predict correctly movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.

The Fund's option and futures investments may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as a regulated investment company and may reduce the portion of the Fund's
dividends which is eligible for the corporate dividends-received deduction.
These transactions are also subject to special tax rules that may affect the
amount, timing and character of certain distributions to shareholders, more
information about which is included in the tax section of this Prospectus and
the section entitled "Additional information Regarding Taxation" in the
Statement of Additional Information.

During the option period the Fund, as the writer of covered calls, gives up the
potential for capital appreciation above the exercise price should the
underlying security rise in value, and retains the risk of loss, as the writer
of puts, should the underlying security decline in value. Substantial
appreciation in the value of the security underlying covered calls written by
the Fund would result in the security being "called away." Substantial
depreciation in the value of the security underlying puts written by the Fund
would result in the se-

<PAGE>

curity being "put to" the writer. If a covered call option written by the Fund
expires unexercised, the Fund will realize a gain in the amount of the premium
received. If the Fund has to sell the security underlying the covered call
because of the exercise of a call option, it realizes a gain or loss from the
sale of the underlying security, with the proceeds being increased by the
amount of the premium. From time to time, under certain market conditions, the
Fund may receive little or no short-term capital gains from its options
transactions, which will reduce the Fund's return.

If a put option written by the Fund expires unexercised, it will realize a gain
from the amount of the premium. If the Fund has to buy the underlying security
because of the exercise of the put option, it will incur an unrealized loss to
the extent that the current market value of the underlying security is less
than the exercise price of the put option. However, this may be offset in whole
or in part by gain from the premium received.

Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin; if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.

Over-the-counter Options ("OTC" options) differ from exchange traded options in
certain material respects. OTC options are arranged directly with dealers and
not, as is the case with exchanged traded options, with a clearing corporation.
Thus, there is a risk of non-performance by the dealer. Because there is no
exchange, pricing is typically done by reference to information from market
makers. However, OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices than exchange
traded options; and the writer of an OTC option is paid the premium in advance
by the dealer.

There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can
close out that option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote it. If
a covered call option writer cannot effect a closing transaction, it cannot
sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of such
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.

The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this

<PAGE>

position. Nevertheless, pending a change in the staff's position, the Fund will
treat OTC options and "cover" assets as subject to the Fund's limitation on
illiquid securities. (See "Investment Objective and Policies Followed by the
Fund - Illiquid Investments" in this Prospectus.)

Futures contracts entail risks. Although the Fund believes that use of such
contracts will benefit the Fund, if the investment adviser's investment
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part
or all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition,
in such situations, if the Fund has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements. Such
sales may be, but will not necessarily be, at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it may
be disadvantageous to do so.

The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course of business it will purchase
securities upon termination of long futures contracts and long call options on
future contracts, but under unusual market conditions it may terminate any of
such positions without a corresponding purchase of securities.

In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by the Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract or option. (See "Investment
Restrictions and Policies" in the Statement of Additional Information for a
more complete discussion of the Fund's investments in options and futures,
including the risks associated with such activity.)

Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. 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 disposition costs in liquidating the collateral. The
Fund, however, intends to enter into repurchase agreements only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System. Under the 1940 Act, a repurchase agreement is
deemed to be the loan of money by the Fund to the seller, collateralized by the
underlying security. The U.S. government security subject to resale (the
collateral) will be held pursuant to a written agreement and the Fund's
custodian will take title to, or actual delivery of, the security.

Borrowing. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund, except that borrowings for temporary or emer-

<PAGE>

gency purposes may be made from banks in an amount up to 10% of total asset
value. No new investments will be made while any such borrowings are in excess
of 5% of total assets.

Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund.

Foreign Securities. The Fund will ordinarily purchase foreign securities which
are traded in the United States or purchase American Depository Receipts
("ADRs"), which are certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may purchase the securities of foreign
issuers directly in foreign markets.

Investments in foreign securities where delivery takes place outside the United
States will involve risks that are different from investments in U.S.
securities. These risks may include future unfavorable political and economic
developments, possible withholding taxes, seizure of foreign deposits, currency
controls, higher transactional costs due to a lack of negotiated commissions,
or other governmental restrictions which might affect the amount and types of
foreign investments made or the payment of principal or interest on securities
the Fund holds. In addition, there may be less information available about
these securities and it may be more difficult to obtain or enforce a court
judgment in the event of a lawsuit. Fluctuations in currency convertibility or
exchange rates could result in investment losses for the Fund. Investment in
foreign securities may also subject the Fund to losses due to nationalization,
expropriation or differing accounting practices and treatments.

Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the United States and which
are publicly traded in the United States or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be an illiquid
asset so long as the Fund acquires and holds the security with the intention of
re-selling the security in the foreign trading market, the Fund reasonably
believes it can readily dispose of the security for cash in the U.S. or foreign
market and current market quotations are readily available. The Fund presently
has no intention of investing more than 25% of its net assets in foreign
securities.

The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more
information concerning the policies discussed herein, please see the Statement
of Additional Information.

The Fund expects that its portfolio turnover rate will generally not exceed
150%, but this rate should not be construed as a limiting factor. The Fund's
portfolio turnover rate for the prior two years is included in the Financial
Highlights table. Upon the exercise of an option written by the Fund, the
underlying securities are sold; the Fund receives cash which it then invests,
thus increasing the portfolio turnover rate. High portfolio turnover increases
transaction costs which must be paid by the Fund.

<PAGE>

MANAGEMENT OF THE FUND

The Board of Directors has the primary responsibility for the overall
management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources' outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(112 separate series) with aggregate assets of over $74 billion.

Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.

During the fiscal year ended December 31, 1993, a management fee totaling 0.63%
of the average monthly net assets of the Fund was paid to Advisers.

Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.

Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.

During the fiscal year ended December 31, 1993, the expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totalled 1.00% of the
average monthly net assets of the Fund.

PLAN OF DISTRIBUTION

Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 13, 1994. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid
to securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such distribution expenses
is 0.25% per annum of the average daily net assets of the Fund, payable on a
quarterly

<PAGE>

basis. All expenses of distribution and marketing in excess of 0.25% per annum
will be borne by Distributors, or others who have incurred them, without
reimbursement from the Fund. The Plan also covers any payments to or by the
Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers,
or Distributors, to the extent such payments are deemed to be for the financing
of any activity primarily intended to result in the sale of shares issued by
the Fund within the context of Rule 12b-1. The payments under the Plan are
included in the maximum operating expenses which may be borne by the Fund.

In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). Such fees will be paid to the
current securities dealer of record on the shareholder's account. In addition,
until such time as the maximum payment of 0.25% is reached on a yearly basis,
up to an additional 0.05% will be paid to Distributors under the Plan. The
payments to be made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the Plan,
such as advertising.

The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear 12b-1 expenses at the same rate. That rate
initially will be at least 0.20% (0.15% plus 0.05%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed 0.25% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Plan, the Plan
permits the Fund's directors to allow the Fund to pay a full 0.25% on all
assets at any time. The approval of the Fund's Board of Directors would be
required to change the calculation of the payments to be made under the Plan.

DISTRIBUTIONS TO SHAREHOLDERS

There are two types of distributions which the Fund may make to its
shareholders:

1. Income dividends. The Fund receives income in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Fund's operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.

2. Capital gain distributions. The fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities. To the
extent that the Fund receives premiums for writing options, those premiums will
be included in the computation of capital gain or loss when the options are
exercised, sold or lapse. Distributions by the Fund derived from net short-term
and net long-term capital gains (after taking into account any net capital loss
carryovers) may generally be made twice each year. One distribution will be
made in December and will reflect the net short-term and net long-term capital
gains realized by the Fund as of October 31 of such year. Any net

<PAGE>

short-term and net long-term capital gains realized by the Fund during the
remainder of the fiscal year will normally be distributed following the end of
the fiscal year in the month of July. The Fund may determine to make only one
distribution derived from net short-term and net long-term capital gains in any
year or adjust the timing of these distributions for operational or other
reasons.

Further information on the taxation of distributions is included under
"Taxation of the Fund and Its Shareholders."

DISTRIBUTION DATE

Although subject to change by the Fund's Board of Directors, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends quarterly for shareholders of record on the last business day
of the months of March, June and September, payable on or about the 15th day of
the following month. The Fund's December dividend will generally be declared
and paid during that month.

The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed, and is subject to the discretion of the Board of Directors. Fund
shares are quoted ex-dividend on the first business day following the record
date. The Fund does not pay "interest" or guarantee any fixed rate of return on
an investment in its shares.

In order to be entitled to a dividend, the investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.

DIVIDEND REINVESTMENT

Unless requested otherwise in writing or on the Shareholder Application, income
dividends and any capital gain distributions will be automatically reinvested
in the shareholder's account in the form of additional shares, valued at the
closing net asset value (without sales charge) on the dividend reinvestment
date. Shareholders have the right to change their election with respect to the
receipt of distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after the Fund has been notified. See the Statement of Additional
Information for more information.

Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.

HOW SHAREHOLDERS PARTICIPATE
IN THE RESULTS OF THE FUND'S ACTIVITIES

The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund.

<PAGE>

DISTRIBUTIONS IN CASH

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Income
dividend and capital gain distributions directed to another fund in the
Franklin Group of Funds or the Templeton Group are eligible for investment at
net asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

The following discussion reflects some of the provisions of the Code that
affect mutual funds and their shareholders. For further information, see the
section entitled "Additional Information Regarding Taxation" in the Statement
of Additional Information.

The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. By distributing all of its net investment income and net realized
short-term and long-term capital gains for a fiscal year in accordance with the
timing requirements imposed by the Code and by meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.

For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.

Distributions derived from the excess of net long-term capital gain over net
short-term capital loss (net capital gain) are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.

Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or in another fund in the Franklin Group of
Funds and a sales charge which would otherwise apply to the

<PAGE>

reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment. Shareholders should consult with
their tax advisors concerning the tax rules applicable to the redemption or
exchange of Fund shares.

For the fiscal year ended December 31, 1993, 92.70% of the net income dividends
paid by the Fund qualified for the corporate dividends-received deduction,
subject to certain holding period, hedging and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.

The Fund's activities involving options, spreads, straddles, futures contracts,
and certain security transactions including short sales, synthetic positions,
and loans of portfolio securities may reduce the portion of the Fund's
dividends which otherwise would be eligible for the corporate
dividends-received deduction. These transactions are subject to special tax
rules that may affect the amount, timing, and character of distributions to
shareholders. These investments and transactions are discussed in the Statement
of Additional Information.

