FRANKLIN CALIFORNIA TAX FREE INCOME FUND INC, 497, 1995-02-17

FRANKLIN CALIFORNIA TAX FREE INCOME FUND INC
497, 1995-02-17

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12 P

SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
DATED AUGUST 1, 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. A contingent deferred sales charge of 1%, however, will
be imposed on certain redemptions within 12 months of the calendar month
following such investments ("contingency period"). 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) The following is added at the end of the first paragraph:

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...................................... 4.25% 4.44% 4.00%
$100,000 but less than $250,000......................... 3.50% 3.63% 3.25%
$250,000 but less than $500,000......................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000...................... 2.15% 2.20% 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: 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. 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. See "How to Sell Shares of the
Fund - Contingent Deferred Sales Charge."

<PAGE>

Government Securities Trust (the "Franklin Funds"), (b) other investment
products 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) 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 1.00% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
certain trust companies and trust departments of banks. See definition under
"Description of Special Net Asset Value Purchases" and as set forth in the
SAI.

b) 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, 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) 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.

Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge 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 or 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. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."

<PAGE>

Shares of the Fund may be purchased at net asset value or 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 or 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 also be purchased at net asset value or 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 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 invested 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.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

a) The following language is added at the end of the first paragraph of this
section:

Investors should review the prospectus of the fund they wish to exchange
from and the fund they wish to exchange into for all specific requirements
or limitations on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges.

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."

<PAGE>

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.
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; 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.

<PAGE>

FRANKLIN CALIFORNIA
TAX-FREE INCOME FUND, INC.

PROSPECTUS AUGUST 1, 1994

[FRANKLIN LOGO]

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

Franklin California Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company which invests in municipal securities in
order to provide as high a level of interest income exempt from federal income
taxes as is consistent with prudent investing, while seeking preservation of
shareholders' capital. The Fund intends to invest primarily in California
municipal securities with the objective of paying dividends exempt from
California income taxes to its California resident shareholders. Investments in
municipal securities will be within the four highest ratings of Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or in unrated securities which in the
opinion of the Fund's investment manager are of comparable quality to such four
highest ratings (see "Investment Objective and Policies of the Fund").
Normally, except for temporary defensive purposes, at least 80% of the Fund's
assets will be invested in municipal securities.

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 concerning the Fund, dated August 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.

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.

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.

<PAGE>

<TABLE>
<CAPTION>
Contents Page
<S> <C>
Expense Table................................... 2
Financial Highlights............................ 4
About the Fund.................................. 5
Investment Objective and
Policies of the Fund........................... 5
Risk Factors in California...................... 11
Management of the Fund.......................... 12
Distributions to Shareholders................... 14
Taxation of the Fund
and Its Shareholders........................... 15
How to Buy Shares of the Fund................... 17
Other Programs and Privileges
Available to Fund Shareholders................. 23
Exchange Privilege.............................. 25
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
operating expenses of the Fund for the fiscal year ended March 31, 1994,
restated to reflect Rule 12b-1 fees as though such had been in effect at the
beginning of the fiscal year.

Shareholder Transaction Expenses
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................................................... 4.25%
Maximum Sales Charge Imposed on Reinvested Dividends............................................... NONE
Deferred Sales Charge.............................................................................. NONE
Redemption Fees.................................................................................... NONE
Exchange Fee (per transaction)..................................................................... $5.00*
</TABLE>

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

<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fees.................................................................................... 0.45%
Maximum 12b-1 Fees................................................................................. 0.10%**
Other Expenses:
Reports to Shareholders................................................................. 0.01%
Custodian Fees.......................................................................... 0.01%
Other................................................................................... 0.02%
---------
Total Other Expenses:.............................................................................. 0.04%
--------
Total Fund Operating Expenses...................................................................... 0.59%
========
</TABLE>

**Shareholders of the Fund approved a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Plan") which provides for
payments by the Fund for distribution of its shares, up to a maximum annual
rate of 0.10% of average net assets. See "Management of the Fund - Plan of
Distribution." 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.

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>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
$48 $61 $74 $113
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE
MOEE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and
only indirectly by shareholders as a result of their investment in the Fund. 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%.

<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 March 31, 1994. The
information for each of the five fiscal years in the period ended March 31,
1994 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 March 31,
-------------------------------------------------------------
1994 1993 1992 1991 1990
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year $7.36 $7.07 $6.92 $6.89 $6.80
----- ------ ----- ----- -----
Net investment
income......... .46 .48 .49 .50 .51
Net realized &
unrealized gains (losses)
on investments (.226) .288 .154 .036 .096
----- ------ ----- ----- -----
Total from investment
operations..... .234 .768 .644 .536 .606
----- ------ ----- ----- -----
Less Distributions:
Distribution from net
investment income (0.456) (0.478) (0.494) (0.506) (0.516)
Distribution from
capital gains. (0.018) -- -- -- --
----- ------ ----- ----- -----
Total distributions (0.474) (0.478) (0.494) (0.506) (0.516)
----- ------ ----- ----- -----
Net asset value at
end of year.... $7.12 $7.36 $7.07 $6.92 $6.89
===== ====== ===== ===== =====
Total Return**.. 2.88% 10.95% 9.32% 7.76% 8.83%
Ratios/Supplemental
Data
Net assets at end of
year (in 000's) $13,345,420 $13,541,443 $12,303,807 $11,466,168 $10,525,484
Ratio of expenses to
average net assets .49% .49% .49% .48% .49%
Ratio of net investment
income to average
net assets..... 6.19% 6.61% 6.93% 7.22% 7.29%
Portfolio turnover
rate........... 18.12% 15.63% 16.13% 15.83% 11.09%
<CAPTION>
Year ended March 31,
--------------------------------------------------------
1989 1988 1987 1986 1985
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year $6.73 $7.32 $7.05 $6.39 $6.39
----- ----- ----- ----- -----
Net investment
income......... .51 .52 .54 .60 .61
Net realized &
unrealized gains (losses)
on investments .076 (.584) .300 .660 (.010)
----- ----- ----- ----- -----
Total from investment
operations..... .586 (.064) .840 1.260 .600
----- ----- ----- ----- -----
Less Distributions:
Distribution from net
investment income (0.516) (0.526) (0.570) (0.600) (0.600)
----- ----- ----- ----- -----
Distribution from
capital gains. -- -- -- -- --
----- ----- ----- ----- -----
Total distributions (0.516) (0.526) (0.570) (0.600) (0.600)
----- ----- ----- ----- -----
Net asset value at
end of year.... $6.80 $6.73 $7.32 $7.05 $6.39
===== ===== ===== ===== =====
Total Return**.. 8.67% (.94)% 12.15% 20.27% 9.67%
Ratios/Supplemental
Data
Net assets at end of
year (in 000's) $8,768,832 $7,569,502 $8,503,062 $4,767,231 $2,331,370
Ratio of expenses to
average net assets .49% .48% .50% .51% .52%
Ratio of net investment
income to average
net assets..... 7.53% 7.6% 7.38% 8.62% 9.5%
Portfolio turnover
rate........... 32.95% 23.14% 8.85% 11.64% 26.33%
</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 at net asset
value.

<PAGE>

ABOUT THE FUND

The Fund is a diversified, open-end management investment company, which is the
type of company commonly called a "mutual fund." It was incorporated under the
laws of the state of Maryland in 1977 and registered with the SEC under the
Investment Company Act of 1940 (the "1940 Act"), and in 1978 assumed all the
assets and liabilities of the Tax-Free Income Series of Franklin Custodian
Funds, Inc. In July 1982, the Fund's name was changed from Franklin Tax-Free
Income Fund, Inc.

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 4.25% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND

The Fund's investment objective is to provide a high level of income exempt
from federal income taxes through investing its assets primarily in securities,
the interest on which is exempt from such taxes under the Internal Revenue
Code. The objective is a fundamental policy of the Fund and may not be changed
without shareholder approval. The Fund will seek to achieve its objective by
investing in a diversified portfolio of municipal securities which are
obligations issued by or on behalf of states, territories and possessions of
the United States, and the District of Columbia, and their political
subdivisions, agencies, authorities and instrumentalities including industrial
revenue securities, the interest on which is exempt from federal income tax.
Additionally, investments may be made in obligations of certain agencies and
instrumentalities of the United States in circumstances where the interest from
such obligations is exempt from federal income taxes.

The Fund's investment objective is also to pay dividends to its California
resident shareholders which will be exempt from California personal income
taxes. In order to be eligible to pay dividends to California residents which
will be exempt from California's personal income tax, a mutual fund must now
have at the end of each quarter of its fiscal year at least 50% of its total
assets invested in obligations which are exempt from taxation by California
under the Constitution or laws of California or of the United States. These
exempt obligations include California state and municipal obligations,
obligations of the U.S. government and agencies and instrumentalities of the
U.S. government authorized by federal law to issue obligations exempt from any
state's personal income tax, and U.S. territorial obligations, including
obligations of Puerto Rico, Guam and the Virgin Islands. The Fund intends to
comply with this requirement and to pay dividends which are exempt from
California's personal income tax to the extent that it earns interest on such
exempt obligations. It is the Fund's current policy to invest at least 65% of
its assets in exempt California municipal securities, and it may invest up to
100% of its assets in such securities consistent with its fundamental policies
and objective. There is, of course, no assurance that the Fund's objective will
be achieved. For fiscal year ended March 31, 1994, 100% of the net income
earned by the Fund was derived from obligations exempt from federal and
California tax.

The Fund has no restrictions on the maturity of municipal securities in which
it may invest. Accordingly, the Fund seeks to invest in municipal securities of
such maturities which, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with pru-

<PAGE>
dent investment, with consideration given to market conditions.

The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, the four highest ratings of Moody's (Aaa, Aa, A, Baa),
S&P (AAA, AA, A, BBB), Fitch (AAA, AA, A, BBB), or in securities which are not
rated, provided that, in the opinion of the Fund's investment manager, such
securities are comparable in quality to those within the four highest ratings.
These are considered to be "investment grade" securities, although bonds in the
lowest rating category are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and to have some speculative characteristics. In the event the
rating on an issue held in the Fund's portfolio is downgraded from investment
grade, the investment manager will consider such event in its evaluation of the
overall investment merits of that security but such consideration will not
necessarily result in an automatic sale of the security. As of March 31, 1994,
the fiscal year end, 5 out of 2,120 issues held in the Fund's portfolio,
constituting 0.14% of the net assets of the Fund, were in default on their
contractual provisions. In such cases, prices for such securities are generally
significantly reduced from their face value. A description of the ratings is
contained in the Appendix to the Statement of Additional Information.

Prior to acquiring unrated securities, the investment manager considers the
terms of the offering and various other factors in order initially to determine
whether the securities are consistent with the Fund's investment objective and
policies and thereafter to determine the issuer's comparative credit rating. In
making such determinations the investment manager typically (i) interviews
representatives of the issuer at its offices, conducting a tour and inspection
of the physical facilities of the issuer in an effort to evaluate the issuer
and its operations, (ii) performs analysis of the issuer's financial and credit
position, including comparisons of appropriate ratios, and (iii) compares other
similar securities offerings to the issuer's proposed offering.

From time to time due to unusual circumstances, such as avoiding the necessity
of liquidating portfolio investments to meet withdrawals of funds by investors,
the Fund may temporarily invest up to 20% of its assets, pending investment or
reinvestment in municipal bonds, in fixed-income obligations or in private
activity bonds, the interest on which is subject to regular federal income tax
or which constitutes a preference item for alternative minimum tax purposes.
The Fund may also invest in U.S. Treasury obligations and other direct
obligations of the U.S. government, its agencies and instrumentalities (the
interest on which is exempt from personal income taxation only for California
income tax purposes) or in obligations of U.S. possessions (the interest on
which is exempt from personal income taxation for both California and federal
income tax purposes). Investments in taxable obligations will be primarily made
in non-direct U.S. government obligations (including mortgage-backed securities
such as GNMA and FNMA securities and repurchase agreements collateralized by
U.S. government securities), commercial paper and obligations of U.S. banks
(including commercial banks and savings and loan associations) with $1 billion
or more of assets. See the sections "Taxation of the Fund and Its Shareholders"
in this Prospectus and "Additional Information Regarding Taxation" in the
Statement of Additional Information for more information on the taxation of the
interest earned by the Fund on these obligations.

As a fundamental policy, no more than 5% of the value of the Fund's gross
assets will be invested in securities of any one issuer, but this limitation
does

<PAGE>
not apply to investments issued or guaranteed by the U.S. government or
its instrumentalities. In determining the issuer of a tax-exempt security, each
state and each political subdivision, agency and instrumentality of each state
and each multi-state agency of which such state is a member is a separate
issuer. Where securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
Percentage limitations referred to herein and elsewhere in this Prospectus are
determined as of the time an investment or purchase is made. When the Fund
proposes to add to its position in the securities of a single issuer, it may
value that position at the lesser of the Fund's cost or current market value,
for the sole purpose of determining the amount of that issuer's securities
which may be purchased consistent with the 5% limitation described in this
paragraph. In addition to the fundamental policy described in this paragraph,
the Fund shall adhere to the diversification requirements applicable to
diversified investment companies under the 1940 Act, which are described in the
Statement of Additional Information.

No more than 25% of the Fund's assets will be invested in industrial revenue
bonds or in securities of issuers located in the same state except for the
state of California. Issuers representing more than one state will be excluded
in determining the percentage for any state.