In addition, the Fund's transactions in options and futures contracts will give
rise to taxable income, gain or loss and will be subject to special tax
treatment under certain mark-to-market and straddle rules, the effect of which
may be to accelerate income to the Fund, defer Fund losses, cause adjustments
in the holding periods of Fund securities, convert capital gains and losses
into ordinary income and losses, convert long-term capital gains into
short-term capital gains, and convert short-term capital losses into long-term
capital losses. Certain elections may be available to the Fund to mitigate some
of the unfavorable consequences of the provisions described in this paragraph.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding taxes to distributions received by them from the Fund.

The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.

HOW TO BUY SHARES OF THE FUND

Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin providing for regular
periodic investments. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares.

PURCHASE PRICE OF FUND SHARES

Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application ac-

<PAGE>

companied by a negotiable check). The sales charge is a variable percentage of
the offering price, depending upon the amount of the sale. On orders for
100,000 shares or more, the offering price will be calculated to four decimal
places. On orders for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."

Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------------------
DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE AS A PERCENTAGE OF AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE NET AMOUNT INVESTED OF OFFERING PRICE*
------------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.

On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. Sales charges on purchases of $1,000,000 or more
are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group
(except Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments
may not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on
the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation
will be at the applicable sales charge of 1% or more until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $2,500,000, in which event the sales charge on the excess
will be calculated as stated above. Sales charge reductions based upon
purchases in more than one of the funds in the Franklin Group or Templeton

<PAGE>

Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.

Distributors, or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned additional
compensation is paid for by the Fund or its shareholders.

Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.

QUANTITY DISCOUNTS IN SALES CHARGES

Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.

In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:

1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will

<PAGE>

be effective only after notification to Distributors that the investment
qualifies for a discount. The shareholder's holdings in the Franklin/Templeton
Group acquired more than 90 days before the Letter of Intent is filed will be
counted towards completion of the Letter of Intent but will not be entitled to
a retroactive downward adjustment of sales charge. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less
redemptions) during the period. An investor who executes a Letter of Intent
prior to the change in the sales charge structure for the Fund will be entitled
to complete the Letter at the lower of (i) the new sales charge structure; or
(ii) the sales charge structure in effect at the time the Letter was filed with
the Fund.

AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, the investor will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge which would have applied to
the aggregate purchases if the total of such purchases had been made at a
single time. Upon such remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the investor or
delivered to the investor or to the investor's order. If within 20 days after
written request such difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize such difference will be
made. In the event of a total redemption of the account prior to fulfillment of
the Letter of Intent, the additional sales charge due will be deducted from the
proceeds of the redemption and the balance will be forwarded to the investor.
By completing the Letter of Intent section of the Shareholder Application, an
investor grants to Distributors a security interest in the reserved shares and
irrevocably appoints Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or

<PAGE>

all shares for the purpose of paying any additional sales charge due. Purchases
under the Letter of Intent will conform with the requirements of Rule 22d-1
under the 1940 Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is in effect each
time a purchase is made.

Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.

If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
various procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently those criteria require that
the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee savings plans and employee benefit plans not
qualified under Section 401 of the Code may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for qualified
groups previously described under "Group Purchases" which enable Distributors
to realize economies of scale in its sales efforts and sales related expenses.
If investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of

<PAGE>

their own resources, to such dealer in an amount not to exceed 1% of the amount
invested. Contact Franklin's Institutional Sales Department for additional
information.

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check, or by
telephone 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same
fund is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the Statement of Additional Information.

Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment
in a registered management investment company which charges a contingent
deferred sales charge, and which has investment objectives similar to those of
the Fund.

Shares of the Fund may also be purchased at net asset value by (1) officers,
directors and full-time employees of the Fund or any fund in the Franklin Group
of Funds or the Templeton Group, the Manager and Distributors and affiliates of
such companies, if they have been such for at least 90 days, and by their
spouses and family members, (2) former participants in the Franklin/Templeton
Profit Sharing/401(k) plan, who elect to make a direct rollover of all, or a
portion of, their eligible distribution account balance from

<PAGE>

such plan, (3) registered securities dealers and their affiliates, for their
investment account only, and (4) registered personnel and employees of
securities dealers and by their spouses and family members in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.

Shares of the Fund may also be purchased at net asset value by any state,
county or city, or any instrumentality, department, authority or agency
thereof, which has determined that the Fund is a legally permissible investment
and which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares of any
registered management investment company (an "eligible governmental
authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL
INVESTMENTS FOR THEM. Municipal investors considering investment of proceeds of
bond offerings into the Fund should consult with expert counsel to determine
the effect, if any, of various payments made by the Fund or its investment
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

GENERAL

Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.

PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS

Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an existing retirement plan or
Franklin/Templeton Trust Company may provide the plan documents and trustee or
custodian services. A plan document must be adopted in order for a plan to be
in existence.

Franklin/Templeton Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for various types of retirement plans. The brochures for
each of the plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and IRS requirements.

The Franklin IRA is an individual retirement account in which the
contributions, which are for the most part still deductible for the majority of
wage earners, accumulate on a tax-deferred basis until withdrawn. Pursuant to
the Code, individuals who are not active participants (and who do not have a
spouse who is an active participant) in an employer or joint
employer/union-maintained retirement plan may deduct their full amount of IRA
contribution, the lesser of $2,000 or 100% of compensation. For taxpayers who
are active participants (or whose spouse is an active participant)

<PAGE>

in such a retirement plan, the IRA deduction is gradually phased out to the
extent that their adjusted gross incomes exceed certain specified limits.

For taxpayers filing a joint return, even if one spouse received less than $250
in compensation for the year, two IRAs, with an aggregate contribution not
exceeding the lesser of 100% of compensation or $2,250, may be established for
both spouses, provided that no more than $2,000 be contributed to either one.

The Franklin IRA Rollover account is designed to maintain the tax-deferred
status of lump-sum or qualifying partial distributions from an
employer-sponsored retirement plan which are eligible for rollover treatment.

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small employers
(generally 25 or fewer employees) who want to make deductible retirement
contributions to an employee's IRA in an amount to be determined annually at
the discretion of the employer up to the lesser of $30,000 or 15% of
compensation per employee. The SAR-SEP allows employees to defer a pre-taxed
portion of their salary to an IRA through their employer in an amount
determined by the employee. The maximum annual salary deferral limit for a
SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals) or $9,240
(1994 limit; indexed for inflation).

The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
educational and certain non-profit institutions [Section 501(c)(3)
organizations]. The 403(b) Plan allows participants to determine the annual
amount of salary they wish to defer. The maximum annual salary deferral amount
is generally the lesser of 25% or $9,500. Franklin Trust Company may provide
billing information and other support services for the employer.

The Franklin Business Retirement Plans may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan allows
an employer to make contributions, at its discretion, of up to the lesser of
$30,000 or 15% of compensation per employee each year. The Money Purchase
Pension Plan allows the employer to contribute up to the lesser of $30,000 or
25% of compensation per employee; however, a fixed contribution rate must be
elected by the employer at the outset. The Money Purchase Pension Plan may be
used in conjunction with a Profit Sharing Plan to achieve a combined
contribution rate of 25%, up to 15% in the Profit Sharing Plan and a fixed
contribution rate of 10% in the Money Purchase Pension Plan.

Franklin/Templeton Trust Company can add optional provisions to the Profit
Sharing and Money Purchase Pension Plans described above and can also provide
Defined Benefit, Target Benefit, and 401(k) Plans on a custom designed basis.
Business Retirement Plans, whether standard or custom designed, may require an
annual report to be filed with the IRS.

Liquidations of any Franklin retirement accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."

For additional information about the Franklin retirement plans, shareholders
may request brochures describing each of the plans from their securities
dealer, investment advisor or Distributors. The brochures contain more specific
information about the retirement plans available from Franklin. Individuals and
employers should consult with a competent tax or financial advisor before
choosing a retirement plan.

<PAGE>

OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS

CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).

SHARE CERTIFICATES

Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate cannot
be replaced without obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the shareholder's
securities dealer.

CONFIRMATIONS

A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including the number of shares
in "plan balance" for the account of the shareholder.

AUTOMATIC INVESTMENT PLAN

Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.

The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semiannual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the shareholder's account in additional shares at net
asset value. Payments will then be made from the liquidation of shares at net
asset value on the day of the trans-

<PAGE>

action (which is generally the first business day of the month in which the
payment is scheduled) with payment generally received by the shareholder three
to five days after the date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected withdrawals to
another fund in the Franklin Group of Funds or the Templeton Group, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be
made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Withdrawals which may be paid in the interim will be sent to the
address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance will be sent to the
shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the Plan may be more than the shareholder's actual yield or income, part
of the payment may be a return of the shareholder's investment.

The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.

INSTITUTIONAL ACCOUNTS

There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1-800/321-8563.

EXCHANGE PRIVILEGE

The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange

<PAGE>

into for all specific requirements or limitations on exercising the exchange
privilege, for example, minimum holding periods or applicable sales charges.
Exchanges may be made in any of the following ways:

EXCHANGES BY MAIL

Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.

EXCHANGES BY TELEPHONE

Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by calling Investor Services at 1-800/632-1753. IF
THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT,
THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to "Telephone
Transactions - Verification Procedures."

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.

EXCHANGES THROUGH SECURITIES DEALERS

As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges by Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income and
capital gain dividends will be transferred to the fund being exchanged into and
will be invested at net asset value. Because the exchange is considered a
redemption and purchase of shares, the shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and information reporting
may also apply. Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and in the Statement
of Additional Information.

<PAGE>

There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.

If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.

The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.

RETIREMENT ACCOUNTS

Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may, however, apply to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."

TIMING ACCOUNTS

Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.

RESTRICTIONS ON EXCHANGES

In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.

The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) make more than two exchanges out of the Fund
per calendar quarter, or (iii) exchange shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.

The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected.
A shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.

The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.

<PAGE>

HOW TO SELL SHARES OF THE FUND

A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:

REDEMPTIONS BY MAIL

Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. Shareholders are requested to provide
a telephone number(s) where they may be reached during business hours, or in
the evening if preferred. Investor Services' ability to contact a shareholder
promptly when necessary will speed the processing of the redemption.

To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:

(1) the proceeds of the redemption are over $50,000;

(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;

(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;

(4) share certificates, if the redemption proceeds are in excess of $50,000;
or

(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.

Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; (3)
securities dealers which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000; or (4)
institutions that participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee medallion program. A
notarized signature will not be sufficient for the request to be in proper
form.

Where shares to be redeemed are represented by share certificates, the request
for redemption must

<PAGE>

be accompanied by the share certificate and a share assignment form signed by
the registered shareholders exactly as the account is registered, with the
signature(s) guaranteed as referenced above.

Shareholders are advised, for their own protection, to send the share
certificate and assignment form in separate envelopes if they are being mailed
in for redemption.

Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:

Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation and (2) a corporate resolution.

Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.

Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.

Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.

Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.

Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.

REDEMPTIONS BY TELEPHONE

Shareholders who file a Telephone Redemption Authorization Agreement (the
"Agreement") may redeem shares of the Fund by telephone, subject to the
Restricted Account exception noted under "Telephone Transactions - Restricted
Accounts." THE AGREEMENT MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR
SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE
FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."

For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.

REDEEMING SHARES THROUGH SECURITIES DEALERS

The Fund will accept redemption orders by telephone or other means of
electronic transmission

<PAGE>

from securities dealers who have entered into a dealer or similar agreement
with Distributors. This is known as a repurchase. The only difference between a
normal redemption and a repurchase is that if the shareholder redeems shares
through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all
other documents set forth above. A shareholder's letter should reference the
Fund, the account number, the fact that the repurchase was ordered by a dealer
and the dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest during the time between
receipt of the dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
dealer may charge a fee for handling the order. The Statement of Additional
Information contains more information on the redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be suspended
or the date of payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC that trading on the
Exchange is restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount received may
be more or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.

RETIREMENT ACCOUNTS

Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.

OTHER

For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the broker may call
Franklin's Dealer Services Department.

TELEPHONE TRANSACTIONS

Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301. All shareholders will

<PAGE>

be able to: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) exchange Fund shares
as described in this Prospectus by telephone. In addition, shareholders who
complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.

VERIFICATION PROCEDURES

The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the
purpose of establishing the caller's identification, and by sending a
confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction will not be
executed, and neither the Fund nor Investor Services will be liable for any
losses which may occur because of a delay in implementing a transaction.

RESTRICTED ACCOUNTS

Telephone redemptions and dividend option changes may not be accepted on
Franklin/Templeton Trust Company or Templeton Funds Trust Company retirement
accounts. To assure compliance with all applicable regulations, special forms
are required for any distribution, redemption, or dividend payment. Currently,
the telephone exchange privilege is extended to Franklin/Templeton IRA and
403(b) retirement accounts; certain restrictions may apply to other types of
retirement plans. Changes to dividend options must also be made in writing.

To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call a
Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2") (also toll free) for Templeton accounts.

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
registered investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this Prospectus.

Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.

The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.

VALUATION OF FUND SHARES

The net asset value per share of the Fund is determined as of 1:15 p.m. Pacific
time each day that the Exchange is open for trading. Many newspa-

<PAGE>

pers carry daily quotations of the prior trading day's closing "bid" (net asset
value) and "ask" (offering price, which includes the maximum sales charge of
the Fund).

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities (including, without limitation, the
current market value of any outstanding options written by the Fund), accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and dividends are recorded
on the ex-dividend date. Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Portfolio securities
underlying actively traded call options are valued at their market price as
determined above. The current market value of any option held by the Fund is
its last sales price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market quotations are
readily available are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the Board of
Directors. All money market instruments with a maturity of more than 60 days
are valued at current market, as discussed above. All money market instruments
with a maturity of 60 days or less are valued at their amortized cost, which
the Board of Directors has determined in good faith constitutes fair value for
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the directors determine that it does not constitute
fair value for such purposes. With the approval of the directors, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the
above described functions.

HOW TO GET INFORMATION REGARDING
AN INVESTMENT IN THE FUND

Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. Informa-

<PAGE>

tion about the Fund may be accessed by entering Fund Code 02 followed by the #
sign, when requested to do so by the automated operator.

To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:

<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
--------------- ------------- ---------------------------------
<S> <C> <C> <C>
Shareholder Services 1-800/632-2301 6:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

PERFORMANCE

Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.

Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods, or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price.

Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.

Yield, which is calculated according to a formula prescribed by the SEC (see
the Statement of Additional Information), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by the current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends

<PAGE>

during the past twelve months. 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 gain, and is calculated over a different
period of time.

In each case performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the
maximum sales charge on the purchase of shares. When there has been a change in
the sales charge structure, the historical performance figures will be restated
to reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures
should not be considered to represent what an investment may earn in the future
or what the Fund's yield, distribution rate or total return may be in any
future period.

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Fund, including the auditor's report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Fund at the telephone number or address set forth on the cover
page of this prospectus.

Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the Statement of Additional Information.

ORGANIZATION

The Fund's authorized capital stock consists of 5,000,000,000 shares of common
stock. All shares are of one class, have one vote and, when issued, are fully
paid and nonassessable. All shares have equal voting, participation and
liquidation rights, but have no subscription, preemptive or conversion rights.

VOTING RIGHTS

Shares of the Fund have cumulative voting rights which means that in all
elections of directors each shareholder has the right to cast a number of votes
equal to the number of shares owned, multiplied by the number of directors to
be elected at such election, and each shareholder may cast the whole number of
votes for one candidate or distribute such votes among two or more candidates.

The California Corporations Code does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold such routine
annual meetings. The Fund may, however, hold a special meeting for such
purposes as changing fundamental investment restrictions, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by a majority of
the Board of Directors or by shareholders holding at least ten percent of the
shares entitled to vote at the meeting. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or
removal of directors such as that provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose ac-

<PAGE>

count has been in existence for at least 12 months and has a value of less than
$50, but only where the value of such account has been reduced by the
shareholder's prior voluntary redemption of shares and has been inactive
(except for the reinvestment of distributions) for a period of at least six
months, provided advance notice is given to the shareholder. More information
is included in the Statement of Additional Information.

OTHER INFORMATION

Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).

"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.

ACCOUNT REGISTRATIONS

An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.

Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.

A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.

Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean as "joint tenants with rights of survivorship" and not as
"tenants in common."

Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer.
Both the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.

The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the

<PAGE>

name of, or by, the owner, the nominee, or both. If a securities dealer or
other representative is of record on an investor's account, the investor will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the
NSCC, to have adopted as instruction and signature any such electronic
instructions received by the Fund and the Shareholder Services Agent, and to
have authorized them to execute the instructions without further inquiry. At
the present time, such services which are available, or which are anticipated
to be made available in the near future, include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems.

Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.

IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS

Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup
withholding if the IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding for previous under-reporting of interest or dividend income.

The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the then current net asset value
upon receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an awaiting "TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio: Lisa Costa and R. Martin Wiskemann since inception.

Lisa Costa, Portfolio Manager of Advisers, holds a bachelor of science degree
in finance from California State University at Hayward and a master's degree in
business administration and finance from Golden Gate University, San Francisco.
She has been with Advisers since 1980. Ms. Costa is a member of several
securities industry-related committees and associations.

R. Martin Wiskemann, Senior Vice President of Advisers, holds a degree in
business administration from the Handelsschule of the State of Zurich,
Switzerland. He has been with Advisers since 1972 and, prior thereto, he was a
securities analyst at Laird, Bissell & Meed and an investment manager with
Winfield & Company. Mr. Wiskemann is a member of several securities
industry-related committees and associations.

<PAGE>

SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN PREMIER RETURN FUND
DATED MAY 1, 1994 AS AMENDED SEPTEMBER 8, 1994

a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

Special Net Asset Value Purchases. As discussed in the Prospectus under "How to
Buy Shares of the Fund - Description of Special Net Asset Value Purchases,"
certain categories of investors may purchase shares of the Fund without a
front-end sales charge ("net asset value") or a contingent deferred sales
charge. Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for such
purchases, as indicated below. As a condition for these payments, Distributors
or its affiliates may require reimbursement from the securities dealers with
respect to certain redemptions made within 12 months of the calendar month
following purchase, as well as other conditions, all of which may be imposed by
an agreement between Distributors, or its affiliates, and the securities
dealer.

The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible
for (i) purchases of most equity and taxable-income Franklin Templeton Funds
made at net asset value by certain designated retirement plans (excluding IRA
and IRA rollovers): 1.00% on sales of $1 million but less than $2 million, plus
0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of
$3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most taxable income Franklin Templeton Funds made at net asset
value by non-designated retirement plans: 0.75% on sales of $1 million but less
than $2 million, plus 0.60% on sales of $2 million but less than $3 million,
plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on
sales of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. These payment breakpoints are reset every 12 months for
purposes of additional purchases. With respect to purchases made at net asset
value by certain trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of $10
million or more, Distributors, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.

Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the prospectus. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the Letter
of Intent section completed, may be filed with the Fund. After the Letter of
Intent is filed, each additional investment will be entitled to the sales
charge applicable to the level of investment indicated on the Letter. Sales
charge reductions based upon purchases in more than one of the Franklin
Templeton Funds will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's holdings in the
Franklin Templeton Funds acquired more than 90 days before the Letter of Intent
is filed will be counted towards completion of the Letter of Intent but will
not be entitled to a retroactive downward adjustment in the sales charge. Any
redemptions made by the shareholder, other than by a designated benefit plan
during the 13-month period will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge, depending upon the
amount actually purchased (less redemptions) during the period. The upward
adjustment does not apply to designated benefit plans. An investor who executes
a Letter of Intent prior to a change in the sales charge structure for the Fund
will be entitled to complete the Letter of Intent at the lower of (i) the new
sales charge structure; or (ii) the sales charge structure in effect at the
time the Letter of Intent was filed with the Fund.

As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of Intent and is an
amount which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable
to a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total
of such purchases had

<PAGE>

been made at a single time. Upon such remittance the reserved shares
held for the investor's account will be deposited to an account in the name of
the investor or delivered to the investor or to the investor's order. If within
20 days after written request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to the investor.