As a fundamental policy, at least 80% of the Fund's total assets will be
invested in tax-exempt securities except where adverse market conditions would
cause serious erosion of portfolio value, in which case assets may temporarily
be substantially invested in short-term taxable obligations as a defensive
measure to preserve net asset value. Under normal circumstances, the securities
included in this 80% policy will also not be subject to the federal alternative
minimum tax. An opinion as to the tax-exempt status of a municipal security
generally is rendered to the issuer by the issuer's counsel at the time of
issuance of the security.

Temporary investments will be substantially limited to short-term municipal
obligations and obligations issued or guaranteed by the U.S. government, its
agencies, instrumentalities or authorities, or one of the U.S. possessions;
highly-rated corporate debt securities; prime commercial paper; certificates of
deposit of domestic banks with assets of $1 billion or more; and repurchase
agreements which, at present, will be limited to banks subject to regulation by
the United States government, provided no more than 10% of the Fund's total
assets will be invested in illiquid securities, including repurchase agreements
with maturities in excess of seven days.

MUNICIPAL SECURITIES

The term "municipal securities," as used in this Prospectus, means
obligations issued by or on behalf of states, territories and possessions of
the U.S. and the District of Columbia and their political subdivisions,
agencies, and instrumentalities, the interest on which is exempt from federal
income tax. An opinion as to the tax-exempt status of a municipal security
generally is rendered to the issuer by the issuer's counsel at the time of
issuance of the security.

Municipal securities are used to raise money for various public purposes such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to provide funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.

The Fund has no restrictions on the maturities of municipal securities in which
it may invest. The

<PAGE>
Fund will seek to invest in municipal securities of such maturities that,
in the judgment of the Fund and its investment manager, will provide a high
level of current income consistent with prudent investment. The investment
manager will also consider current market conditions in determining which
securities to buy or hold.

It is possible that the Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, industrial development bonds,
transportation bonds, or pollution control revenue bonds, or in securities the
interest on which is paid from revenues of a similar type of project. In such
circumstances, economic, business, political, or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or declining markets or needs
for the projects) might also affect other bonds in the same segment, thereby
potentially increasing market risk.

Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation, and the credit rating of the issuer. Generally, municipal
securities of longer maturities produce higher current yields than municipal
securities with shorter maturities but are subject to greater price fluctuation
due to changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to make timely payment of principal and
interest on its obligations.

The interest on bonds issued to finance state and local government operations
is generally tax-exempt for regular federal income tax purposes. Interest on
certain "private activity bonds" (including those for housing and student
loans) issued after August 7, 1986, while still tax-exempt, constitutes a
preference item for taxpayers in determining the federal alternative minimum
tax under the Internal Revenue Code of 1986, as amended (the "Code"). This
interest could subject a shareholder to, or increase liability under, the
federal and state alternative minimum taxes, depending on the shareholder's tax
situation. In addition, all distributions derived from interest exempt from
regular federal income tax may subject a corporate shareholder to, or increase
liability under, the federal alternative minimum tax, because such
distributions are included in the corporation's "adjusted current earnings."

Consistent with the Fund's investment objectives, the Fund may acquire such
private activity bonds if, in the investment manager's opinion, bonds represent
the most attractive investment opportunity then available to the Fund. As of
March 31, 1994, the Fund derived 6.85% of its income from such bonds, the
interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.

The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at prevailing market rates. The Fund may also invest
in variable or floating rate demand notes ("VRDNs"). VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest according to its terms upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or
by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to such instrument. Although it is not a put option in the usual sense,
such a demand feature

<PAGE>
is sometimes known as a "put". With respect to 75% of the total value of the
Fund's assets, no more than 5% of such value may be in securities underlying
"puts" from the same institution, except that the Fund may invest up to 10% of
its asset value in unconditional "puts" (exercisable even in the event of a
default in the payment of principal or interest on the underlying security) and
other securities issued by the same institution.

The Fund may also purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the
buyer in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions,
it will do so for the purpose of acquiring securities for its portfolio
consistent with its investment objectives and policies and not for the purpose
of investment leverage.

While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce such risk. There are two
categories of risks to which the Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security
to maintain timely interest payments and to pay the principal of a security
upon maturity. It is generally reflected in a security's underlying credit
rating and its stated interest rate (normally the coupon rate). A change in the
credit risk associated with a municipal security may cause a corresponding
change in the security's price. The Fund attempts to minimize the impact of
individual credit risks by diversifying its portfolio investments.

Market risk is the risk of price fluctuation of a municipal security caused by
changes in general economic and interest rate conditions generally affecting
the market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the prices of the debt securities in
which a 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.

CALLABLE BONDS

The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have
call-protection (that is, a period of time during which the bonds may not be
called) which usually lasts for 5 to 10 years, after which time such bonds may
be called away. An issuer may generally be expected to call its bonds, or a
portion of them, during periods of declining interest rates, when borrowings
may be replaced at lower rates than those obtained in prior years. If the
proceeds of a bond called under such circumstances are reinvested, the result
may be a lower overall yield due to lower current interest rates. If the
purchase price of such bonds included a premium related to the appreciated
value of the bonds, some or all of that premium may not be recovered by
bondholders, such as the Fund, depending on the price at which such bonds were
redeemed.

<PAGE>
CERTIFICATES OF PARTICIPATION

The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state
and local governments to finance state and local government needs, function
much like installment purchase agreements. For example, a COP may be created
when long-term lease revenue bonds are issued by a governmental corporation to
pay for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.

A feature which distinguishes COPs from municipal debt is that the
lease which is the subject of the transaction contains a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease without penalty if the municipality's appropriating
body does not allocate the necessary funds. Local administrations, being faced
with increasingly tight budgets, therefore, have more discretion to curtail
payments under COPs than they do to curtail payments on traditionally funded
debt obligations. If the government lessee does not appropriate sufficient
monies to make lease payments, the lessor or its agent is typically entitled to
repossess the property. In most cases, however, the private sector value of the
property will be less than the amount the government lessee was paying.

While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or
in unrated COPs believed by the investment manager to be of comparable quality.
Criteria considered by the rating agencies and the investment manager in
assessing such risk include the issuing municipality's credit rating, the
essentiality of the leased property to the municipality and the term of the
lease compared to the useful life of the leased property. The Board of
Directors reviews the COPs held in the Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by the
investment manager and monitored by the Board. Such factors include (a) the
credit quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of quality comparable to the ratings required for each Fund's
investment, including an assessment of the likelihood that the leases will not
be cancelled; (b) the size of the municipal securities market, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
the Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
While there is no limit as to the amount of assets which the Fund may invest in
COPs, as of March 31, 1994, the Fund held 15.81% of its net assets in COPs and
other municipal leases.

MELLO-ROOS BONDS

The Fund also invests in bonds issued pursuant to the California Mello-Roos
Community Facilities Act, commonly known as Mello-Roos bonds. Such bonds are
used to finance the building of roads, sewage treatment plants and other
projects

<PAGE>
designed to improve the infrastructure of an existing community or one that is
in the early development stage and are primarily secured by real estate taxes
levied on property located in such community. Mello-Roos bond financing arose
in response to limitations contained in California's Proposition 13 (see "Risk
Factors in California") and generally do not constitute obligations of a
municipality. Timely payment of such bonds depends on the developer or other
property owners' ability to pay their real estate taxes, which could be
adversely affected by a declining economy and real estate market.

Most Mello-Roos bonds are not rated and the purchase of a Mello-Roos
bond is based on the investment manager's determination that such bond is of
investment quality suitable for the Fund. In making such determination, the
investment manager visits each location and meets with the developer and other
parties involved, analyzes various relevant factors, including location of the
community, economic prospects in its general area and the need for the facility
being financed, and also adheres to certain financial guidelines such as
value-to-lien ratios and reserve funding requirements. As of March 31, 1994,
approximately 5.71% of the Fund's assets were invested in Mello-Roos bonds.

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 policies discussed herein, please see the Statement of
Additional Information.

RISK FACTORS IN CALIFORNIA

The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon
information derived from public documents relating to securities offerings of
California state and municipal issuers, from independent municipal credit
reports and historically reliable sources, but has not been independently
verified by the Fund.

Changes in California constitutional and other laws during the last several
years have raised questions about the ability of California state and municipal
issuers to obtain sufficient revenue to pay their bond obligations. In 1978,
California voters approved an amendment to the California Constitution known as
Proposition 13. Proposition 13 limits ad valorem taxes on real property and
restricts the ability of taxing entities to increase real property taxes.
Legislation passed subsequent to Proposition 13, however, provided for the
redistribution of California's General Fund surplus to local agencies, the
reallocation of revenues to local agencies and the assumption of certain local
obligations by the state so as to help California municipal issuers to raise
revenue to pay their bond obligations. It is unknown, however, whether
additional revenue redistribution legislation will be enacted in the future and
whether, if enacted, such legislation would provide sufficient revenue for such
California issuers to pay their obligations. The state is also subject to
another constitutional amendment, Article XIIIB, which may have an adverse
impact on California state and municipal issuers. Article XIIIB restricts the
state from spending certain appropriations in excess of an appropriations limit
imposed for each state and local government entity. If revenues exceed such
appropriations limit, such revenues must be returned either as revisions in the
tax rates or fee schedules. Because of the uncertain impact of the
aforementioned statutes and cases, the possible inconsistencies in the
respective terms of the statutes and the

<PAGE>
impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation, cases and policies on the
long-term ability of California state and municipal issuers to pay interest or
repay principal on their obligations.

California's economy is larger than most sovereign nations. During the 1980s,
California experienced growth rates well in excess of the rest of the nation.
The state's major employment sectors are services, trade, and manufacturing.
Industrial concentration is in electronics, aerospace, and non-electrical
equipment. Also significant are agriculture and oil production.

Key sectors of California's economy have been severely affected by the
recession. Since May of 1990, job losses total over 850,000. Declines in the
aerospace and high technology sectors have been especially severe. The
continuing drive in population and labor force growth has produced higher
unemployment rates in the state. Although total job loss has declined, weakness
continues in key areas of California's economy, including government, real
estate and aerospace. Wealth levels still remain high in the state, although
the difference between state and national levels continues to narrow.

In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California. These revisions reflect the state's heavy
reliance on the short-term note market to finance its cash imbalance and the
likelihood that this exposure will persist for at least another two years. For
more information on these ratings revisions and the state's current budget,
please refer to the Fund's Statement of Additional Information.

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, approximately
$40.7 billion of which are in the municipal securities market.

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 March 31, 1994, fees totaling 0.45% of the
average monthly net assets of the Fund were paid to Advisers.

As a result of the imposition of the Rule 12b-1 Plan, Advisers has
voluntarily agreed to limit its fees (i) to the extent overall Fund expenses
exceed 0.70% of average daily net assets; or (ii) should the assets fall below
$4 billion, to limit its fees to the extent that overall Fund expenses exceed
0.90% of average daily net assets.

It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because

<PAGE>
municipal securities are generally traded on a "net" basis, that is, in
principal transactions without the addition or deduction of brokerage
commissions or transfer taxes. To the extent that the Fund does participate in
transactions involving brokerage commissions, it is the Manager's
responsibility to select brokers through whom such transactions 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 March 31, 1994, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totalled 0.49% 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 11, 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 0.10% per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.10%
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
0.10% 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 0.05% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). In addition, until such time as
the maximum payment of 0.10% is reached on a yearly basis, up to an additional
0.01% will be paid to Distributors under the Plan or, should the Fund's

<PAGE>
assets fall below $4 billion up to an additional 0.02% could 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 Rule 12b-1 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 is at least 0.06% (0.05% plus 0.01%) 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 shares of the Fund, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.10% of the average daily net assets). While this is the current
calculation for fees payable under the Plan, the Plan permits the Fund's
Directors to allow the Fund to pay a full 0.10% 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 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.
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 may be made in December to reflect
any net short-term and net long-term capital gains realized by the Fund as of
October 31 of such year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund may make only
one distribution derived from net short-term and net long-term capital gains in
any year or adjust the timing of its distributions for operational or other
reasons.

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 monthly for shareholders of record on the last business day of
the month, payable on or about the 15th day of the following 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 Fund's 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, an 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

<PAGE>
the principle of supply and demand, any distribution of income or capital gain
will result in a decrease in the value of its shares equal to the amount of the
distribution.

DIVIDEND REINVESTMENT

Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, 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.

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. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.

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.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in 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 income and 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.

By meeting certain requirements of the Code and California Personal Income Tax
Law, the Fund has

<PAGE>
qualified and continues to qualify to pay exempt-interest dividends to its
shareholders. Such exempt-interest dividends are derived from interest income
exempt from regular federal income tax and are not subject to regular federal
income tax for Fund shareholders. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of
California and its political subdivisions, from interest on direct obligations
of the federal government, or from interest on U.S. territorial obligations
(including Puerto Rico, the U.S. Virgin Islands and Guam), they will be exempt
from California personal income tax. Dividends paid by the Fund on interest on
obligations exempt from tax in California will generally be fully taxable to
corporate shareholders who are subject to California's corporate franchise tax.

To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from
the excess of net short-term capital gain over net long-term capital loss, or
from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.

From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond. For such obligations purchased after April 30, 1993, a portion of the
gain on sale or disposition (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to its shareholders will be subject to regular federal and state income taxes
in the hands of Fund shareholders. In any fiscal year, the Fund may elect not
to distribute to its shareholders its taxable ordinary income and to instead,
pay federal income or excise taxes on this income at the Fund level. The amount
of such distributions, if any, is expected to be small.