If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectus), the level
and any reduction in sales charge for these designated benefit plans will be
based on actual plan participation and the projected investments in the
Franklin Templeton Funds under the Letter of Intent. Benefit plans are not
subject to the requirement to reserve 5% of the total intended purchase, or to
any penalty as a result of the early termination of a plan, nor are benefit
plans entitled to receive retroactive adjustments in price for investments made
before executing the Letter of Intent.

b) The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:

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

<PAGE>
FRANKLIN
PREMIER [LOGO]
RETURN FUND

STATEMENT OF
ADDITIONAL INFORMATION

MAY 1, 1994 777 MARINERS ISLAND BLVD., P.O. BOX 7777
AS AMENDED SEPTEMBER 8, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN

<PAGE>

FRANKLIN
PREMIER
RETURN FUND

STATEMENT OF
ADDITIONAL INFORMATION LOGO

MAY 1, 1994 777 MARINERS ISLAND BLVD., P.O. BOX 7777
AS AMENDED SEPTEMBER 8, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN

<TABLE>
<S> <C>
CONTENTS PAGE

About the Fund (See also the Prospectus "About the Fund" and
"General Information")................................................ 2
The Fund's Investment Restrictions and Policies (See also
the Prospectus "Investment Objectives and Policies of the Fund")...... 2
Officers and Directors................................................. 8
Investment Advisory and Other Services (See also the Prospectus
"Management of the Fund")............................................. 10
The Fund's Policies Regarding Brokers Used on Portfolio Transactions... 11
Additional Information Regarding Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund," "How to Sell Shares of the Fund,"
and "Valuation of Fund Shares")....................................... 13
Additional Information Regarding Taxation.............................. 15
The Fund's Underwriter................................................. 17
General Information.................................................... 18
Financial Statements................................................... 22
</TABLE>

A Prospectus for Franklin Premier Return Fund (the "Fund") dated May 1, 1994,
as amended September 8, 1994 and as may be further amended from time to time,
which provides the basic information you should know before investing in the
Fund, may be obtained without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address listed above. This Statement of Additional Information is not a
prospectus. It contains information in addition to and in more detail than set
forth in the Prospectus. This Statement 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.

<PAGE>

ABOUT THE FUND

The Fund is a diversified, open-end management investment company, commonly
called a "mutual fund." It was incorporated in Hawaii on December 5, 1951, and
reincorporated in California on April 27, 1983, pursuant to a statutory merger
with a corporation formed on April 18, 1983. On April 12, 1991 shareholders
approved a change in the Fund's investment objective and policies and the
adoption of the Fund's current name. The Fund has only one class of capital
stock with no par value.

THE FUND'S INVESTMENT
RESTRICTIONS AND POLICIES

TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES

Call and Put Options on Securities. The Fund intends to write covered put and
call options and purchase put and call options which trade on securities
exchanges and in the over-the-counter market.

Writing Call and Put Options. A call option gives the option holder the right
to buy the underlying securities from the option writer at a stated exercise
price. A put option gives the option holder the right to sell the underlying
security at the option exercise price at any time during the option period.

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

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

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

Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular

<PAGE>

security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.

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

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

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

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

Over-the-Counter Options ("OTC" options). The Fund intends to write covered put
and call options and purchase put and call options which trade in the
over-the-counter market to the same extent that it will engage in exchange
traded options. Just as with exchange traded options, OTC call options give the
option holder the right to buy an underlying security from an option writer at
a stated exercise price; OTC put options give the holder the right to sell an
underlying security to an option writer at a stated exercise price. However,
OTC options differ from exchange traded options in certain material respects.

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

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

Options on Stock Indices. The Fund may also purchase call options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to purchase or sell
stock at a specified price, options on a stock index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option ex-

<PAGE>

pressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.

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

Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of a
specified quantity of a financial instrument, such as a security, or the cash
value of a securities index during a specified future period at a specified
price. A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. Futures contracts have
been designed by exchanges which have been designated "contracts markets" by
the Commodity Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.

At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required, since each day the Fund would provide or receive cash
that reflects any decline or increase in the contract's value.

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

The Commodities Futures Trading Commission and the various exchanges have
established limits referred to as "speculative position limits" on the maximum
net long or net short position which any person may hold or control in a
particular futures contract. Trading limits are imposed on the maximum number
of contracts which any person may trade on a particular trading day. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The Fund does
not believe that these trading and positions limits will have an adverse impact
on the Fund's strategies for hedging its securities.

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

The Fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities which it
intends to purchase. The Fund will not enter into any stock index or financial
futures contract or related option if, immediately thereafter, more than
one-third of the Fund's net assets would be represented by futures contracts or
related options. In addition, the Fund may not purchase or sell futures
contracts or purchase or

<PAGE>

sell related options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions, and
premiums paid for related options, would exceed 5% of the market value of the
Fund's total assets. In instances involving the purchase of futures contracts
or related call options, money market instruments equal to the market value of
the futures contract or related option will be deposited in a segregated
account with the custodian to collateralize such long positions.

The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into futures contracts, (to the extent required by the rules of the
Securities and Exchange Commission), it will maintain with its custodian assets
in a segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contract and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.

STOCK INDEX FUTURES AND
OPTIONS ON STOCK INDEX FUTURES

The Fund may purchase and sell stock index futures contracts and options on
stock index futures contracts.

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

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

Options on Stock Index Futures. The Fund may purchase and sell call and put
options on stock index futures to hedge against risks of market-side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.

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

Bond Index Futures and Options on Such Contracts. The Fund may purchase and
sell futures contracts based on an index of debt securities and options on such
futures contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to
correlate with price movements in certain categories of debt securities. The
Fund's investment strategy in employing futures contracts based on an index of
debt securities will be similar to that used by it in other financial futures
transactions.

The Fund also may purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options.

Future Developments. The Fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its prospectus, if appropriate.

RISK FACTORS AND CONSIDERATIONS REGARDING
OPTIONS, FUTURES AND OPTIONS ON FUTURES

The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options

<PAGE>

on stock indices, stock index futures, financial futures and related options
depends on the degree to which price movements in the underlying debt index or
underlying debt securities correlate with price movements in the relevant
portion of the Fund's portfolio. Inasmuch as such securities will not duplicate
the components of the index or such underlying securities, the correlation will
not be perfect. Consequently, the Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and the
hedged securities which would result in a loss on both such securities and the
hedging instrument. Accordingly, successful use by the Fund of options on stock
indices, stock index futures, financial futures and related options will be
subject to the investment manager's ability to predict correctly movements in
the direction of the securities markets generally or a particular segment. This
requires different skills and techniques than predicting changes in the price
of individual stocks.

Positions in stock index options, stock index futures and
financial futures and related options may be closed out only on an exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option or futures
contract or related option at any specific time. Thus, it may not be possible
to close such an option or futures position. The inability to close options or
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities. The Fund will enter into an option or futures
position only if there appears to be a liquid secondary market for such options
or futures.

There can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently,
the Fund may be able to realize the value of an OTC option it has purchased
only by exercising it or entering into a closing sale transaction with the
dealer that issued it. Similarly, when the Fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the Fund
originally wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires or
the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for other
investment purposes while it is obligated as a put writer. Similarly, a
purchaser of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.

The Commodities Futures Trading Commission and the various exchanges have
established limits, referred to as "speculative position limits," on the
maximum net long or net short position which any person may hold or control in
a particular futures contract. Trading limits are imposed on the maximum number
of contracts which any person may trade on a particular trading day. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The Fund does
not believe that these trading and positions limits will have an adverse impact
on the Fund's strategies for hedging its securities.

In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the investment adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if the

<PAGE>

Fund has hedged against the possibility of an increase in interest rates which
would adversely affect the price of bonds held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. Such sales may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous
to do so.

The Fund's sale of futures contracts and purchase of put options on
futures contracts will be solely to protect its investments against declines in
value. The Fund expects that in the normal course it will purchase securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.

In addition to the objectives and policies discussed in the Prospectus, the
Fund has adopted the following restrictions as fundamental policies. The Fund
may not:

1. Purchase the securities of any one issuer (except securities issued by the
United States of America or any instrumentality thereof) if, immediately after
and as a result of such purchase, the market value of the holdings of the Fund
in the securities of such issuer would exceed 5% of the market value of the
Fund's total net assets.

2. Purchase the securities of any issuer if such purchase would cause more than
10% of the outstanding voting securities of such issuer, or more than 10% of
the outstanding voting securities of any one class of such issuer, to be held
in the Fund's portfolio.

3. Concentrate investments in any particular industry; therefore, the Fund will
not purchase a security if, as a result of such purchase, more than 25% of its
assets will be invested in a particular industry.

4. Purchase any securities on margin or sell securities short.

5. Purchase or retain the securities of any regulated investment company;
except to the extent the Fund invests its uninvested daily cash balances in
shares of Franklin Money Fund and other money market funds in the Franklin
Group of Funds provided (i) its purchases and redemptions of such money market
fund shares may not be subject to any purchase or redemption fees, (ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and (iii)
provided aggregate investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.

6. Invest more than 15% of the Fund's total assets in the securities of all
issuers in the aggregate, the respective businesses of which have been in
continuous operation for less than three years. As a non-fundamental policy,
the Fund has determined to limit such investments to 5% of its total assets.

7. Purchase or retain investments in securities of any issuer in which
directors or officers of the Fund have a substantial financial interest. The
Fund, as a non-fundamental policy, will not purchase the securities of any
issuer if any officer, director or employee of the Fund is an officer, director
or security holder of such issuer and owns beneficially more than 1/2 of 1% of
the securities of such issuer, and if all of such persons owning more than 1/2
of 1% own more than 5% of the outstanding securities of such issuer.

8. Borrow money, except as a temporary measure for extraordinary purposes, and
then not in excess of 10% of the total assets of the Fund taken at cost or
value, whichever is less, and provided that immediately after any such
borrowing there is an asset coverage (meaning the ratio which the value of the
total assets of the Fund, less all liabilities and indebtedness of the Fund not
represented by such borrowing, bears to the aggregate amount of such borrowing)
of at least 300% for all borrowings of the Fund.

9. Lend any money or assets of the Fund, except through the purchase of a
portion of an issue of debt securities distributed privately by federal, state
or municipal government agencies, and then not in excess of 10% of the total
assets of the Fund taken at cost or value, whichever is less, or to the extent
the entry into a repurchase agreement may be deemed a loan. For the purpose of
this policy, the purchase by the Fund of a portion of an issue of publicly
distributed corporate or governmental bonds, debentures or other debt
securities shall not be deemed to be the lending of money by the Fund.

<PAGE>

10. Mortgage or pledge any of the Fund's assets. The escrow arrangements
involved in the Fund's option writing activities are not deemed to be a
mortgage or pledge of its assets.

11. Act as a securities underwriter or investor in real estate or commodities,
other than the Fund's investments in derivative securities, including financial
futures and options on financial futures.

12. Purchase or sell any securities other than shares of the Fund from or to
the manager or any officer or director of the manager of the Fund.

13. Invest in the securities of companies for the purpose of exercising
control.

14. Issue securities senior to the Fund's presently authorized common stock.

So long as the percentage restrictions above are observed by the Fund at the
time it purchases any security, changes in values of particular Fund assets or
the assets of the Fund as a whole will not cause a violation of any of the
foregoing restrictions.

In order to change any of these restrictions which are fundamental policies,
approval is needed by the lesser of (i) 67% or more of the Fund's voting
securities present at a meeting, if the holders of more than 50% of the Fund's
voting securities are represented at that meeting or (ii) more than 50% of the
Fund's outstanding voting securities.