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.

Distributions derived from the excess of net long-term capital gain over net
short-term capital loss 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.

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 and will be disallowed to the extent of exempt-interest
dividends paid 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 the Templeton Group
and a sales charge which would otherwise apply to the reinvestment is reduced
or eliminated. Any portion of such sales charge excluded from the tax

<PAGE>
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.

Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
March 31, 1994 qualified for this deduction and it is not anticipated that any
of the current year's dividends will so qualify.

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 dis tributions, including the portion of the
dividends on an average basis which constitutes taxable income or a tax
preference item under the federal alternative minimum tax. Shareholders who
have not held shares of the Fund for a full calendar year may have designated
as tax-exempt or as tax preference income a percentage of income which is not
equal to the actual amount of tax-exempt or tax preference income earned during
the period of their investment in the Fund.

Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest dividends on their
federal income tax returns.

Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares may not be fully deductible for federal income
tax purposes.

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 or other taxes on distributions received
by them from the Fund and the application of foreign tax laws to these
distributions.

The foregoing description relates solely to the federal income tax law and to
California personal and corporate income tax treatment of regulated investment
companies and their distributions to shareholders to the extent indicated.
Investors may be subject to other taxes, such as the California franchise tax
applicable to corporate shareholders, or to the taxes of other jurisdictions,
and should consult with their own tax advisors as to the application of these
tax laws.

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.

<PAGE>
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 accompanied 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
--------------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
------------------- ----------------- -------- ------------------
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 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. All 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 II 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

<PAGE>
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 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

<PAGE>
"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 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

<PAGE>
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 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 3.50%. 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
varying 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 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

<PAGE>
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.

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) registered securities dealers and their
affiliates, for their investment account only, and (3) 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

<PAGE>
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.

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 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.

<PAGE>
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 transaction (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.

<PAGE>
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. 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 TELEPHONE BY CALLING INVESTOR SERVICES AT
1-800/632-2301 OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT
1-800/247-1753. 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 and the TeleFACTS
option may not be available. 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 without a sales charge will be

<PAGE>
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.

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 tax-exempt
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 municipal
securities 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.

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.

Effective September 1, 1994, the Fund will amend its policy in regard to Timing
Accounts, to reflect the following:

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

<PAGE>
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.

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's 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

<PAGE>
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 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 Transaction Application (the "Application")
may redeem shares of the Fund by telephone. THE APPLICATION 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,

<PAGE>
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 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.

OTHER

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

<PAGE>
various transactions by calling Investor Services at 1-800/632-2301.

All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option, (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 Application 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 ac count 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.

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
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 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers 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, 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. 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

<PAGE>
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. Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. 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 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 system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 12 followed by the # sign, when requested to do so by the automated
operator. The TeleFACTS system is also available for exchange transactions. See
"Exchange Privilege".

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 6:00 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 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

<PAGE>
PERFORMANCE

Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution
rate and taxable equivalent 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. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's
yield (calculated as indicated) by one minus a stated income tax rate and
adding the product to the taxable portion (if any) of the fund's yield.

Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC (see the Statement of Additional Information),
are 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 or taxable equivalent 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 twelve months by a current maximum offering price. A taxable
equivalent distribution rate demonstrates the taxable distribution rate
necessary to produce an after tax distribution rate equivalent to the Fund's
distribution rate (calculated as indicated above). 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 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 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

<PAGE>
the Fund's yield, tax equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period.

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends March 31. Annual Reports containing audited
financial statements of the Fund, including the auditors' 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 10,000,000,000 shares of common
stock of one cent par value. All shares are of one class, have one vote and,
when issued, are fully paid and nonassessable. All shares have equal voting,
participating and liquidating 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 his number of shares of common stock 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 Fund is not required to nor does it intend to hold routine annual meetings
of shareholders. The Fund may, however, hold a special shareholders' 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 will 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 account 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.

<PAGE>
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 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.

<PAGE>

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: Bernie Schroer since 1987 and Andrew Jennings, Sr.
since 1990.

Bernie Schroer, Vice President of Advisers has a degree in Finance from Santa
Clara University. Mr. Schroer has been with Advisers since 1987 and, prior
thereto, was the manager of trading at Kidder Peabody and Company, Inc. He is
currently a member of municipal securities industry-related committees and
associations.

Andrew Jennings, Sr., Vice President of Advisers attended Villanova University
in Philadelphia and has been in the securities industry for over 33 years. Mr.
Jennings has been with Advisers since 1990 and, prior thereto, was First Vice
President and Manager of the Municipal Institutional Bond Department at Dean
Witter Reynolds, Inc. He is a member of several securities industry-related
committees and associations.

35
12SAI
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
DATED AUGUST 1, 1994

1. 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 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. 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

<PAGE>

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.

2. 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>

<PAGE>
FRANKLIN
CALIFORNIA TAX-FREE
INCOME FUND, INC.

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
AUGUST 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN

Franklin California Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company which invests in municipal securities to
provide as high a level of dividend income exempt from federal income taxes to
its shareholders as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The Fund intends to invest primarily in
California municipal securities with the objective of paying dividends exempt
from California personal income taxes to its California resident shareholders.
Investments in municipal securities will be within the four highest ratings of
either Moody's Investors Service ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or in unrated securities
which in the opinion of the Fund's investment manager are of comparable quality
to such four highest ratings. Normally, except for temporary defensive
purposes, at least 80% of the Fund's assets will be invested in municipal
securities.

A Prospectus for the Fund dated August 1, 1994, as may be amended
from time to time, provides the basic information a prospective investor should
know before investing in the Fund. It may be obtained without charge from the
Fund at the address listed above or from 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 OF ADDITIONAL INFORMATION IS INTENDED TO PROVIDE A
PROSPECTIVE INVESTOR WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND
OPERATIONS OF THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
The Fund's Investment Objective
and Policies (See also the Prospectus
"Investment Objective and Policies
of the Fund").................................... 2
Description of Municipal
and Other Securities............................ 2
Officers and Directors........................... 5
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund").................................... 7
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions.................. 10
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")...................... 10
The Fund's Underwriter........................... 12
Additional Information
Regarding Taxation.............................. 13
Additional Information
Concerning California........................... 13
General Information.............................. 14
Appendix......................................... 18
Financial Statements............................. 21
</TABLE>

<PAGE>

THE FUND'S INVESTMENT
OBJECTIVE AND POLICIES

As noted in the Prospectus, the investment objective of the Fund is to provide
a high level of dividend income which is exempt from both federal and
California personal income tax to its California resident shareholders. (See
Prospectus "Investment Objective and Policies of the Fund.")

RATINGS

The ratings of Moody's, S&P and Fitch represent their respective opinions of
the qualities of the securities they undertake to rate. Such ratings are
general and are not absolute standards of quality. On March 31, 1994, 100% of
the Fund's invested assets were invested in tax-exempt securities of which
23.7% had a rating of Aaa by Moody's, AAA by S&P or AAA by Fitch, or unrated
but judged by the Fund's investment manager to be of comparable quality; 15.3%
had a rating of Aa by Moody's, AA by S&P or AA by Fitch, or unrated but judged
by the Fund's investment manager to be of comparable quality; 31.1% had a
rating of A by Moody's, A by S&P or A by Fitch, or unrated but judged by the
Fund's investment manager to be of comparable quality; and 29.4% were in
securities rated Baa by Moody's, BBB by S&P or BBB by Fitch, or unrated but
judged by the Fund's investment manager to be of comparable quality; 0.4% had a
rating of Ba by Moody's, BB by S&P or Fitch, or unrated but judged by the
Fund's investment manager to be of comparable quality; and 0.14% were in
default. An explanation of the bond ratings is set forth in the Appendix
hereto.

DIVERSIFIED FUND

As a diversified fund, the Fund is subject to the following restriction.
With respect to 75% of its net assets, the Fund, except as stated below, will
not purchase a security if, as a result of the investment, more than 5% of its
assets would be in the securities of any single issuer (with the exception of
obligations of the U.S. government). For this purpose, each political
subdivision, agency, or instrumentality and each multi-state agency of which a
state is a member, and each public authority which issues private activity
bonds on behalf of a private entity, will be regarded as a separate issuer for
determining the diversification of the Fund's portfolio. A bond for which the
payments of principal and interest are secured by an escrow account of
securities backed by the full faith and credit of the U.S. government
("defeased"), in general, will not be treated as an obligation of the original
municipality for purposes of determining issuer diversification.

DESCRIPTION OF MUNICIPAL
AND OTHER SECURITIES

The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which the Fund may invest.

MUNICIPAL NOTES

Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of
the issuer, secured by the taxing power for the payment of principal and
interest.

Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue
Sharing Program. They are usually general obligations of the issuer. Bond
Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the money
for the repayment of the notes.

Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.

Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.

Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.

1.General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.

<PAGE>

2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities;
and hospitals. The principal security behind these bonds may vary. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, and/or the
net revenues from housing or other public projects. Many bonds provide
additional security in the form of a debt service reserve fund, from which
money may be used to make principal and interest payments on the issuer#s
obligations. Some authorities are provided with further security in the form of
state assurance (although without obligation) to make up deficiencies in the
debt service reserve fund.

Industrial Development Bonds. These are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money for the financing
of various privately operated facilities for business manufacturing, housing,
sports, and pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds is solely dependent on the
ability of the facilities user to meet its financial obligations and the
pledge, if any, of the real and personal property so financed as security for
such payment.

Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the prospectus,
VRDNs are tax-exempt obligations which contain a floating or variable interest
rate and a right of demand, which may be unconditional, to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or
by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to such instrument. The interest rates are adjustable at intervals
ranging from daily up to monthly, calculated to maintain the market value of
the VRDN at approximately the par value of the VRDN upon the adjustment date.
The adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.

When-Issued Purchases. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place within 15 to 60 days after the date
that the offer is accepted. The purchase price and the yield that will be
received on the securities are fixed at the time the buyer enters into the
commitment. While the Trust will always make commitments to purchase such
securities with the intention of actually acquiring the securities, it may
nevertheless sell these securities before the settlement date if it is deemed
advisable as a matter of investment strategy. To the extent that assets of a
Fund are held in cash pending the settlement of a purchase of securities, that
Fund would earn no income; however, it is the Trust's intention to have each
Fund fully invested to the extent practicable and subject to the policies
stated in the Prospectus. At the time a Fund makes the commitment to purchase a
municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Trust
does not believe that any Fund's net asset value or income will be adversely
affected by the purchase of municipal bonds on a when-issued basis. Each Fund
will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.

Municipal securities may also be sold in "stripped" form. Stripped Municipal
Securities represent separate ownership of interest and principal payments on
municipal obligations.

Callable Bonds. In the early 1980s large numbers of municipal bonds were issued
with provisions which prevented their being called, typically for periods of 5
to 10 years. During the coming years that protection will end on many issues.
During times of generally declining interest rates, if the call-protection on
callable bonds expires, there is an increased likelihood that a number of such
bonds may, in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used by the Funds'
investment manager, the Funds believe they have reduced the risk of adverse
impact on net asset value based on calls of callable bonds. The investment
manager may dispose of such bonds in the years prior to their call date, if the
investment manager believes such bonds are at their maximum premium potential.
In pricing such bonds in each Fund's portfolio, each callable bond is marked to
the market daily based on the bond's call date. Thus, the call of some or all
of each Fund's callable

<PAGE>

bonds may have an impact on such Fund's net asset value. In light of each
Fund's pricing policies and because the Funds follow certain amortization
procedures required by the Internal Revenue Service, the Funds are not expected
to suffer any material adverse impact related to the value at which the Fund
has carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the re-investment of the proceeds of
any called bond may be in bonds which pay a higher or lower rate of return than
the called bonds; and as with any investment strategy, there is no guarantee
that a call may not have a more substantial impact than anticipated or that the
Funds' objectives will be achieved.

Certificates of Participation. As stated in the prospectus, each Fund may also
invest in municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that
the lease which is the subject of the transaction typically contains a
"nonappropriation" or "abatement" clause. A nonappropriation clause provides
that, while the municipality will use its best efforts to make lease payments,
the municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds.

While the risk of nonappropriation is inherent to COP financing, the Funds
believe that this risk is mitigated by their policy of investing only in COPs
rated within the four highest rating categories of Moody's Investors Service
("Moody's"), Standard & Poor's (S&P) or Fitch Investors Service, Inc.
("Fitch"), or in unrated COPs believed to be of comparable quality. Criteria
considered by the rating agencies and the investment manager in assessing such
risk include the issuing municipality's credit rating, the essentiality of the
leased property to the municipality and the term of the lease compared to the
useful life of the leased property. The Board of Trustees has determined that
COPs held in each Fund's portfolio constitute liquid investments based on
various factors reviewed by the investment manager and monitored by the Board.
Such factors include (a) the credit quality of such securities and the extent
to which they are rated; (b) the size of the municipal securities market for
each Fund, both in general and with respect to COPs; and (c) the extent to
which the type of COPs held by each Fund trade on the same basis and with the
same degree of dealer participation as other municipal bonds of comparable
credit rating or quality. There is no limit as to the amount of assets which
each Fund may invest in COPs.

Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest- bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of
principal and interest of the advance refunded bond. Escrow-secured bonds will
often receive a triple-A rating from S&P and Moody's.

U.S. government obligations which may be owned by a Fund are issued by the U.S.
Treasury and include bills, certificates of indebtedness, notes and bonds, or
are issued by agencies and instrumentalities of the U.S. government and backed
by the full faith and credit of the U.S. government.

Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.

There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Funds may also invest, to the extent such investments would be
consistent with the foregoing objective and policies.

INVESTMENT RESTRICTIONS AND POLICIES

Restrictions - The Fund has adopted the following restrictions as
fundamental policies, which means that they may not be changed without the
approval of a majority of the Fund's shares. The Fund MAY NOT:

1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.

2. Buy any securities on "margin" or sell any securities "short."

3. Lend any funds or other assets, except by the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be
deemed a loan. Although such loans are not presently intended, this prohibition
will not preclude the Fund from loaning securities to securities dealers or
other institutional investors if at least 102% cash collateral is pledged and
main tained by the borrower provided such security loans may not be made if, as
a result, the aggregate of

<PAGE>

such loans exceeds 10% of the value of the Fund's total assets at the time of
the most recent loan.

4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under federal securities laws
in connection with the disposition of portfolio securities.

5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.

6. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more
of its officers, directors or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and directors
together own beneficially more than 5% of such securities.

7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.

8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the Fund and, therefore, there are no option transactions available for the
Fund.

9. Invest in companies for the purpose of exercising control or management.

10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; except to the
extent the Fund invests its uninvested daily cash balances in shares of
Franklin California Tax-Exempt Money Fund and other tax-exempt 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.

11. Purchase securities in private placements or in other transactions for
which there are legal or contractual restrictions on resale.

12. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.

With respect to the limits set forth in restrictions 1 and 3 above, it should
be noted that the Fund has not in the past nor does it intend in the future to
engage in either of those investment techniques to any extent.

In order to change any of the foregoing restrictions, or any other fundamental
policies listed in the Prospectus, approval must be obtained from the Fund's
shareholders. Such approval requires the affirmative vote of 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.

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 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, are indicated by an
asterisk (*).

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Harris J. Ashton Director President, Chief Executive Officer and Chairman of the Board,
General Host Corporation General Host Corporation (nursery and craft centers); Director,
Metro Center, 1 Station Place RBC Holdings, Inc. (a bank holding company), Bar-S Foods and
Stamford, CT 06904-2045 Sunbelt Nursery Group, Inc.; director of certain of the
investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case may
be, of most of the investment companies in the Franklin Group
of Funds.

S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director
Park Avenue at Morris County of General Host Corporation; director of certain of the
P. O. Box 1945 investment companies in the Templeton Group of Funds; and
Morristown, NJ 07962-1945 director, trustee or managing general partner, as the case may
be, of most of the investment companies in the Franklin Group
of Funds.

*Charles B. Johnson President President and Director, Franklin Resources, Inc. and Franklin/
77 Mariners Island Blvd. and Director 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.

* Rupert H. Johnson, Jr. Vice President Executive Vice President and Director, Franklin Resources, Inc.
777 Mariners Island Blvd. and Director and Franklin/Templeton Distributors, Inc.; President and
San Mateo, CA 94404 Director, Franklin 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.

Gordon S. Macklin Director Chairman White River Corporation (financial services);
8212 Burning Tree Road Director Fundamerican Enterprises Holdings, Inc.,
Bethesda, MD 20817 Martin Marietta Corporation, and MCI Communications Corporation;
director of certain of the investment companies in the Templeton
Group of Funds; and director, trustee or managing general
partner, as the case may be, of most of the investment companies
in the Franklin Group of Funds; formerly, Chairman, Hambrecht
and Quist Group; Director, H & Q Healthcare Investors; and
President, National Association of Securities Dealers, Inc.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director,
San Mateo, CA 94404 Franklin/Templeton 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 the investment companies in the
Franklin Group of Funds.

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

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

Brian E. Lorenz Secretary Attorney, member of the law firm of Bleakley Platt & Schmidt;
One North Lexington Avenue officer of some of the investment companies in the Franklin
White Plains, NY 10001-1700 Group of Funds.
</TABLE>

As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R). Directors not affiliated
with the investment manager are currently paid fees of $1,200 per month plus
$1,200 per meeting attended and are reimbursed for expenses incurred in
connection with attending such meetings. During the fiscal year ended March 31,
1994, fees and expenses totaling $86,400 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 May 3, 1994, the directors
and officers, as a group, owned of record and beneficially (approximately
761,987 shares or) less than 1% of the total outstanding shares of the Fund).
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. Legal fees and expenses of $51,226
were paid during the fiscal year ended March 31, 1994, to the law firm of which
Mr. Lorenz is a partner, and which acts as counsel to the Fund. 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 shares.

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

<PAGE>

Resources currently manage over $112 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.

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 extensive
research activities include, as appropriate, traveling to meet with issuers and
to review project sites. 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,
at an annual rate of approximately 5/8 of 1% for the first $100 million of net
assets of the Fund; approximately 1/2 of 1% on net assets of the Fund in excess
of $100 million up to $250 million; approximately 45/100 of 1% of net assets of
the Fund in excess of $250 million up to $10 billion; approximately 44/100 of
1% from $10 billion to $12.5 billion of net assets; approximately 42/100 of 1%
on net assets from $12.5 billion to $15 billion; approximately 40/100 of 1% on
net assets from $15 billion to $17.5 billion; approximately 38/100 of 1% on
assets from $17.5 billion to $20 billion; and approximately 36/100 of 1% on
assets in excess of $20 billion.

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 March 31, 1992, 1993 and 1994 were
$54,488,592, $58,422,395 and $62,407,624, respectively.

The management agreement is in effect until July 31, 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 Investment Company Act of 1940.

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 1994, 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.

<PAGE>

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 0.10% 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 with the Fund, 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 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 the directors of the Fund, including those
directors who are not interested persons, as defined in the 1940 Act, and by
the public shareholders of the Fund at a meeting held on April 11, 1994. The
Plan is effective through April 30, 1995 and renewable annually thereafter 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 the directors or by Distributors on not more than 60 days' written notice,
by any act that terminates the underwriting agreement with Distributors, or, as
to the Fund, by a vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their

<PAGE>

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 such 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.

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

Since most purchases made by the Fund are principal transactions at net prices,
the Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or purchasing principal or market maker without incurring charges for
the services of a broker on its behalf unless it is determined that a better
price or execution may be obtained by utilizing the services of a broker.
Purchases of portfolio securities from underwriters include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
include a spread between the bid and ask price. As a general rule, the Fund
does not purchase bonds in underwritings where it is not given any choice, or
only limited choice, in the designation of dealers to receive the commission.
The Fund seeks to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services rendered by such
dealers in the execution of orders. 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 allocations 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
which the Manager or its affiliates may lawfully and appropriately use in their
investment advisory capacities with other clients. Provided that the best
execution is obtained, the sale of Fund shares may also be considered as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. If purchases or sales of securities of the Fund and one or more
other investment companies or clients supervised by the 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.

During the past three fiscal years ended March 31, 1994, the Fund paid no
brokerage commissions. As of March 31, 1994, 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 Fund reserves the right to delay acquiring the shares of
another investment company 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.

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.

<PAGE>

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:

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE 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 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

<PAGE>

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
1:00 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 may occur between
the times at which they are determined and 1:00 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.

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until July 31, 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.

Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission 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 March 31, 1992, 1993 and 1994 were
$59,642,899, $56,234,219 and $45,850,292, respectively. After allowances to
dealers, Distributors retained $4,159,869, $4,295,632 and $4,350,830 for the
years 1992, 1993 and 1994, respectively. Distributors received no other
compensation from the Fund for acting as underwriter.

<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 Code. 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, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
tax-exempt interest dividends) to shareholders will be taxable to the extent of
the Fund's available earnings and profits.

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. 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. The Fund intends as a matter of policy to declare and pay such
dividends, if any, in December 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.

Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.

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.

Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. Government securities do not generally
qualify for tax-free treatment. While it is not the primary investment
objective of this Fund to invest in such obligations, the Fund is authorized to
so invest for temporary or defensive purposes. To the extent that such
investments are made, the Fund will provide shareholders with the percentage of
any dividends paid which may qualify for such tax-free treatment at the end of
each calendar year. Shareholders should then consult with their own tax
advisers with respect to the application of their state and local laws to these
distributions and on the application of other state and local laws on
distributions and redemption proceeds received from the Fund.

Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of the Fund.

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 or other taxes on distributions received by them from
the Fund and the application of foreign tax laws to these distributions.

ADDITIONAL INFORMATION
CONCERNING CALIFORNIA

On June 6, 1978, California voters approved Proposition 13, which added Article
XIIIA to the California Constitution. The principal thrust of Article XIIIA is
to limit the amount of ad valorem taxes on real property to one percent of the
full cash value as determined by the county assessor. The assessed valuation of
all real property may be increased, but

<PAGE>

not in excess of two percent per year, or decreased to reflect the rate of
inflation or deflation as shown by the consumer price index. Article XIIIA
requires a vote of two thirds of the qualified electorate to impose special
taxes, and completely prohibits the imposition of any additional ad valorem,
sales or transaction tax on real property (other than ad valorem taxes to repay
general obligation bonds issued to acquire or improve real property), and
requires the approval of two-thirds of all members of the State Legislature to
change any state tax laws resulting in increased tax revenues.

On November 6, 1979, California voters approved the initiative seeking to amend
the California Constitution entitled "Limitation of Government Appropriations"
which added Article XIIIB to the California Constitution. Under Article XIIIB
state and local governmental entities have an annual appropriations limit and
may not spend certain monies which are called appropriations subject to
limitations (consisting of tax revenues, state subventions and certain other
funds) in an amount higher than the appropriations limit. Generally, the
appropriations limit is to be based on certain 1978-79 expenditures, and is to
be adjusted annually to reflect changes in consumer prices, population and
services provided by these entities.

Decreases in state and local revenues in future fiscal years as a consequence
of these initiatives may continue to result in reductions in allocations of
state revenues to California municipal issuers or reduce the ability of such
California issuers to pay their obligations.

With the apparent onset of recovery in California's economy, revenue growth
over the next few years could recommence at levels that would enable California
to restore fiscal stability. The political environment, however, combined with
pressures on the state's financial flexibility, may frustrate its ability to
reach this goal. Strong interests in long-established state programs ranging
from low-cost public higher education access to lofty welfare and health
benefits join with the more recently emerging pressure for expanded prison
construction and a heightened awareness and concern over the state's business
climate.

Adopted on July 8, 1994, the fiscal 1995 budget is designed to address
California's accumulated deficit over a 22-month period. In order to balance
the budget and generate sufficient cash to retire the $4 billion deficit
Revenue Anticipation Warrant and a $3 billion Revenue Anticipation Note to be
issued in July 1995, the state's fiscal plan relies upon aggressive assumptions
of federal aid, projected at about $760 million in fiscal year 1995 and $2.8
billion in fiscal year 1996, to compensate the state for its costs of providing
services to illegal immigrants. These assumptions, combined with fiscal year
1996 constitutionally mandated increases in spending for K-14 education, and
continued growth in social services and corrections expenditures, are risky. To
offset this risk, the state has enacted a Budget Adjustment Law, known as the
"trigger" legislation, which establishes a set of backup budget adjustment
mechanisms to address potential shortfalls in cash. The trigger mechanism will
be in effect for both fiscal years 1995 and 1996.

In July of 1994, S&P and Moody's lowered the general obligation bond rating of
the state of California. The rating agencies explained their actions by citing
the state's continuing deferral of substantial portions of its estimated $3.8
billion accumulated deficit; continuing structural budgetary constraints
including a funding guarantee for K-14 education; overly optimistic expectation
of federal aid to balance fiscal year 1995's budget and fiscal year 1996's cash
flow projections; and reliance upon a trigger mechanism to reduce spending if
the plan's federal aid assumptions prove to be inflated.

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 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-, fiveand ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The cal-

<PAGE>

culation assumes the maximum sales charge is deducted from the initial $1,000
purchase order, capital gains are reinvested at net are reinvested at net asset
value and all income dividends are reinvested at the maximum public offering
price (offering price includes sales charge) 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. If a change is made on the sales charge structure, historical
performance information will be restated to reflect the maximum sales charge in
effect currently.

The average annual compounded rates of return for the Fund for one-, five- and
ten-year periods ended on the date of the financial statements included herein
were -1.28%, 7.05% and 8.38%, 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

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. The
total return for the Fund for the one-, five- and ten-year periods ended on the
date of the financial statements included herein were -1.28%, 40.56% and
123.61%, 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 5.28%.

This figure was obtained using the SEC formula:

Yield = 2[(a-b + 1)6 - 1]
----
cd
where:
a = interest earned during the period
b = net expenses accrued for the period
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

TAX EQUIVALENT YIELD

The Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund
which invests in tax-exempt obligations. Such yield is computed by dividing
that portion of the yield of the Fund (computed as indicated above) which is
tax-exempt by one minus the highest applicable combined federal and California
income tax rate (and adding the product to that portion of the yield of the
Fund that is not tax-exempt, if any). The tax equivalent yield for the Fund for
the 30-day period ended on the date of the financial statements included herein
was 9.81%.