In addition to these fundamental policies, it is the Fund's present policy
(which may be changed without the approval of the Fund's shareholders) not to:
invest in oil, gas or other mineral exploration or development programs; engage
in joint or joint and several trading accounts in securities, except that a
Fund order to purchase or sell securities may be combined with other orders to
obtain lower brokerage commissions; invest in any security which would be
restricted from sale to the public without registration under the Securities
Act of 1933 if, as a result of such purchase, more than 5% of the Fund's total
assets would be invested in such securities; or invest more than 10% of its
assets in securities, including restricted securities, which are not readily
marketable. The Fund's investments in warrants, if any, other than those
acquired by the Fund as a part of a unit, valued at the lower of cost or
market, will not exceed 5% of the value of the Fund's net assets, including not
more than 2% which are not listed on the New York or American Stock Exchange.
The Fund will not invest in straddles or spreads or any combination thereof;
however, the Fund may purchase put options on securities in its portfolio and
call options to close out its obligations on a call option it has previously
written (see "Investment Objectives and Policies of the Fund" in the
Prospectus).

The exchanges on which options are traded have established limitations
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert (regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers). It is possible
that the Fund and other clients of the Manager may be considered to be such a
group. An exchange may order the liquidation of positions found to be in
violation of these limits, and it may impose certain other sanctions. These
position limits may restrict the number of options which the Fund will be able
to write on a particular security.

OFFICERS AND DIRECTORS

The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities.
The directors, in turn, elect the officers of the Fund who are responsible for
administering the day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"), are
indicated by an asterisk (*).

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Director President and Director, Abbott Corporation (an investment company); Director,
1045 Sansome St. Vacu-Dry Co. (a food processing company) and Mother Lode Gold Mines Consolidated;
San Francisco, CA 94111 and director, trustee or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
</TABLE>
8

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of
Park Avenue at Morris County General Host Corporation; director of certain of the investment
P. O. Box 1945 companies in the Templeton Group of Funds; and director,
Morristown, NJ 07962-1945 trustee or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.

David W. Garbellano Director Privatete Investor; Assistant Secretary/Treasurer and Director,
111 New Montgomery St., #402 Berkeley Science Corporation (a venture capital company); and
San Francisco, CA 94105 director, trustee or managing general partner, as the case may be, of
most of the investment companies in the Franklin Group of Funds.

*Edward B. Jamieson President and Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.;
777 Mariners Island Boulevard Director and officer and/or director or trustee of some of the investment
San Mateo, CA 94404 companies in the Franklin Group of Funds.

*Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Board and Director Franklin/Templeton Distributors, Inc.; Chairman of the Board and
San Mateo, CA 94404 Director, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; director of
certain of the investment companies in the Templeton Group of Funds;
and officer and/or director, trustee or managing general partner, as
the case may be, of most other subsidiaries of Franklin Resources, Inc.
and of most of the investment companies in the Franklin Group of Funds.

Hayato Tanaka Director Retired, former owner of The Jewel Box Orchids; and Trustee of some
277 Haihai Street of the funds in the Franklin Group of Funds.
Hilo, HI 96720

*R. Martin Wiskemann Vice President Senior Vice President, Portfolio Manager and Director, Franklin
777 Mariners Island Blvd. and Director Advisers, Inc.; Senior Vice President, Franklin Management, Inc.; Vice
San Mateo, CA 94404 President, Treasurer and Director, ILA Financial Services, Inc. and
Arizona Life Insurance Company of America; and officer and/or director,
as the case may be, of many of the investment companies in the Franklin
Group of Funds.

Rupert H. Johnson, Jr. Vice President Executive Vice President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; President and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.;
director of certain of the investment companies in the Templeton Group
of Funds; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of most of the investment companies in the Franklin
Group of Funds.
</TABLE>

<PAGE>

<TABLE>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------- --------------------- --------------------------------------------
<S> <C> <C>
Harmon E. Burns Executive Vice President, Secretary and Director, Franklin Resources,
777 Mariners Island Blvd. Inc.; Executive Vice President and Director, Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; director of
certain of the investment companies in the Templeton Group of Funds;
officer and/or director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of all
Vice President the investment companies in the Franklin Group of Funds.

Kenneth V. Domingues Senior Vice President, Franklin Resources, Inc. and Franklin Advisers,
777 Mariners Island Blvd. Inc.; Vice President, Franklin/Templeton Distributors, Inc.; officer or
San Mateo, CA 94404 director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing general partner, as the
Vice President case may be, of all the investment companies in the Franklin Group
and Treasurer of Funds.

Edward V. McVey Senior Vice President/National Sales Manager, Franklin/Templeton
777 Mariners Island Blvd. Distributors, Inc.; and officer of many of the investment companies in
San Mateo, CA 94404 Vice President the Franklin Group of Funds.

Deborah R. Gatzek Senior Vice President - Legal, Franklin Resources, Inc. and
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; Vice President, Franklin
San Mateo, CA 94404 Vice President Advisers, Inc.; and officer of all the investment companies in the
and Secretary Franklin Group of Funds.
</TABLE>

As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds. Directors not affiliated with
the investment manager are currently paid fees of $100 per meeting attended and
are reimbursed for expenses incurred in connection with attending such
meetings. During the fiscal year ended December 31, 1993, fees totaling $6,891
were paid to directors of the Fund who are not affiliated with the investment
manager. No officer or director received any other compensation directly from
the Fund. As of February 8, 1994, the directors and officers, as a group, owned
of record and beneficially approximately 47,076 outstanding shares of the Fund
or approximately 1.3% of shares outstanding. Certain officers or directors who
are shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Fund, no other person holds
beneficially or of record more than 5% of the Fund's outstanding common stock.

INVESTMENT ADVISORY AND OTHER SERVICES

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $113
billion in assets for over 3.5 million shareholders. The preceding table
indicates those officers and directors who are also affiliated persons of
Distributors and Advisers.

<PAGE>

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers through whom
the Fund's portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of the Fund's Board of Directors to whom
the Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping, clerical, secretarial
and administrative personnel and services; and provides certain telephone and
other mechanical services. The Manager is covered by fidelity insurance on its
officers, directors, and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager. See the Statement of
Operations in the financial statements at the end of this Statement of
Additional Information for additional details of these expenses.

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for
the first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2
of 1% per year) on net assets of the Fund in excess of $100 million up to $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million. The management agreement specifies that the
management fee will be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by the Fund as prescribed
by any state in which the Fund's shares are offered for sale. The most
stringent current limit requires the Manager to reduce or eliminate its fee to
the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 21/2% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 11/2% of average net assets of the Fund in excess of
$100 million. Expense reductions have not been necessary based on state
requirements. Management fees for the fiscal years ended December 31, 1991,
1992 and 1993 were $197,765, $147,863 and $139,233, respectively.

The management agreement is in effect until April 30, 1995. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors 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 Fund's
directors who are not parties to the management agreement or interested persons
of any such party (other than as directors of the Fund), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Fund or by the Manager on 30 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.

Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.

Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended December 31, 1993,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report and this Statement
of Additional Information.

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Fund's Board of Directors may give.

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which

<PAGE>

are done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry
and information available to them concerning the level of commissions being
paid by other institutional investors of comparable size. The Manager will
ordinarily place orders for the purchase and sale of over-the-counter
securities on a principal rather than agency basis with a principal market
maker unless, in the opinion of the Manager, a better price and execution can
otherwise be obtained. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask price. The
Fund will seek to obtain prompt execution of orders at the most favorable net
price.

The amount of commission is not the only relevant factor to be considered in
the selection of a broker to execute a trade. If it is felt to be in the Fund's
best interests, the Manager may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Fund will
have to pay a higher commission than would be the case if no weight were given
to the broker's furnishing of these services. This will be done only if, in the
opinion of the Manager, the amount of any additional commission is reasonable
in relation to the value of the services. Higher commissions will be paid only
when the brokerage and research services received are bona fide and produce a
direct benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund, or when it is otherwise in the best interest of
the Fund to do so, whether or not such data may also be useful to the Manager
in advising other clients.

When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in
light of such services, and through brokers who supply research, statistical
and other data to the Fund and Manager in such amount of total brokerage as may
reasonably be required.

It is not possible to place a dollar value on the special executions or on the
research services received by Advisers 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 staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of
securities dealers to execute the Fund's portfolio transactions.

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain 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
under the management agreement will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection therewith.

If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the Manager are considered at or
about the same time, transactions in such securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by the Manager, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. It is recognized that in some
cases this procedure could possibly 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.

<PAGE>

During the fiscal years ended December 31, 1991, 1992 and 1993, the Fund paid
total brokerage commissions of $117,149, $47,902 and $26,048, respectively. As
of December 31, 1993, the Fund did not own securities of its regular
broker-dealers.

ADDITIONAL INFORMATION
REGARDING FUND SHARES

All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.

In connection with exchanges (see Prospectus "Exchange Privilege"), it should
be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the funds into which the Fund shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an
exchange for shares of any of the investment companies will be effected at the
close of business on the day the request for exchange is received in proper
form at the net asset value then effective.

Dividend checks which are returned to the Fund marked unable to "forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option, and the proceeds will be reinvested in additional shares
at net asset value until new instructions are received.

The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.

Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service
fees may be paid to Distributors or an affiliate of Distributors to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.

Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:

SIZE OF PURCHASE SALES CHARGE
- ---------------- ------------
<S> <C>
Up to U.S. $100,000................... 3%
U.S. $100,000 to U.S. $1,000,000 ..... 2%
Over U.S. $1,000,000.................. 1%
</TABLE>

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Fund. Such reference
however is for convenience only and does not indicate a legal conclusion of
capacity.

Orders for the redemption of shares are effected at net asset value
subject to the same conditions concerning time of receipt in proper form. It is
the securities dealer's responsibility to transmit the order in a timely
fashion and any loss to the customer resulting from failure to do so must be
settled between the customer and the securities dealer.

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may
purchase shares of the Fund at net asset value (without a sales charge) or at a
reduced sales charge. The reason for this is that there is minimal or no sales
effort required with respect to these investors. If certain investments at net
asset value are made through a dealer who has executed a dealer or similar
agreement with Distributors, Distributors or its affiliates may make

<PAGE>

a payment, out of their own resources, to such dealer in an amount not to
exceed 0.25% of the amount invested, paid pro rata on a quarterly basis on
average quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Securities and Exchange Commission. In the
case of requests for redemption in excess of such amounts, the directors
reserve the right to make payments in whole or in part in securities or other
assets of the Fund from which the shareholder is redeeming, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Fund. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net assets.
Should the Fund do so, a shareholder may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind; however, should it happen, shareholders may not be able to timely recover
their investment and may also incur brokerage costs in selling such securities.