The tax equivalent yield included above is based on a California effective rate
of 11.0% and a federal effective rate of 39.6% (a combined effective tax rate
of 46.24%). The tax equivalent yield for shareholders in the highest California
tax brackets or who are subject to the disallowance of federal or California
exemption credits or itemized deductions will be higher, with the amount of
increase depending upon their income levels and the amount of exemption credits
or itemized deductions disallowed. From time to time, as any changes to such
rates become effective, tax equivalent yield quotations advertised by the Fund
will be updated to reflect such changes. The Fund expects updates may be
necessary as tax rates are changed by federal, state and local governments. The
advantage of tax-free investments, such as the Fund, will be enhanced by any
tax rate increases. Therefore, the details of specific tax increases may be
used in sales material for the Fund.

CURRENT DISTRIBUTION RATE

Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC are not indicative of the amounts which were

<PAGE>

or will be paid to the Fund's shareholders. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable equivalent
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. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to the Fund's current
distribution rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current federal and
California state tax rates available to the Fund. 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 additional sources (i.e., sources other than dividends and
interest), such as 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 or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average, over a specified period
of time. The 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 for Net Asset Value Investments." This
rate is computed by adding the income dividends paid by the Fund during the
last 12 months and dividing that sum by a current net asset value. Figures for
yield, total return and other measures of performance for Net Asset Value
Investments may also be quoted. These will be derived as described elsewhere in
this Statement of Additional Information with the substitution of net asset
value for public offering price.

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. Franklin Resources, Inc. 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) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.

b) Lehman Brothers Aggregate Bond Index or its component indices - The
Aggregate Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage, and Yankee bonds.

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

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

e) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 25 revenue bonds maturing in 30 years.

f) Bond Buyer's 40-Bond Index - an index of municipal bond yields based upon
yields of 40 long-term municipal bonds.

g) Bond Buyer's 40 Average Dollar Prices - simple average of the price of the
municipal bonds in the Bond Buyer's 40-Bond Index.

h) Financial publications: The Wall Street Journal and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.

i) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-

<PAGE>

Term High-Yield Index, Intermediate-Term High- Yield Index, Long-Term Utility
High-Yield Index.

j) 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.

k) Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is
published weekly in the Los Angeles Times and the San Francisco Chronicle.

l) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis and Lipper Mutual Fund Yield Survey - 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.

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

n) Merrill Lynch Corporate Master Index - reflects investment grade corporate
securities

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 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

Shares of the Fund are eligible for investment by the National Marine Fisheries
Service Capital Construction Fund.

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 $112 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 103 U.S.-based mutual funds. The Fund may identify itself by its Quotron
or CUSIP number.

Franklin is a leader in the tax-free mutual fund industry currently offering 40
tax-free funds, including 31 funds free from both federal and state personal
income taxes, and managing more than $40 billion in municipal bond assets for
over half a million investors.

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

<PAGE>

been ranked number one in service quality by Dalbar for five of the past six
years.

From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the federal, state and
local taxing authorities.

The Fund's team of professional managers live and work in California and select
investments they believe offer the best combination of yield, quality and
maturity. The Fund was the first California tax-free fund and is currently the
largest, with assets of more than $13 billion. It currently has more than
200,000 investors.

Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. With income taxes continuing to
rise, you could be faced with a bigger Internal Revenue Service ("IRS")
surprise in 1994 than ever before. If your earnings put you in a higher tax
bracket, you could undoubtedly use a tax break. For example, 1994 taxes could
cost you as much as $46 on every $100 you earn from a fully taxable investment.
(This is based on the maximum combined 39.6% federal tax rate and the
California state tax rate of 11% for 1994.) But Franklin tax-free funds offer
tax relief you can use.

At Franklin, our objective is to offer tax-free funds through a professionally
managed portfolio of tax-free securities selected for attractiveness based on
their yield, quality and maturity. No matter where you live, you'll have the
potential to earn income free of federal taxes and, depending on the fund,
state and local taxes as well, while supporting state and local public
projects.

Franklin tax-free funds can be a way to participate in a portfolio of municipal
securities with the added advantage of tax-free compounding, when you reinvest
your dividends. As time passes, your investment can grow more rapidly than
similar taxable investments.

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.

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.

APPENDIX

DESCRIPTION OF MUNICIPAL BOND RATINGS:
Moody's Investors Service

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

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

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

Baa: Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstand-

<PAGE>

ing investment characteristics and in fact have speculative characteristics as
well.

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

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

Standard & Poor's Corporation

AAA: Municipal bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates, and hence provide the maximum safety on all counts.

AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here, too,
prices move with the long-term money market.

A: Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are
regarded as safe. They predominantly reflect money rates in their market
behavior, but also, to some extent economic conditions.

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

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

Fitch Investors Service, Inc.

AAA bonds: (highest quality) "the obligor has an extraordinary ability to pay
interest and repay principal which is unlikely to be affected by reasonably
foreseeable events."

AA bonds: (high quality) "the obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA rated securities or
more subject to possible change over the term of the issue."

A bonds: (good quality) "the obligor's ability to pay interest and repay
principal is strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings."

BBB bonds: (satisfactory bonds) "the obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to weaken this ability
than bonds with higher ratings."

DESCRIPTION OF OTHER INVESTMENTS:

U.S. Government Obligations - are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities
of the U.S. government are established under the authority of an act of
Congress and include, but are not limited to, the Government National Mortgage
Association, the Tennessee Valley Authority, the Bank for Cooperatives, the
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks and the Federal National Mortgage Association.

Certificates of Deposit - are certificates issued against funds deposited in a
commercial bank, are for a definite period of time, earn a specified rate of
return and are normally negotiable.

Bankers' Acceptances - are short-term credit instruments used to finance the
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.

Commercial Paper - refers to promissory notes issued by corporations in order
to finance their short-term credit needs.

Repurchase Agreements - At the same time the Fund purchases the security, it
resells it to the vendor (a member bank of the Federal Reserve System) and is
obligated to redeliver the security to the vendor on an agreed-upon date in the
future. The resale price is in excess of the purchase price and reflects an
agreed-upon market rate unrelated to the coupon rate on the purchased security.
Such

<PAGE>

transactions afford an opportunity for the Fund to earn, at no market risk, a
return on cash which is only temporarily available. The Fund's risk is limited
to the ability of the vendor to pay an agreed-upon sum upon the delivery date.
The securities employed by the Fund in such transactions are limited to
obligations issued or guaranteed as to interest and principal by the United
States government or any agency or instrumentality thereof or any federally
created corporation.

Rates bonds of issuers which have $600,000 or more of debt, except bonds of
educational institutions, projects under construction, enterprises without
established earnings records and situations where current financial data is
unavailable.

Rates all governmental bodies having $1,000,000 or more of debt outstanding,
unless adequate information is not available.

Municipal division handles requests from all types of domestic long and
short-term tax-exempt issuers.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
of Franklin California Tax-Free Income Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of the
Franklin California Tax-Free Income Fund, Inc., (the Fund) including the
statement of investments in securities and net assets, as of March 31, 1994,
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 periods indicated thereon. 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
March 31, 1994, 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 California Tax-Free Income Fund, Inc. as of March 31, 1994, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated thereon, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
April 25, 1994

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 99.0%
BONDS 95.5%
ABAG Finance Authority of Nonprofit Corporations, COP,
$ 5,800,000 Buttle Valley-Tulelake Rural Health, 6.65%, 10/01/22............... $ 5,578,324
4,545,000 Insured, COP Financing No. 3, 5.60%, 11/01/23...................... 3,874,067
3,785,000 Insured, COP Financing No. 4, 5.95%, 01/01/24...................... 3,393,820
3,090,000 Insured, Easter Seal Society for the Redwood Coast, 6.00%, 06/01/23 2,792,309
1,250,000 Insured, Miramonte Mental Health Services, 6.60%, 07/01/22......... 1,246,650
2,000,000 Insured, Rehabilitation Mental Health Services, Inc. Project, 6.50%,
06/01/12......................................................... 1,985,060
2,370,000 Insured, Rehabilitation Mental Health Services, Inc. Project, 6.55%,
06/01/22......................................................... 2,348,670
3,155,000 Nonprofit Combination Financing, 5.80%, 03/01/23................... 2,827,164
1,250,000 Peninsula Family YMCA, Series A, 6.80%, 10/01/11................... 1,261,250
3,000,000 United Way of Santa Clara County Project, 7.20%, 07/01/11.......... 3,190,710
4,500,000 ABAG Finance Corp., COP, ABAG XXV, 6.80%, 08/01/12....................... 4,544,820
125,000 Adelanto Improvement Agency, SFRMR, Series 1983-A, 10.25%, 04/01/17...... 125,005
Adelanto Improvement Agency, Tax Allocation,
120,000 Adelanto Improvement Project, 8.25%, 08/01/95...................... 125,244
1,195,000 Adelanto Improvement Project, 8.25%, 08/01/96...................... 1,271,468
900,000 Adelanto Improvement Project, Series 1990, 8.00%, 08/01/95......... 936,495
11,800,000 Adelanto Improvement Project, Series 1990, 8.00%, 08/01/20......... 13,672,778
1,870,000 Adelanto Improvement Project, Series 1991, 8.25%, 08/01/20......... 2,144,871
8,230,000 Refunding, Series 1985, Pre-Refunded, 8.125%, 06/01/15............. 9,528,776
11,315,000 Refunding, Series B, FGIC Insured, 5.50%, 12/01/23................. 10,133,261
16,365,000 Agua Mansa Industrial Growth Association, Special Tax, CFD No. 89-1, 8.25%,
09/01/17......................................................... 16,798,836
Alameda 1915 ACT, Improvement Board,
24,900,000 Harbor Bay Park, AD No. 92-1, 7.50%, 09/02/12...................... 25,742,616
170,000 Marina Village AD No. 84-3, Series 1986-1, 8.00%, 09/02/98......... 176,140
185,000 Marina Village AD No. 84-3, Series 1986-1, 8.00%, 09/02/99......... 191,682
200,000 Marina Village AD No. 84-3, Series 1986-1, 8.10%, 09/02/00......... 207,222
215,000 Marina Village AD No. 84-3, Series 1986-1, 8.10%, 09/02/01......... 222,764
230,000 Marina Village AD No. 84-3, Series 1986-1, 8.125%, 09/02/02........ 238,305
250,000 Marina Village AD No. 84-3, Series 1986-1, 8.20%, 09/02/03......... 259,027
270,000 Marina Village AD No. 84-3, Series 1986-1, 8.20%, 09/02/04......... 279,750
290,000 Marina Village AD No. 84-3, Series 1986-1, 8.20%, 09/02/05......... 300,472
315,000 Marina Village AD No. 84-3, Series 1986-1, 8.20%, 09/02/06......... 326,375
dAlameda COP,
285,000 Series 1994, 4.00%, 04/01/95....................................... 284,456
295,000 Series 1994, 4.50%, 04/01/96....................................... 293,891
305,000 Series 1994, 4.75%, 04/01/97....................................... 303,322
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
dAlameda COP, (cont.)
$ 320,000 Series 1994, 5.00%, 04/01/98....................................... $ 317,718
340,000 Series 1994, 5.25%, 04/01/99....................................... 337,062
355,000 Series 1994, 5.40%, 04/01/00....................................... 351,425
375,000 Series 1994, 5.55%, 04/01/01....................................... 370,729
23,675,000 Alameda-Contra Costa Transit District, Refunding, COP, 7.60%, 08/01/18... 24,389,985
4,560,000 Alameda County Board of Education, COP, East Wing Educational Services
Center Building, Pre-Refunded, 7.80%, 04/01/03......................... 4,821,744
Alameda County COP,
4,250,000 Capital Projects, Series 1992, 6.25%, 06/01/06..................... 4,252,720
10,500,000 Capital Projects, Series 1992, 6.75%, 06/01/16..................... 10,715,040
825,000 Alameda County, MFMR, Series B, Mandatory Put 12/01/95, 9.00%, 12/01/00.. 828,185
1,190,000 Alameda County, SFMR, Series A, 9.50%, 04/01/14.......................... 1,219,024
Alameda Housing Authority Mortgage Revenue, Refunding,
1,670,000 Series A, MBIA Insured, 5.70%, 07/01/14............................ 1,559,713
2,485,000 Series A, MBIA Insured, 5.80%, 07/01/23............................ 2,294,823
2,560,000 Alhambra RDA, Refunding, Tax Allocation, Industrial Redevelopment
Project, 6.375%, 05/01/23.............................................. 2,315,494
5,730,000 Anaheim COP, California Lutheran Homes, Pre-Refunded, 8.20%, 01/01/18.... 6,462,523
3,000,000 Anaheim COP, Refunding, Anaheim Memorial Hospital Associates, AMBAC
Insured, 5.125%, 05/15/20.............................................. 2,510,940
1,000,000 Anaheim Electric System, COP, AMBAC Insured, Pre-Refunded, 6.75%,
10/01/22............................................................... 1,107,430
17,000,000 Anaheim Public Financing Authority Revenue, Refunding, Anaheim Electric
Utility Projects, 2nd. Series, FGIC Insured, 5.75%, 10/01/22........... 15,518,790
Antelope Valley East Kern Water Agency, Special Tax, CFD No. 90-1,
7,395,000 Series A, Issue 01/01/91, 8.60%, 09/01/21.......................... 7,184,464
4,820,000 Series A, Issue 04/01/91, 8.60%, 09/01/21.......................... 4,682,775
Antelope Valley Insured Hospital District, COP,
5,515,000 Series 1989, 7.30%, 01/01/06....................................... 5,808,894
21,600,000 Series 1989, 7.35%, 01/01/20....................................... 22,442,616
Antioch 1915 ACT,
1,295,000 AD No. 26, Hillcrest, Series 1987, 8.00%, 09/02/04................. 1,351,345
1,560,000 AD No. 26, Hillcrest, Series 1987, 8.10%, 09/02/05................. 1,617,361
1,600,000 AD No. 26, Hillcrest, Series 1987, 8.10%, 09/02/06................. 1,658,832
375,000 AD No. 26, Hillcrest, Series 1987, 8.10%, 09/02/07................. 388,789
890,000 AD No. 27, Lone Tree, Series 1988, 8.20%, 09/02/09................. 922,138
890,000 AD No. 27, Lone Tree, Series 1988, 8.25%, 09/02/10................. 922,138
890,000 AD No. 27, Lone Tree, Series 1988, 8.25%, 09/02/11................. 922,138
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Antioch 1915 ACT, (cont.)
$ 890,000 AD No. 27, Lone Tree, Series 1988, 8.25%, 09/02/12................. $ 922,138
890,000 AD No. 27, Lone Tree, Series 1988, 8.25%, 09/02/13................. 922,138
4,895,000 Antioch California Development Agency, Refunding, Tax Allocation,
Project 1, FGIC Insured, 6.40%, 09/01/17............................... 4,931,517
3,500,000 Apple Valley Insured Health Facilities Revenue, COP, 7.30%, 06/01/20..... 3,738,280
Apple Valley USD, COP, Refunding,
2,600,000 Series 1993, 5.90%, 09/01/11....................................... 2,385,474
1,000,000 Series 1993, 6.00%, 09/01/15....................................... 911,440
Arcadia Hospital Revenue,
9,000,000 Methodist Hospital of Southern California, 7.875%, 08/01/10........ 9,619,020
1,295,000 Methodist Hospital of Southern California, 6.50%, 11/15/12......... 1,292,112
3,000,000 Methodist Hospital of Southern California, 6.625%, 11/15/22........ 2,990,190
Arcata CDA, Tax Allocation,
1,250,000 Community Development Project, 7.90%, 11/01/12..................... 1,271,612
1,650,000 Community Development Project, 7.90%, 11/01/13..................... 1,678,528
3,470,000 Atascadero Union School District, COP, Measure B, Capital Projects,
Series B, 5.50%, 08/01/12.............................................. 3,057,313
2,230,000 Aurburn COP, Refunding, Civic Center Project, 6.125%, 09/01/20........... 1,972,123
3,255,000 Azusa COP, Municipal Facilities Corp., 9.75%, 08/01/10................... 3,504,593
10,225,000 Azusa Public Financing Authority Revenue, Local Agency, Series A, 7.75%,
08/01/20............................................................... 10,688,499
Azusa RDA, Tax Allocation, West End Redevelopment Project,
940,000 Series A, Pre-Refunded, 8.00%, 08/01/15............................ 983,231
2,600,000 Series A, Pre-Refunded, 8.00%, 08/01/16............................ 2,751,736
5,750,000 Bakersfield COP, Waste Water Treatment Plant No. 3 Project, 8.00%,
01/01/10............................................................... 6,281,473
Bakersfield Hospital Revenue,
2,205,000 Bakersfield Memorial Hospital, Series A, 6.375%, 01/01/12.......... 2,175,938
2,750,000 Bakersfield Memorial Hospital, Series A, 6.50%, 01/01/22........... 2,732,153
20,825,000 Greater Bakersfield Memorial Hospital, Pre-Refunded, 7.375%,
01/01/14......................................................... 23,306,715
17,000,000 Greater Bakersfield Memorial Hospital, Pre-Refunded, 7.375%,
01/01/19......................................................... 19,025,890
Bakersfield Public Financing Authority Revenue,
2,795,000 Series A, 5.80%, 09/15/05.......................................... 2,722,051
1,695,000 Series A, 5.80%, 09/15/06.......................................... 1,640,997
11,070,000 Series A, 6.10%, 09/15/10.......................................... 10,636,942
Baldwin Park Public Financing Authority Revenue, Tax Allocation,
12,630,000 Series A, 7.75%, 08/01/19.......................................... 13,843,743
5,795,000 Series B, 7.75%, 08/01/21.......................................... 6,351,900
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Bay Area Government Association Revenue, Municipal Financing Pool,
$ 6,975,000 Series A, 8.05%, 09/01/10.......................................... $ 7,572,548
19,120,000 Series B, 8.05%, 09/01/15.......................................... 20,723,977
1,455,000 Bell COP, Series 1990, 8.75%, 11/01/20................................... 1,505,212
5,705,000 Bell CRDA, Refunding, Tax Allocation, Bell Redevelopment Project Area,
8.10%, 08/01/17........................................................ 6,008,791
6,325,000 Bell Gardens RDA, Tax Allocation, Central City Project, Pre-Refunded,
8.00%, 07/01/19........................................................ 6,549,031
2,080,000 Belmont RDA, Tax Allocation, Los Costanos Community Development,
Series A, 6.25%, 08/01/17.............................................. 2,003,269
3,500,000 Berkeley COP, AMBAC Insured, 7.50%, 06/01/19............................. 3,816,050
Berkeley Hospital Revenue, Alta Bates Hospital,
7,680,000 Series 1985-B, Pre-Refunded, 7.65%, 12/01/15....................... 8,747,290
2,850,000 Series 1985-C, Pre-Refunded, 7.60%, 12/01/15....................... 3,280,036
2,580,000 Beverly Hills COP, Refunding, Civic Center Improvement Project, 7.00%,
06/01/15............................................................... 2,642,152
4,745,000 Beverly Hills COP, Refunding, Civic Center Improvement Project,
Pre-Refunded, 7.00%, 06/01/15.......................................... 5,255,609
2,375,000 Blythe, MFHR, Series 1989, 8.125%, 05/01/20.............................. 2,373,504
11,000,000 Brea & Olinda USD, COP, Brea H.O.P.E., Inc., Brea High School Project,
7.70%, 08/01/18........................................................ 11,402,600
Brea & Olinda USD, Subordinated COP,
2,060,000 Series 1989, 7.85%, 08/01/09....................................... 2,060,968
12,040,000 Series 1989, 7.90%, 08/01/18....................................... 12,084,909
Brea Public Finance Authority Revenue, Tax Allocation, Redevelopment
Project,
1,720,000 Series A, MBIA Insured, 7.00%, 08/01/15............................ 1,857,617
4,395,000 Series A, MBIA Insured, 6.75%, 08/01/22............................ 4,554,099
6,410,000 Series A, MBIA Insured, 7.00%, 08/01/23............................ 6,819,214
4,280,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 08/01/15.............. 4,816,070
10,605,000 Series A, MBIA Insured, Pre-Refunded, 6.75%, 08/01/22.............. 11,773,353
3,900,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 08/01/23.............. 4,388,475
7,500,000 Brea RDA, Refunding, Tax Allocation, Redevelopment Project, MBIA Insured,
5.75%, 08/01/23........................................................ 6,894,600
20,595,700 Brentwood 1915 ACT, Improvement Board, AD No. 92-1, 8.40%, 09/02/17...... 21,734,642
2,000,000 Brentwood RDA, Tax Allocation, Brentwood Redevelopment Project, Series A,
7.70%, 11/01/08........................................................ 2,094,420
3,390,000 Brisbane COP, Civic Center Financing Project, 8.25%, 04/01/18............ 3,588,891
5,700,000 Brisbane Public Finance Authority Revenue, 8.00%, 09/02/15............... 5,806,533
4,500,000 Buena Park CRDA, Refunding, Tax Allocation, Central Business District
Project, Series A, 7.10%, 09/01/14..................................... 4,555,575
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 1,880,000 Burbank Parking Authority, Special Tax, CFD No. 1, 8.375%, 10/01/06...... $ 1,959,750
6,025,000 Burbank RDA, Tax Allocation, 2nd Lien, Golden State Redevelopment
Project, Series A, Pre-Refunded, 9.25%, 12/01/05....................... 6,652,082
2,750,000 Burbank Waste Disposal Revenue, Series A, AMBAC Insured, 6.00%, 05/01/22. 2,533,685
1,320,000 Butte Valley USD, COP, 7.75%, 03/01/15................................... 1,392,151
2,100,000 CSAC Finance Corp., COP, Sutter County, Health Facilities Program, 7.80%,
01/01/21............................................................... 2,113,671
5,455,000 Calexico COP, CRDA, Water & Waste Improvement Project, 7.80%, 11/01/13... 5,608,504
5,500,000 Calexico CRDA, Tax Allocation, Sub-Notes, 6.25%, 10/01/98................ 5,600,485
Calexico USD, COP, Financing Project,
745,000 Series 1992, 7.25%, 09/01/08....................................... 711,691
3,185,000 Series 1992, 7.375%, 09/01/17...................................... 3,018,839
California Alternative Energy Source Financing Authority Revenue,
Congeneration,
1,120,000 Refunding, University of San Francisco, Series 1987-A, 8.00%,
12/01/95......................................................... 1,123,394
3,250,000 a,cSRI International Project, 9.75%, 12/01/05......................... 1,625,000
California Counties Lease Financing Authority, COP, CSAC Financing Corp.,
2,565,000 Amador County Project, 7.70%, 10/01/09............................. 2,715,232
4,585,000 Contra Costa County Project II, Pre-Refunded, 7.85%, 10/01/09...... 5,106,085
4,165,000 Contra Costa County Project II, Pre-Refunded, 7.90%, 10/01/19...... 4,645,016
1,810,000 Glenn County Project, 8.125%, 10/01/08............................. 1,889,658