REDEMPTIONS BY THE FUND

Due to the relatively high cost of handling small investments, the Fund
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption
of shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value
of $50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.

CALCULATION OF NET ASSET VALUE

As noted in the Prospectus, the Fund generally calculates net asset value as of
1:15 p.m. Pacific time each day that the Exchange is open for trading. As of
the date of this Statement of Additional Information, the Fund is informed that
the Exchange observes the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior
to the close of the Exchange. The values of such securities used in computing
the net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities and exchange rates
may occur between the times at which they are determined and 1:15 p.m. Pacific
time which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Board of Directors.

REINVESTMENT DATE

The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.

SPECIAL SERVICES

The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.

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

<PAGE>

ADDITIONAL INFORMATION REGARDING TAXATION

As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (The
"Code"), qualified as such and intends to continue to so qualify. The Directors
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
the shareholders. In such case, the Fund will be subject to federal and
possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be ordinary dividend income to the extent
of the Fund's available earnings and profits.

Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Funds's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.

Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed
by a Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment
in Fund shares. The entire dividend, including the portion which is treated as
a deduction, is includable in the tax base on which the alternative minimum tax
is computed and may also result in a reduction in the shareholder's tax basis
in its Fund shares, under certain circumstances, if the shares have been held
for less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.

The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the twelve-month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to shareholders by December 31 of each year
in order to avoid the imposition of a federal excise tax. The Fund intends as a
matter of policy to declare such dividends, if any, in December and to pay
these dividends in December or January to avoid the imposition of this tax, but
does not guarantee that its distributions will be sufficient to avoid any or
all federal excise taxes. Under these rules, certain distributions which are
declared in October, November or December but which, for operational reasons,
may not be paid to the shareholder until the following January, will be treated
for tax purposes as if paid by the Fund and received by the shareholder on
December 31 of the calendar year in which they are declared.

All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares purchased.

The Fund's investment in options and futures contracts are subject to many
complex and special tax rules. For example, over-the-counter options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse,
or closing out of the option or sale of the underlying stock or security. The
Fund treatment of certain other options, futures and forward contracts entered
into by the Fund is generally governed by Section 1256 of the Code. These
"Section 1256" positions generally include listed options on debt

<PAGE>

securities, options on broad-based stock indexes, options on securities
indexes, options on futures contracts, regulated futures contracts and certain
foreign currency contracts and options thereon.

Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions
at fiscal year end (except certain foreign currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. The effect of Section
1256 mark-to-market rules may be to accelerate income or to convert what
otherwise would have been long-term capital gains into short-term capital gains
or short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, 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
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and time of income distributed to shareholders by the Fund.

When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position which may reduce or
eliminate the operation of these straddle rules.

As discussed in the Prospectus, the Fund may invest in "synthetic convertible
securities," i.e., two or more financial instruments that will produce an
economic effect that is similar to holding a convertible security. Generally,
each instrument included in a synthetic position is treated as a separate
property for tax purposes. Thus, the conversion of a "synthetic" convertible
position may result in one or more taxable transactions with respect to the
separate properties, in contrast to the conversion of a true convertible
instrument, which may be tax-free. Gains or losses recognized may affect the
amount, timing and character of the fund's distributions.

Gains realized by the Fund from any transactions entered into after April 30,
1993 that are deemed to constitute "conversion transactions" under the Code and
which would otherwise produce capital gain may be recharacterized as ordinary
income to the extent that such gain does not exceed an amount defined by the
Code as the "applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent
the applicable federal rate, reduced by any prior recharacterizations under
this provision or Section 263(g) of the Code concerning capitalized carrying
costs.

As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than
three months ("short-short income"). This requirement may limit the Fund's
ability to engage in options, straddles, hedging transactions and forward or
futures contracts because these transactions are often consummated in less than
three months, may require the sale of portfolio securities held less than three
months and may, as in the case of short sales of portfolio securities reduce
the holding periods of certain securities within the Fund, resulting in
additional short-short income for the Fund. The Fund will monitor its
transactions in such options and contracts and may make certain other tax
elections in order to mitigate the effect of the above rules and to prevent
disqualification of the Fund as a regulated investment company under Subchapter
M of the Code.

<PAGE>

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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

The underwriting agreement will continue in effect for successive annual
periods provided that its continuance is specifically approved at least
annually by a vote of the Fund's Board of Directors, 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 Fund's directors who are not parties to
the underwriting agreement or interested persons of any such party (other than
as directors of the Fund), 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 90 days' written notice.

Distributors allows a portion of the underwriting commission on the sale of
Fund shares to the securities dealer of record, if any, on an account. Until
April 30, 1994, income dividends were reinvested at the offering price (which
includes the sales charge). Distributors allowed 50% of the entire commission
on such reinvestment to the securities dealer of record, if any, on an account.
Starting with any income dividends paid after April 30, 1994, such reinvestment
will be at net asset value.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended December 31, 1991, 1992 and 1993 were
$59,312, $45,152 and $54,031, respectively. After allowances to dealers,
Distributors retained $8,675, $7,642 and $7,353, for the fiscal years ended
December 31, 1991, 1992 and 1993, respectively. Distributors received no other
compensation from the Fund for acting as underwriter.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of
its average daily net assets for expenses incurred in the promotion and
distribution of its shares.

Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred
in the distribution and promotion of the Fund's shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparation and distribution of sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid
to securities dealers or their firms or others who have executed a servicing
agreement the Fund with Distributors or its affiliates.

In addition to the payments to which Distributors or others are entitled under
the Plan, the Plan also provides that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such payments shall
be deemed to have been made pursuant to the Plan.

In no event shall the aggregate asset-based sales charges which include
payments made under the Plan, plus any other payments deemed to be made
pursuant to the Plan, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.

The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.

To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the Plan as a result of applicable
federal law prohibiting certain banks from engaging in the distribution of
mutual fund shares. Such banking institutions, however, are permitted to
receive fees under the Plan for administrative servicing or for agency
transactions. If a bank were prohibited from providing such services, its
customers who are shareholders would be permitted to remain shareholders of the
Fund, and alternate means for continuing the servicing of

<PAGE>

such shareholders would be sought. In such an event, changes in the
services provided might occur and such shareholders might no longer be able to
avail themselves of any automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these changes. Securities
laws of states in which the Fund's shares are offered for sale may differ from
the interpretations of federal law expressed herein, and banks and financial
institutions selling shares of the Fund may be required to register as dealers
pursuant to state law.

The Board of Directors has determined that a consistent cash flow resulting
from the sale of new shares is necessary and appropriate to meet redemptions
and to take advantage of buying opportunities of portfolio securities without
having to make unwarranted liquidations of other portfolio securities. The
Board of Directors, therefore, felt that it would benefit the Fund to have
monies available for the direct distribution activities of Distributors or
others in promoting the sale of its shares. The Board of Directors, including
the non-interested directors, concluded that, in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.

The Plan has been approved by shareholders and by the directors of the Fund,
including those directors who are not interested persons, as defined in the
1940 Act. The Plan is effective through May 1, 1995 and renewable annually by a
vote of the Fund's Board of Directors, including a majority vote of the
directors who are non-interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such directors be done by the non-interested directors. The Plan
and any related agreement may be terminated at any time, without any penalty,
by vote of a majority of the non-interested directors on not more than 60 days'
written notice, by Distributors on not more than 60 days' written notice, by
any act that constitutes an assignment of the Underwriting Agreement with
Distributors, or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice. The Plan and
any related agreements may not be amended to increase materially the amount to
be spent for distribution expenses without approval by a majority of the Fund's
outstanding shares, and all material amendments to the Plan or any related
agreements shall be approved by a vote of the non-interested directors, cast in
person at a meeting called for the purpose of voting on any such amendment.

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

GENERAL INFORMATION

PERFORMANCE

As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.

Performance quotations by investment companies are subject to rules adopted by
the Securities and Exchange Commission ("SEC"). 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.
Current yield and average annual compounded total return quotations used by the
Fund are based on the standardized methods of computing performance mandated by
the SEC. An explanation of those and other methods used by the Fund to compute
or express performance follows.

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum sales charge is deducted from the
initial $1,000 purchase order, capital gains are reinvested at net asset value
and income dividends on the reinvestment dates during the period. The quotation
assumes the account was completely redeemed at the end of each one-, five- and
ten-year period and the deduction of all applicable charges and fees. When a
change is made to the sales charge structure, historical performance
information is restated to reflect the maximum sales charge currently in
effect. With the reinvest-

<PAGE>

ment of dividends at net asset value (without a sales charge) effective
May 1, 1994, and the maximum sales charge of 4.50% effective July 1, 1994,
historical performance information will be restated to reflect these changes.

In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation is a one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge the longer an
investor retains the investment in the Fund. The average annual compounded
rates of return for the Fund for the one-,five- and ten-year periods ended on
the date of the financial statements included herein are 13.54%, 10.61%, and
10.52%, respectively.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV =ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods (or fractional portion thereof).

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Fund for the
one-, five- and ten-year periods ended on the date of the financial statements
included herein are 13.54%, 65.56% and 171.88%, respectively.

YIELD

Current yield reflects the income per share earned by the Fund's portfolio
investments.

Current yield is determined 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
yield for the Fund for the 30-day period ended on the date of the financial
statements included herein was 1.82%.

These figures were obtained using the following SEC formula:

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

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 the Fund's
shareholders. Amounts paid to shareholders are reflected in the quoted "current
distribution rate." The current distribution rate is computed by dividing the
total amount of dividends per share paid by the Fund during the past 12 months
by a current maximum offering price. Under certain circumstances, such as when
there has been a change in the amount of dividend payout, or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid over the period such policies were in effect, rather than using
the dividends during the past 12 months. 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 specify Fund volatility
or risk. Measures of volatility or risk are generally used to compare Fund net
asset value or performance relative 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 the Standard & Poor's 500 Stock Index. 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

<PAGE>

variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.

OTHER PERFORMANCE QUOTATIONS

With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, total return, average annual
total return and other measures of performance as described elsewhere in this
Statement of Additional Information with the substitution of net asset value
for the public offering price.

Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.

Regardless of the method used, past performance is not necessarily indicative
of future results, but is an indication of the return to shareholders only for
the limited historical period used.

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

COMPARISONS

To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various 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.
Such comparisons may include, but are not limited to, the following examples:

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

b) Standard & Poor's 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.

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

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

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

f) 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.

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

h) 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.

i) 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.

j) 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.

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

l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.

<PAGE>

m) Standard & Poor's 100 Stock Index - an unmanaged index based on
the prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller, more flexible index for options trading.

From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.

Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. Investors 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
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to increase.
Certificates of deposit 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 such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
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 this
performance as compared to such other averages.

OTHER FEATURES AND BENEFITS

The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may
assist an investor 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 an investor through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that such goals
will be met.

MISCELLANEOUS INFORMATION

The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations in the United States 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 45 years and now services
more than 2.5 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 Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $114 billion in
assets under management for more than 3.6 million shareholder accounts and
offers 97 U.S.-based mutual funds. The Fund may identify itself by its NASDAQ
or CUSIP number.

The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was
also ranked number one. Franklin has been ranked number one in service quality
by Dalbar for five of the past six years.

OWNERSHIP AND AUTHORITY DISPUTES

In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's 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, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.

<PAGE>

FRANKLIN PREMIER RETURN FUND
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
of Franklin Premier Return Fund:

We have audited the accompanying statement of assets and liabilities of
Franklin Premier Return Fund, including the statement of investments in
securities, open options and net assets, as of December 31, 1993, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights included under the caption "Financial Highlights" for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits 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 statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1993 by correspondence with the custodian and brokers. 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 audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Premier Return Fund as of December 31, 1993, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
January 26, 1994

<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS,
DECEMBER 31, 1993

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 61.7%
AEROSPACE/DEFENSE 3.8%
20,000 Boeing Co. ............................................ $ 865,000
----------
CHEMICALS 3.1%
10,000 Dow Chemical Co. ...................................... 567,500
3,000 Du Pont (E.I.) de Nemours & Co. ....................... 144,750
----------
712,250
----------
COMMERCIAL SERVICES .7%
7,500 Ogden Corp. ........................................... 170,624
----------
COMPUTER SYSTEMS 1.4%
1,500 *Cisco Systems, Inc. ................................... 96,938
20,000 *Tandem Computers, Inc. ................................ 217,500
----------
314,438
----------
ELECTRICAL EQUIPMENT .6%
10,000 Westinghouse Electric Co. ............................. 141,250
----------
ENGINEERING/CONSTRUCTION 1.0%
7,000 Foster Wheeler Corp. .................................. 234,500
----------
ENTERTAINMENT 1.9%
10,000 Time Warner, Inc. ..................................... 442,500
----------
FINANCE 6.8%
10,000 BankAmerica Corp. ..................................... 463,750
4,600 Beneficial Corp. ...................................... 175,950
10,000 Chemical Banking Corp. ................................ 401,250
5,000 First Interstate Bancorp .............................. 320,625
6,500 *Travelers Corp. ....................................... 202,313
----------
1,563,888
----------
FOOD 1.5%
20,000 PET, Inc. ............................................ 350,000
----------
HOTELS/MOTELS 1.3%
5,000 Hilton Hotels Corp. .................................. 303,750
----------
HOUSEHOLD FURNISHINGS & APPLIANCES 3.5%
15,000 Armstrong World Industries, Inc. ..................... 798,750
----------
MACHINERY 3.7%
10,000 Deere & Co. .......................................... 740,000
3,000 Ingersoll-Rand Co. ................................... 114,750
----------
854,750
----------
MANUFACTURING .5%
3,000 Illinois Tool Works, Inc. ............................ 117,000
----------
MEDICAL PRODUCTS & SUPPLIES .5%
5,000 Allergan, Inc. ....................................... 113,124
----------
MINING 1.1%
4,000 American Barrick Resources Corp. ..................... 114,000
3,000 Inco, Ltd. ........................................... 80,625
2,000 Placer Dome, Inc. .................................... 49,750
----------
244,375
----------
MISCELLANEOUS 3.7%
15,000 Harris Corp. ......................................... 682,500
5,000 Polaroid Corp. ....................................... 168,750
----------
851,250
----------

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS,
DECEMBER 31, 1993 (CONT.)

</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (CONT.)
OIL/NATURAL GAS 2.8%
3,000 Anadarko Petroleum Corp. ............................... $ 136,125
3,000 Apache Corp. ........................................... 70,125
4,000 Burlington Resources, Inc. ............................. 169,500
5,000 Halliburton Co. ........................................ 159,375
6,500 Transco Energy Co. ..................................... 91,813
----------
626,938
----------
PAPER AND FOREST PRODUCTS 3.3%
20,000 Champion International Corp. ........................... 667,500
10,200 *Stone Container Corp. .................................. 98,175
----------
765,675
----------
PHARMACEUTICALS 3.1%
5,000 Glaxo Holding, Plc., ADR ............................... 104,375
10,000 Syntex Corp. ........................................... 158,750
15,000 Upjohn Co. ............................................. 436,875
----------
700,000
----------
POLLUTION CONTROL 3.4%
30,000 Browning-Ferris Industries, Inc. ....................... 772,500
----------
PUBLISHING 12.1%
20,000 Dun & Bradstreet Corp. ................................. 1,232,500
7,000 McGraw-Hill, Inc. ...................................... 473,375
17,500 Tribune Co. ............................................ 1,052,188
----------
2,758,063
----------
RETAIL 1.9%
2,000 Charming Shoppers, Inc. ................................ 23,750
2,000 GAP, Inc. .............................................. 78,750
4,000 Limited, Inc. .......................................... 68,500
10,000 Woolworth Corp. ........................................ 253,750
----------
424,750
----------
TOTAL COMMON STOCKS (COST $17,539,568) ............ 14,125,375
----------
SENIOR SECURITIES 12.5%
PREFERRED STOCKS 8.0%
7,000 cAMR Corp., $3.00 cvt. .................................. 369,250
1,100 Battle Mountain Gold, cvt. ............................. 70,950
3,500 Ford Motor Co., cvt., Series A ......................... 379,750
3,200 Freeport-McMoran Copper, Series Gold ................... 137,600
5,000 cNewmont Mining, cvt. ................................... 342,500
10,000 Property Trust of America, 1.75% cvt., Series A ........ 280,000
5,000 aTejas Gas Corp., 5.25% cvt., Series TEJ ................ 240,626
----------
TOTAL PREFERRED STOCKS (COST $1,454,082) .......... 1,820,676
----------
FACE
AMOUNT
--------
BONDS 4.5%
$250,000 Dayton Hudson Co., 8.60%, 01/15/12 ..................... 284,926
100,000 Georgia Pacific Corp., 9.125%, 07/01/22 ................ 111,051
200,000 Pennzoil, Inc., cvt., 6.50%, 01/15/03 .................. 241,000
100,000 cSynOptics, Inc., cvt., 5.25%, 05/15/03 ................. 96,000
250,000 U.S. Treasury Bonds, 8.00%, 11/15/21 ................... 296,170
----------
TOTAL BONDS (COST $896,984) ....................... 1,029,147
----------
TOTAL SENIOR SECURITIES (COST $2,351,066) ......... 2,849,823
----------

</TABLE>
The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN PREMIER RETURN FUND
STATEMENT OF INVESTMENTS IN SECURITIES, OPEN OPTIONS AND NET ASSETS,
DECEMBER 31, 1993 (CONT.)

<TABLE>
<CAPTION>
SHARES EXPIRATION EXERCISE VALUE
OPTIONED DATE PRICE (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
aPURCHASED PUT OPTIONS
AEROSPACE/DEFENSE
10,000 Boeing Co. (Cost $7,025).................................................. May, 1994 35 $ 3,125
-----------
TOTAL COMMON STOCKS, SENIOR SECURITIES AND PURCHASED
PUT OPTIONS (COST $19,897,659)............................................................... 16,978,323
-----------
Face
Amount
------
bRECEIVABLES FROM REPURCHASE AGREEMENTS 25.5%
$2,760,000 BankAmerica Corp., 3.25%, 01/03/94 (Maturity Value $2,920,791)
Collateral: U.S. Treasury Notes, 7.625%, 05/31/96................................................. 2,920,000
3,015,000 Daiwa Securities America, Inc., 3.20%, 01/03/94 (Maturity Value $2,920,779)
Collateral: U.S. Treasury Bills, 05/12/94......................................................... 2,920,000
-----------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $5,840,000)................................ 5,840,000
-----------
TOTAL INVESTMENTS (COST $25,737,659) 99.7%.................................................. 22,818,323
OTHER ASSETS AND LIABILITIES, NET .3%....................................................... 58,918
-----------
NET ASSETS 100.0%........................................................................... $22,877,241
===========

At December 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $25,766,080 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost............................................................... $ 965,415
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value............................................................... (3,929,272)
Unrealized depreciation on purchased options.................................................... (3,900)
-----------
Net unrealized depreciation..................................................................... $(2,967,757)
===========
</TABLE>

(a) Non-income producing.
(b) Face amount for repurchase agreements is for the underlying collateral.
(c) See Note 6 regarding Rule 144A securities.
(d) Travelers Corp. merged into Primerica Corp. after the close of business
on December 31, 1993. Thereafter, Primerica Corp. changed its name to
Travelers Inc.

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN PREMIER RETURN FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1993

<TABLE>
<S> <C>
Assets:
Investment in securities, at value (identified cost $19,897,659)..................................... $16,978,323
Receivables from repurchase agreements, at value and cost............................................ 5,840,000
Cash................................................................................................. 28,334
Receivables:
Dividends and interest............................................................................. 53,479
Capital shares sold................................................................................ 30,399
-----------
Total assets................................................................................. 22,930,535
-----------

Liabilities:
Payables:
Capital shares repurchased......................................................................... 17,137
Management fees.................................................................................... 11,894
Shareholder servicing costs........................................................................ 1,500
Accrued expenses and other payables................................................................ 22,763
-----------
Total liabilities............................................................................ 53,294
-----------
Net assets, at value.................................................................................. $22,877,241
===========

Net assets, consist of:
Undistributed net investment income................................................................ $ 30,659
Unrealized depreciation on investments............................................................. (2,919,336)
Accumulated net realized loss...................................................................... (597,352)
Capital shares..................................................................................... 26,363,270
-----------
Net assets, at value................................................................................. $22,877,241
===========
Computation of net asset value and offering price per share:
Net asset value and redemption price per share ($22,877,241 divided by
3,680,434 shares outstanding).................................................................... $6.22
===========
Maximum offering price (100/96 of $6.22)*.......................................................... $6.48
===========

</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C> <C>
Investment income:
Dividends........................................................................... $520,917
Interest (Note 1)................................................................... 179,718
--------
Total income................................................................................. $ 700,635

Expenses:
Management fees (Note 5)............................................................. 139,233
Shareholder servicing costs (Note 5)................................................. 18,231
Reports to shareholders.............................................................. 19,413
Professional fees.................................................................... 23,449
Registration and filing fees......................................................... 7,215
Directors' fees and expenses......................................................... 6,891
Custodian fees....................................................................... 2,469
Other................................................................................ 5,963
--------
Total expenses............................................................................... 222,864
----------
Net investment income........................................................................ 477,771
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) from security transactions:
From transactions in written options which expired or were closed (Note 4).......... (66,747)
From other security transactions.................................................... 259,799
--------
Net realized gain............................................................................ 193,052
Net unrealized appreciation during the year....................................................... 3,081,039
----------
Net realized and unrealized gain on investments...................................................... 3,274,091
----------
Net increase in net assets resulting from operations................................................. $3,751,862
==========
</TABLE>

(a) On sales of $100,000 or more the offering price is reduced as stated in
the section of the Prospectus entitled "How to Buy Shares of the Fund."