5,295,000 Merced County Project, 8.10%, 10/01/09............................. 5,526,180
8,000,000 Nevada County Project, Pre-Refunded, 7.60%, 10/01/19............... 8,884,320
5,160,000 San Luis Obispo County Project, 8.20%, 04/01/09.................... 5,443,645
1,700,000 San Luis Obispo County Project II, 7.85%, 04/01/09................. 1,806,522
1,295,000 Trinity County Project, 7.70%, 10/01/09............................ 1,357,354
California Educational Facilities Authority Revenue,
1,685,000 Chapman College Project, Pre-Refunded, 7.30%, 01/01/02............. 1,886,998
3,000,000 Chapman College Project, Pre-Refunded, 7.50%, 01/01/18............. 3,429,750
1,100,000 Loyola Marymount University, Series B, 6.60%, 10/01/22............. 1,105,753
3,460,000 Refunding, Los Angeles Chiropractic College, 7.125%, 11/01/07...... 3,596,947
11,705,000 Refunding, Loyola Marymount University, 5.75%, 10/01/24............ 10,589,162
2,100,000 St. Mary's College of California Project, Pre-Refunded, 7.50%,
10/01/20......................................................... 2,405,445
California HFAR,
6,675,000 Home Mortgage, Series 1986-B, 6.90%, 08/01/16...................... 6,841,074
640,000 Home Mortgage, Series 1988-A, 8.125%, 08/01/19..................... 682,470
19,815,000 Home Mortgage, Series 1988-B, 8.60%, 08/01/19...................... 21,169,950
6,640,000 Home Mortgage, Series 1988-C, 8.30%, 08/01/19...................... 7,046,634
27,315,000 Home Mortgage, Series 1988-E, 8.35%, 08/01/19...................... 29,354,338
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California HFAR, (cont.)
$ 3,090,000 Home Mortgage, Series 1988-F, 7.875%, 08/01/19..................... $ 3,279,664
17,530,000 Home Mortgage, Series 1988-G, 8.15%, 08/01/19...................... 18,682,247
5,125,000 Home Mortgage, Series 1989-A, 7.75%, 08/01/17...................... 5,497,946
8,815,000 Home Mortgage, Series 1989-B, 7.90%, 08/01/09...................... 9,453,382
71,980,000 Home Mortgage, Series 1989-B, 8.00%, 08/01/29...................... 77,176,236
8,570,000 Home Mortgage, Series 1989-D, 7.50%, 08/01/20...................... 8,945,023
37,965,000 Home Mortgage, Series 1989-D, 7.50%, 08/01/29...................... 40,074,335
21,055,000 Home Mortgage, Series 1989-E, 7.65%, 08/01/23...................... 22,395,782
8,585,000 Home Mortgage, Series 1989-E, 7.65%, 08/01/29...................... 9,131,693
8,810,000 Home Mortgage, Series 1989-G, 7.55%, 08/01/23...................... 9,351,903
22,830,000 Home Mortgage, Series 1990-A, 7.70%, 08/01/30...................... 24,416,000
71,045,000 Home Mortgage, Series 1990-C, 7.60%, 08/01/30...................... 75,152,822
3,880,000 Home Mortgage, Series 1990-D, 7.75%, 08/01/10...................... 4,204,368
2,415,000 Home Mortgage, Series 1990-D, 7.875%, 08/01/31..................... 2,612,716
4,620,000 Home Mortgage, Series 1991-D, 7.25%, 08/01/17...................... 4,790,386
910,000 Home Mortgage, Series 1991-F, 6.75%, 08/01/11...................... 936,472
2,200,000 Home Mortgage, Series 1991-G, 7.05%, 08/01/27...................... 2,234,760
565,000 Home Mortgage, SF, Series A, 10.25%, 02/01/14...................... 572,136
220,000 Home Mortgage, SF, Series B, 10.625%, 02/01/14..................... 223,027
4,205,000 Housing Revenue, Series 1985-B, MBIA Insured, 8.625%, 08/01/15..... 4,325,347
9,150,000 Insured Housing, Series 1989-A, MBIA Insured, 7.65%, 08/01/24...... 9,369,051
3,690,000 Insured Housing, Series 1990-A, MBIA Insured, 7.80%, 02/01/25...... 3,863,651
1,100,000 Multi-Unit Rental Housing, Series A, 10.375%, 08/01/05............. 1,125,608
1,625,000 Multi-Unit Rental Housing, Series A, 5.80%, 02/01/14............... 1,514,484
2,465,000 Multi-Unit Rental Housing, Series A, 6.875%, 02/01/22.............. 2,488,368
5,105,000 Multi-Unit Rental Housing, Series A, 5.90%, 02/01/25............... 4,692,516
California Health Facilities Authority Revenue,
4,980,000 Kaiser Permanente Medical, 5.45%, 10/01/13......................... 4,442,110
19,010,000 Pacific Presbyterian Medical Center, Series C, 7.60%, 06/01/15..... 20,267,131
California Health Facilities Financing Authority Revenue,
7,300,000 Adventist Health System, Series A, 8.375%, 03/01/08................ 7,956,562
1,500,000 Adventist Health System, West, Series B, MBIA Insured, 6.25%,
03/01/21......................................................... 1,478,745
54,275,000 Childrens Hospital of Los Angeles, Series A, Pre-Refunded, 7.125%,
06/01/21......................................................... 61,192,349
2,965,000 Community Provider, Pooled Loan Program, Series A, 7.35%, 06/01/20. 3,188,531
2,795,000 County Program, Series B, 7.20%, 01/01/12.......................... 2,922,927
3,680,000 Health Dimensions, Health Facilities, Series A, 7.375%, 05/01/07... 3,934,803
960,000 Insured, AIDS Hospice Foundation, Pre-Refunded, 7.15%, 01/01/15.... 1,071,005
6,550,000 Insured, American Baptist Homes West, Series A, 7.65%, 04/01/14.... 7,014,198
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California Health Facilities Financing Authority Revenue, (cont.)
$ 3,590,000 Insured, Asian Community Center, Series A, Pre-Refunded, 9.25%,
09/01/15......................................................... $ 3,921,644
3,650,000 Insured, Association for Retarded Citizens of San Diego, 7.00%,
05/01/21......................................................... 3,819,031
2,700,000 Insured, Episcopal Homes Foundation Project, Series A, 7.75%,
07/01/06......................................................... 2,873,556
9,860,000 Insured, Episcopal Homes Foundation Project, Series A, 7.80%,
07/01/15......................................................... 10,639,729
3,425,000 Insured, Episcopal Homes Foundation Project, Series A, 7.70%,
07/01/18......................................................... 3,683,245
7,750,000 Insured, Episcopal Homes Foundation Project, Series B, 7.80%,
07/01/06......................................................... 8,180,435
18,900,000 Insured, Episcopal Homes Foundation Project, Series B, 7.85%,
07/01/15......................................................... 19,837,440
2,240,000 Insured, Feedback Foundation, Inc., Series A, 6.50%, 12/01/22...... 2,205,414
1,170,000 Insured, Innovation Health, Series A, 6.10%, 06/01/13.............. 1,110,447
4,000,000 Insured, Lodi Memorial Hospital Association, Series A, 7.70%,
09/01/10......................................................... 4,362,200
2,900,000 Insured, Marshall Hospital, Series A, 6.625%, 11/01/22............. 2,900,899
2,000,000 Insured, On Lok Senior Health Services, Series A, 6.40%, 12/01/12.. 1,963,520
7,525,000 Insured, On Lok Senior Health Services, Series A, 6.50%, 12/01/22.. 7,408,814
1,000,000 Insured, San Diego Christian, Series A, 6.25%, 07/01/12............ 971,320
2,250,000 Insured, Small Facilities Loan, Health Facilities, Series A, 6.75%,
03/01/20......................................................... 2,270,790
1,000,000 Insured, South Coast Medical Center, 7.25%, 07/01/15............... 1,065,430
5,000,000 Kaiser Permanente, Series A, 7.00%, 10/01/18....................... 5,254,700
2,000,000 Kaiser Permanente, Series A, 6.75%, 10/01/19....................... 2,062,600
5,000,000 Kaiser Permanente, Series A, 6.50%, 12/01/20....................... 5,048,750
11,880,000 Marin General Hospital, Series A, Pre-Refunded, 8.20%, 08/01/14.... 13,442,695
5,000,000 Mills-Peninsula Hospital, Series A, 7.75%, 01/15/05................ 5,338,750
5,000,000 Mills-Peninsula Hospital, Series A, 7.875%, 01/15/12............... 5,296,450
1,985,000 Pacific Presbyterian Medical Center, Series A, 6.85%, 06/01/19..... 2,007,053
3,500,000 Pomona Valley Community Hospital, Series A, 7.00%, 01/01/17........ 3,590,335
14,000,000 Pomona Valley Hospital Medical Center, 7.375%, 01/01/14............ 15,013,740
2,000,000 Refunding, Cedars Sinai Medical Center, Pre-Refunded, 7.00%,
11/01/15......................................................... 2,238,360
13,920,000 Refunding, Hospital of the Good Samaritan, 6.90%, 09/01/07......... 14,984,880
71,050,000 Refunding, Hospital of the Good Samaritan, 7.00%, 09/01/21......... 73,917,578
1,750,000 Refunding, Insured, AIDS Health Care Foundation, Series C, 6.25%,
09/01/17......................................................... 1,683,395
21,145,000 San Diego Hospital Association, Series A, 6.95%, 10/01/21.......... 22,191,255
19,005,000 San Diego Hospital Association, Series B, Pre-Refunded, 8.25%,
08/01/18......................................................... 21,533,995
4,805,000 S.C. Presbyterian, Health Facilities, Series A, 7.40%, 12/01/18.... 5,124,581
1,375,000 St. Elizabeth Hospital Project, Health Facilities, 6.30%, 11/15/15. 1,344,750
2,000,000 St. Joseph Health System, Pre-Refunded, 6.90%, 07/01/06............ 2,208,560
11,350,000 St. Joseph Health System, Pre-Refunded, 6.90%, 07/01/14............ 12,533,578
3,500,000 Sisters of Providence Project, Pre-Refunded, 8.375%, 10/01/07...... 3,992,345
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California Health Facilities Financing Authority Revenue, (cont.)
$ 7,500,000 Sutter Health, Series A, 6.70%, 01/01/13........................... $ 7,640,925
1,275,000 Unihealth America, Series A, AMBAC Insured, 7.625%, 10/01/15....... 1,400,205
34,665,000 Unihealth America, Series A, AMBAC Insured, Pre-Refunded, 7.625%,
10/01/15......................................................... 39,206,115
3,225,000 Walden House, State Guaranteed, 6.85%, 03/01/22.................... 3,277,922
California PCFA, PCR,
2,300,000 Gilton Project, 7.60%, 09/15/04.................................... 2,387,584
1,750,000 Pacific Gas & Electric Co., Series A, 6.625%, 06/01/09............. 1,777,562
6,500,000 Pacific Gas & Electric Co., Series A, 7.50%, 05/01/16.............. 6,946,030
2,000,000 Pacific Gas & Electric Co., Series A, 5.875%, 06/01/23............. 1,834,860
134,770,000 Pacific Gas & Electric Co., Series B, 8.875%, 01/01/10............. 153,251,010
32,675,000 Pacific Gas & Electric Co., Series B, 5.85%, 12/01/23.............. 29,854,821
2,500,000 Small Business, Desert Valley, Series A, 7.625%, 10/01/00.......... 2,613,000
2,510,000 Southern California Edison, 6.90%, 12/01/17........................ 2,647,046
17,205,000 California PCFA Revenue, Solid Waste Disposal, Keller Canyon Landfill Co.
Project, 6.875%, 11/01/27.............................................. 18,026,367
California Public Capital Improvements Financing Authority Revenue,
31,775,000 Pooled Projects, Joint Powers Agency, Series E, 8.375%, 03/01/03... 35,380,827
68,665,000 Pooled Projects, Series A, 8.40%, 03/01/08......................... 73,812,128
121,300,000 Pooled Projects, Series A, 8.50%, 03/01/18......................... 132,116,321
57,290,000 Pooled Projects, Series B, BIG Insured, 8.10%, 03/01/18............ 62,508,546
California School Boards Association Finance Corp., COP, Various Schools
Districts,
985,000 Series C, 8.125%, 07/01/03......................................... 1,007,606
1,235,000 Series C, 8.25%, 07/01/13.......................................... 1,256,995
California Special Districts Association Finance Corp., COP,
970,000 Series F, 8.10%, 09/01/10.......................................... 1,007,684
1,630,000 Series H, 7.75%, 02/01/15.......................................... 1,699,014
1,500,000 Series H, 7.80%, 02/01/21.......................................... 1,565,985
1,495,000 Series N, 8.30%, 03/01/12.......................................... 1,605,690
1,000,000 Series O, 7.40%, 03/01/17.......................................... 1,005,050
California Special Districts Finance Authority, COP,
22,035,000 Series A, 8.40%, 07/01/05.......................................... 24,563,957
70,000,000 Series A, 8.50%, 07/01/18.......................................... 77,865,900
California Special Districts Lease Financing Program, COP,
3,000,000 Series C, 7.90%, 04/01/14.......................................... 3,167,490
1,100,000 Series E, Pre-Refunded, 7.70%, 12/01/09............................ 1,162,106
3,100,000 Series E, Pre-Refunded, 7.75%, 12/01/19............................ 3,279,986
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,000,000 California State Department of Transportation, COP, East Bay State
Building, Series A, 6.50%, 03/01/16.................................... $ 2,044,500
California State Department of Water Resources, Central Valley Project,
Water System Revenue,
14,705,000 Refunding, Series L, 5.75%, 12/01/13............................... 13,814,906
4,905,000 Refunding, Series L, 5.75%, 12/01/14............................... 4,573,863
2,800,000 Refunding, Series L, 5.70%, 12/01/16............................... 2,570,120
33,590,000 Refunding, Series L, 5.75%, 12/01/19............................... 30,892,723
41,070,000 Refunding, Series L, 5.875%, 12/01/25.............................. 38,312,971
4,500,000 Series A, Pre-Refunded, 7.50%, 12/01/16............................ 4,819,050
14,990,000 Series A, Pre-Refunded, 7.50%, 12/01/22............................ 16,052,791
13,250,000 Series G, Pre-Refunded, 7.125%, 12/01/24........................... 14,698,755
28,045,000 Series H, Pre-Refunded, 6.90%, 12/01/25............................ 30,986,360
21,425,000 Series I, Pre-Refunded, 6.60%, 12/01/19............................ 23,336,539
68,025,000 Series I, Pre-Refunded, 6.95%, 12/01/25............................ 75,337,007
16,120,000 Series J-1, 6.00%, 12/01/20........................................ 15,358,007
11,800,000 Series J-2, 6.00%, 12/01/20........................................ 11,242,214
5,000,000 Series J-2, 5.50%, 12/01/22........................................ 4,418,000
2,675,000 Series K, 6.00%, 12/01/21.......................................... 2,546,787
4,000,000 Series K, 6.40%, 12/01/26.......................................... 3,999,560
California State, GO,
2,750,000 Series 1991, 6.30%, 02/01/04....................................... 2,857,745
2,500,000 Series 1991, 6.40%, 02/01/05....................................... 2,604,700
500,000 Series 1991, 6.40%, 02/01/06....................................... 517,980
13,625,000 Series 1991, 6.60%, 02/01/10....................................... 14,223,683
1,000,000 Series 1992, 6.25%, 09/01/12....................................... 997,750
3,780,000 Various Purpose, Series 1991, 6.50%, 09/01/10...................... 3,911,166
77,490,000 Various Purpose, Series 1992, 6.25%, 10/01/19...................... 77,390,038
25,075,000 Various Purpose, Series 1993, 5.90%, 04/01/23...................... 23,493,520