The accompanying notes are an integral part of these financial statements.

<PAGE>

FRANKLIN PREMIER RETURN FUND
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992

<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income......................................................... $ 477,771 $ 675,103
Net realized gain (loss) from security transactions........................... 193,052 (730,344)
Net unrealized appreciation during the year................................... 3,081,039 3,287,957
----------- -----------
Net increase in net assets resulting from operations....................... 3,751,862 3,232,716
Distributions to shareholders from undistributed net investment income......... (635,781) (719,540)
Decrease in net assets from capital share transactions (Note 3)................ (2,316,254) (8,624,988)
----------- -----------
Net increase (decrease) in net assets....................................... 799,827 (6,111,812)
Net assets:
Beginning of year.............................................................. 22,077,414 28,198,226
----------- -----------
End of year (including undistributed net investment income of $30,659 - 1993;
and $2,889 - 1992)........................................................... $22,877,241 $22,077,414
=========== ===========

</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Premier Return Fund (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1949 as amended.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.

A. SECURITY VALUATION:

Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day, or, if there is no such reported sale,
within the range of the most recent quoted bid and asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from a pricing service, which are based on a
variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.

Open option contracts are valued at their last sales price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day,
the options will be valued at the mean between the current closing bid and ask
prices.

The fair values of securities restricted as to resale, or other securities for
which market quotations are not readily available, if any, are determined
following procedures approved by the Board of Directors -- see Note 6.

B. INCOME TAXES:

It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required.

C. SECURITY TRANSACTIONS:

Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Bond discounts are amortized as required by the Internal Revenue Code.

Distributions from undistributed net investment income, and net realized
capital gains from securities transactions to the extent that they exceed
available capital loss carryovers, are generally made during each year to avoid
the 4% excise tax imposed on regulated investment companies by the Internal
Revenue Code.

Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of losses
deferred due to wash sales and points.

E. OPTION TRANSACTIONS:

The Fund writes put options and covered call options in which premiums received
are recorded as a liability which is marked to market to reflect the current
value of the options written. A covered call option gives the holder the right
to buy the underlying security which the Fund owns at any time during the option
period at a predetermined exercise price. The risk in writing a covered call
option is that the Fund gives up the opportunity to participate in any increase
in the price of the underlying security beyond the exercise price. Proceeds
from call options exercised are increased by the amount of premiums received.
A put option gives the holder the right to sell the underlying security to the
Fund at any time during the option period at a predetermined exercise price.
The risk in writing a put option is that the Fund is exposed to the risk of loss
if the market price of the underlying securities declines, and the Fund cannot
profit from an increase in the market price above the exercise price. If the
holder of a put option written by the Fund exercises the option, the Fund's
costs basis in the underlying security is the exercise price reduced by the
premium received. If an option expires or is cancelled in a closing
transaction, the Fund will realize a gain or loss depending on whether the cost
of the closing transaction, if any, is less than or greater than the premium
originally received.

<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

E. OPTION TRANSACTIONS: (CONT.)

The Fund purchases put options on certain securities in order to protect the
securities against a decline in market value. A purchased put option gives the
Fund the right to sell the underlying security at the option exercise price at
any time during the option period. The put option allows the Fund to protect
the unrealized gain in an appreciated security without actually selling the
security. Any losses realized by the Fund upon expiration of the put options
are limited to the premiums paid for the purchase of such options, plus any
transaction costs.

The Fund may buy call options on securities which it intends to purchase in
order to limit the risk of a substantial increase in the market price of such
securities. A call option gives the Fund the right to buy the underlying
securities from the option writer at a stated exercise price. Any losses
realized by the Fund upon expiration of the call options are limited to the
premiums paid for the purchase of such options, plus any transaction costs.

F. REPURCHASE AGREEMENTS:

The Fund may enter into repurchase agreements with government securities dealers
recognized by the Federal Reserve Board and/or member banks of the Federal
Reserve System. In a repurchase agreement, the Fund purchases a U.S. government
security from a dealer or bank subject to an agreement to resell it at a
mutually agreed upon price and date. Such a transaction is accounted for as a
loan by the Fund to the seller, collateralized by the underlying security. The
transaction requires the initial collateralization of the seller's obligation by
U.S. government securities with market value, including accrued interest, of at
least 102% of the dollar amount invested by the Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. The collateral is delivered to the Fund's custodian and held until resold
to the dealer or bank. At December 31, 1993, all outstanding repurchase
agreements held by the Fund had been entered into on that date.

G. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS:

Effective December 31, 1993, the Fund adopted Statement of Position 93-2:
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result, components of net assets have been reclassified to better reconcile
financial statement amounts with distributions determined in accordance with
income tax regulations. Accordingly, amounts as of December 31, 1993 have been
restated to reflect a decrease in additional paid-in capital of $182,829, an
increase in accumulated net realized loss of $2,951 and an increase in
undistributed net investment income of $185,780.

2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At December 31, 1993, for tax purposes, the Fund had a capital loss carryover
of $548,931 which will expire in 2000.

For income tax purposes, the aggregate cost of securities and unrealized
depreciation are higher than for financial reporting purposes at December 31,
1993, by $48,421.

3. CAPITAL STOCK

At December 31, 1993, there were 5,000,000,000 shares of no par value capital
stock authorized and total capital paid-in aggregated $26,363,270. Transactions
in capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1992
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold....................................................... 179,187 $ 1,053,868 169,071 $ 863,139
Shares issued in reinvestment of dividends and distributions...... 69,260 411,906 85,224 434,995
Shares redeemed................................................... (524,304) (3,064,772) (1,183,527) (6,047,814)
Changes from exercise of exchange privilege:
Shares sold..................................................... 240,657 1,401,087 129,614 671,729
Shares redeemed................................................. (370,064) (2,118,343) (892,880) (4,547,037)
------- ----------- ---------- -----------
Net decrease.................................................. (405,264) $(2,316,254) (1,692,498) $(8,624,988)
======== =========== ========== ===========
</TABLE>

<PAGE>
FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)

4. PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities (excluding purchased and written options and
purchases and sales of short-term securities) for the year ended December 31,
1993 aggregated $3,885,859 and $11,725,401, respectively.

Transactions in purchased options for the year ended December 31, 1993 were as
follows:

CALL PUT
-------------------- ---------------------
NUMBER OF NUMBER OF
SHARES SHARES
COST OPTIONED COST OPTIONED
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992.. $ 7,963 5,000 $ 45,875 37,500
Options purchased ................ 57,920 14,000 100,069 72,500
Options expired .................. (7,963) (5,000) (79,044) (67,500)
Options closed ................... (57,920) (14,000) (59,875) (32,500)
-------- ------- --------- -------
Outstanding at December 31, 1993.. $ - - $ 7,025 10,000
======== ======= ========= =======
</TABLE>

Transactions in written options for the year ended December 31, 1993
were as follows:
<TABLE>
<CAPTION>
CALL PUT
-------------------- ---------------------
NUMBER OF NUMBER OF
SHARES SHARES
COST OPTIONED COST OPTIONED
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding at December
31, 1992 ........................ $241,400 171,000 $ - -
Options sold ..................... 296,170 159,000 35,049 20,000
Options cancelled in closing
purchase transactions .......... (227,440) (151,500) (20,825) (15,000)
Options expired .................. (89,560) (64,300) (14,224) (5,000)
Options exercised ................ (220,570) (114,200) - -
-------- -------- --------- -------
Options outstanding at December
31, 1993 ....................... $ - - $ - -
======== ======== ========= =======
</TABLE>

The cost of canceling written options in closing purchase transactions was
$418,796, resulting in a net short-term capital loss of $170,531 for the year
ended December 31, 1993. Premiums received on expired written call and put
options resulted in a net short-term capital gain of $103,784 for the year
ended December 31, 1993.

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees computed monthly on the net assets of the Fund on the
last day of the month at an annualized rate of 5/8 of 1% of the first $100
million of net assets, 1/2 of 1% on net assets in excess of $100 million up to
$250 million, and 45/100 of 1% of net assets in excess of $250 million. Fees
incurred by the Fund aggregated $139,233 for the year ended December 31, 1993.
The terms of the management agreement provide that aggregate annual expenses of
the Fund be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Fund's shares are registered. There were no reimbursements to the
Fund under this provision for the year ended December 31, 1993.

In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. received commissions on sales of the
Fund's capital stock for the year ended December 31, 1993 totalling $54,031, of
which $46,676 was paid to other dealers. Commissions are deducted from the
gross proceeds received from the sale of the capital stock of the Fund, and as
such are not expenses of the Fund.

Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Fund pays costs on a per shareholder account basis.
Shareholder servicing costs incurred for the year ended December 31, 1993
aggregated $18,231, of which $17,713 was paid to Franklin/Templeton Investor
Services, Inc.

Certain officers and directors of the Fund are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.

<PAGE>

FRANKLIN PREMIER RETURN FUND
NOTES TO FINANCIAL STATEMENTS

6. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At December 31, 1993, the Fund held 144A
securities with a value aggregating $807,750 representing 3.5% of the Fund's
net assets. See accompanying statement of investments in securities, open
options and net assets for specific information of such securities.

7. FINANCIAL HIGHLIGHTS

Selected data for each share of capital stock outstanding throughout each
period are set forth in the Prospectus under the caption "Financial
Highlights."

- --------------------------------------------------------------------------------
The percentage of income dividends paid by the Fund during the year ended
December 31, 1993 which qualified for the 70% dividends-received deduction for
corporations was 92.70%.
- --------------------------------------------------------------------------------