2,075,000 California State Military Department, National Guard Home Purchase
Revenue, Series 1983-A, 10.375%, 08/01/16.............................. 2,131,523
California State Public Works Board Lease Revenue,
9,000,000 California Community Colleges, Series A, 6.75%, 09/01/11........... 9,308,970
5,250,000 California State University, Various Projects, Series A, 6.30%,
10/01/04......................................................... 5,395,793
6,815,000 California State University, Various Projects, Series A, 6.375%,
10/01/05......................................................... 6,990,214
10,695,000 California State University, Various Projects, Series A, 6.50%,
10/01/06......................................................... 11,030,823
8,610,000 California State University, Various Projects, Series A, 6.625%,
10/01/10......................................................... 8,815,435
51,770,000 California State University, Various Projects, Series A, 6.70%,
10/01/17......................................................... 53,100,489
11,470,000 Department of Corrections, Calipatria State Prison, Imperial
County, Series A, 6.50%, 09/01/11................................ 11,662,352
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California State Public Works Board Lease Revenue, (cont.)
$ 20,150,000 Department of Corrections, Calipatria State Prison, Imperial
County, Series A, Pre-Refunded, 6.50%, 09/01/19.................. $ 22,080,975
500,000 Department of Corrections, Madera State Prison, Series E, 5.50%,
06/01/15......................................................... 448,195
3,000,000 Department of Corrections, State Prison, Central Womens Facility,
Madera County, Series A, Pre-Refunded, 7.00%, 09/01/09........... 3,359,820
7,500,000 Department of Corrections, State Prison, Del Norte, Pre-Refunded,
6.625%, 09/01/09................................................. 8,125,425
17,700,000 Department of Corrections, State Prison, Series A, AMBAC Insured,
5.75%, 09/01/21.................................................. 16,349,313
5,655,000 Department of Food & Agricultural Laboratory Buildings Project,
5.30%, 06/01/08.................................................. 5,159,735
1,000,000 Department of Food & Agricultural Laboratory Buildings Project,
5.40%, 06/01/13.................................................. 891,440
5,325,000 Franchise Tax Board, Phases II, Series A, 6.25%, 09/01/11.......... 5,235,966
975,000 Library & Courts Annex Building, Series A, 6.00%, 05/01/18......... 914,911
1,000,000 Regents of the University of California, Series A, Pre-Refunded,
7.00%, 09/01/15.................................................. 1,119,940
18,560,000 Secretary of State, Series A, 6.75%, 12/01/12...................... 19,184,173
2,700,000 University of California Projects, Series A, AMBAC Insured, 6.40%,
12/01/16......................................................... 2,712,123
13,520,000 University of California Projects, Series A, Pre-Refunded, 6.60%,
12/01/22......................................................... 14,947,171
2,290,000 Various Community College Projects, Series A, 5.50%, 12/01/07...... 2,145,616
2,415,000 Various Community College Projects, Series A, 5.50%, 12/01/08...... 2,233,899
12,605,000 Various Community College Projects, Series A, 5.625%, 12/01/13..... 11,415,718
5,000,000 Various Community College Projects, Series A, AMBAC Insured, 6.00%,
12/01/17......................................................... 4,822,250
California State Veterans Bonds,
2,000,000 Series 1989-AX, 7.00%, 04/01/16.................................... 2,080,200
815,000 Series B, 7.375%, 02/01/19......................................... 831,797
California Statewide CDA Revenue, COP,
23,530,000 Hospital Cedars Sinai Medical Center, 6.75%, 08/01/22.............. 24,237,077
2,590,000 Insured Health Facilities, AIDS Project, Series A, 6.25%, 08/01/22. 2,433,305
2,765,000 Insured Health Facilities, Childrens Campus, 6.375%, 09/01/12...... 2,656,418
3,000,000 Insured Health Facilities, Childrens Campus, 6.50%, 09/01/22....... 2,953,890
9,600,000 Insured Health Facilities, Eskaton Properties, 6.75%, 05/01/21..... 9,620,160
38,800,000 Insured Health Facilities, Unihealth America, Series A, AMBAC
Insured, 5.75%, 10/01/25......................................... 35,207,120
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California Statewide CDA Revenue, COP, (cont.)
$ 250,000 Refunding, Health Facilities, Barton Memorial Hospital, Series B,
6.40%, 12/01/05.................................................. $ 260,178
9,000,000 Refunding, Health Facilities, Eskaton, Inc., 5.875%, 05/01/20...... 8,069,850
2,000,000 Refunding, Insured Hospital, Triad Health Care, 6.25%, 08/01/06.... 1,986,380
57,480,000 Refunding, Insured Hospital, Triad Health Care, 6.50%, 08/01/22.... 57,046,026
7,000,000 Refunding, Insured, Retirement Housing Foundation, 6.625%, 04/15/12 6,967,100
16,000,000 Refunding, Insured, Retirement Housing Foundation, 6.75%, 04/15/22. 16,034,240
5,560,000 Refunding, Keiro Nursing Home, 5.875%, 03/01/19.................... 4,946,287
3,750,000 Refunding, St. Joseph Health System, 5.50%, 07/01/14............... 3,354,038
3,045,000 Refunding, St. Joseph Health System, 5.50%, 07/01/23............... 2,620,192
5,000,000 Salk Institute, Connie Lee Insured, 6.20%, 07/01/24................ 4,795,600
5,000,000 Sutter Health Obligated Group, MBIA Insured, 5.80%, 05/01/13....... 4,534,250
California Statewide Community Development Corp., COP,
1,675,000 Insured, United Western Medical Centers, 6.80%, 12/01/09........... 1,707,998
19,600,000 Insured, United Western Medical Centers, 6.75%, 12/01/21........... 19,763,268
5,000,000 Insured, Villaview Community Hospital, 7.00%, 09/01/09............. 5,166,200
3,770,000 Pacific Homes, Series A, 6.00%, 04/01/17........................... 3,466,779
2,575,000 California Urban Waterfront Area Restoration, 7.40%, 10/01/20............ 2,633,710
1,500,000 Calleguas Municipal Water District, COP, System Improvement Project,
AMBAC Insured, Pre-Refunded, 6.625%, 07/01/21.......................... 1,652,775
5,125,000 Camarillo COP, Capital Improvement Corp., Pre-Refunded, 7.625%, 04/01/08. 5,803,858
2,510,000 Cambria Community Services Sewer and Water District Revenue, Refunding,
BIG Insured, 7.40%, 05/01/15........................................... 2,731,859
1,410,000 Campbell COP, Refunding, Civic Center Project, 6.75%, 10/01/17........... 1,452,709
2,340,000 Campbell COP, Refunding, Civic Center Project, Pre-Refunded, 6.75%,
10/01/17............................................................... 2,601,963
2,365,000 Camrosa Water District, COP, Water System Improvement Project, 7.15%,
07/15/11............................................................... 2,438,481
2,800,000 Capistrano Bay Park & Recreation District, COP, Special Lease Finance,
Series Q, 6.35%, 08/01/12.............................................. 2,657,592
5,000,000 Capitola COP, Capitola Public Facilities Corp., 7.80%, 08/01/03.......... 5,101,900
3,000,000 Carlsbad COP, Carlsbad Public Improvement Corp., 8.00%, 08/01/08......... 3,253,290
1,750,000 Carpinteria Sanitary District, Capital Facilities Revenue, FGIC Insured,
5.50%, 07/01/18........................................................ 1,567,055
Carson RDA, Refunding, Project Area No. 1,
3,965,000 Series 1992, 6.375%, 10/01/12...................................... 3,690,781
1,565,000 Series 1992, 6.375%, 10/01/16...................................... 1,438,454
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 35,000,000 Castaic Lake Water Agency, COP, Water System Improvement Project,
7.35%, 08/01/20........................................................ $ 37,491,300
1,000,000 Cathedral City RDA, Tax Allocation, Project No. 1, Series A, 7.40%,
08/01/19............................................................... 1,017,120
Central Coast Water Authority Revenue, Water State Project, Regional
Facilities,
10,000,000 Series 1992, AMBAC Insured, 6.50%, 10/01/14........................ 10,189,900
18,635,000 Series 1992, AMBAC Insured, 6.60%, 10/01/22........................ 19,058,760
5,800,000 Central San Joaquin Water Conservation District, COP, Series 1990, 7.65%,
12/01/18............................................................... 6,077,008
2,000,000 Central School District, San Bernardino County, Series A, 7.05%, 05/01/16 2,237,180
1,000,000 Cerritos Public Financing Authority Revenue, Los Coyotes Redevelopment
Project Loan, Series A, AMBAC Insured, 5.75%, 11/01/22................. 920,070
9,980,000 Chino RDA, Tax Allocation, Central City Redevelopment Project, 7.00%,
09/01/22............................................................... 9,918,124
Chico RDAR, COP, Insured Health Facilities,
4,110,000 Sierra Sunrise Lodge, 6.80%, 02/01/11.............................. 4,177,445
2,800,000 Sierra Sunrise Lodge, 6.75%, 02/01/21.............................. 2,827,356
Chino USD, COP,
2,620,000 Land Acquisition, Series G, BIG Insured, 7.35%, 09/01/24........... 2,840,342
9,000,000 Refunding, Capital Construction Project, Series A, 8.00%, 09/01/04. 8,831,430
90,000 Chula Vista-El Dorado-Livermore-Menlo Park HFA, HMR, Series 1983-A,
10.50%, 12/01/16....................................................... 89,951
5,000,000 Chula Vista RDA, COP, Capital Improvements Project, Series A, 8.75%,
09/01/12............................................................... 5,748,100
16,435,000 Chula Vista RDA, Tax Allocation, Bayfront/Town Center, 7.875%, 05/01/11.. 17,439,836
Clayton 1915 ACT, Limited Obligation, Oakhurst Country Club,
545,000 Contra Costa County, 8.10%, 09/02/01............................... 564,702
840,000 Contra Costa County, 8.20%, 09/02/02............................... 870,366
850,000 Contra Costa County, 8.25%, 09/02/03............................... 880,728
1,100,000 Contra Costa County, 8.30%, 09/02/04............................... 1,139,754
1,265,000 Contra Costa County, 8.30%, 09/02/05............................... 1,310,717
1,255,000 Contra Costa County, 8.35%, 09/02/06............................... 1,300,356
1,470,000 Contra Costa County, 8.35%, 09/02/07............................... 1,523,126
1,550,000 Contra Costa County, 8.375%, 09/02/08.............................. 1,606,017
1,650,000 Contra Costa County, 8.375%, 09/02/09.............................. 1,709,631
175,000 Contra Costa County, 8.40%, 09/02/10............................... 181,325
1,685,000 Contra Costa County, 8.40%, 09/02/11............................... 1,745,896
2,095,000 Contra Costa County, 8.40%, 09/02/12............................... 2,170,713
2,305,000 Contra Costa County, 8.40%, 09/02/13............................... 2,388,303
6,435,000 Clayton Special Tax, CFD No. 90-1, 8.60%, 09/02/22....................... 6,526,184
3,000,000 Clovis CDA, Tax Allocation, 7.625%, 08/01/15............................. 3,075,510
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,670,000 Clovis COP, 7.20%, 08/01/11.............................................. $ 2,653,953
1,750,000 Coachella RDA, Refunding, Tax Allocation, Project Area No. 4, 8.45%,
09/01/20............................................................... 1,899,503
3,000,000 Coachella Valley COP, ID No. 71, Storm Water District, Flood Central
Project, 6.75%, 10/01/12............................................... 3,033,570
1,000,000 Coachella Valley Recreation & Park District, 1915 ACT, Limited
Obligation, AD No. 90-1, 7.75%, 09/02/16............................... 1,036,160
6,375,000 Coachella Valley USD, COP, 8.25%, 09/01/12............................... 6,854,400
Coalinga Public Financing Authority Revenue,
315,000 Series A, MBIA Insured, 3.50%, 08/01/95............................ 313,346
320,000 Series A, MBIA Insured, 3.80%, 08/01/96............................ 316,771
335,000 Series A, MBIA Insured, 4.10%, 08/01/97............................ 330,796
345,000 Series A, MBIA Insured, 4.25%, 08/01/98............................ 337,531
360,000 Series A, MBIA Insured, 4.50%, 08/01/99............................ 350,032
375,000 Series A, MBIA Insured, 4.65%, 08/01/00............................ 363,011
480,000 Series A, MBIA Insured, 5.20%, 08/01/05............................ 456,302
505,000 Series A, MBIA Insured, 5.25%, 08/01/06............................ 476,508
540,000 Series A, MBIA Insured, 5.30%, 08/01/07............................ 505,624
575,000 Series A, MBIA Insured, 5.40%, 08/01/08............................ 539,488
8,120,000 Series B, 6.625%, 09/15/21......................................... 7,712,457
Coast Community College District, Refunding, COP, Coastline Community
College,
1,360,000 Second Project, 7.90%, 02/01/99.................................... 1,475,668
1,450,000 Second Project, 8.00%, 02/01/00.................................... 1,573,366
1,595,000 Second Project, 8.05%, 02/01/01.................................... 1,730,719
1,665,000 Second Project, 8.10%, 02/01/02.................................... 1,806,675
1,860,000 Second Project, 8.10%, 02/01/03.................................... 2,018,267
2,010,000 Second Project, 8.10%, 02/01/04.................................... 2,181,031
Coastside County Water District, 1915 ACT, Improvement Board,
980,000 Crystal Springs, AD No. 1, 7.00%, 09/02/02......................... 1,012,644
985,000 Crystal Springs, AD No. 1, 7.10%, 09/02/03......................... 1,017,801
980,000 Crystal Springs, AD No. 1, 7.15%, 09/02/04......................... 1,012,634
685,000 Crystal Springs, AD No. 1, 7.20%, 09/02/05......................... 707,811
680,000 Crystal Springs, AD No. 1, 7.25%, 09/02/06......................... 702,644
Colton Joint USD, Special Tax,
170,000 CFD No. 1, Southridge Village, 7.75%, 09/01/00..................... 171,052
185,000 CFD No. 1, Southridge Village, 7.75%, 09/01/01..................... 186,145
195,000 CFD No. 1, Southridge Village, 7.75%, 09/01/02..................... 196,207
215,000 CFD No. 1, Southridge Village, 7.75%, 09/01/03..................... 216,331
230,000 CFD No. 1, Southridge Village, 7.75%, 09/01/04..................... 231,424
250,000 CFD No. 1, Southridge Village, 7.75%, 09/01/05..................... 251,547
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Colton Joint USD, Special Tax, (cont.)
$ 265,000 CFD No. 1, Southridge Village, 7.75%, 09/01/06..................... $ 266,640
285,000 CFD No. 1, Southridge Village, 7.75%, 09/01/07..................... 286,764
310,000 CFD No. 1, Southridge Village, 7.75%, 09/01/08..................... 311,919
335,000 CFD No. 1, Southridge Village, 7.75%, 09/01/09..................... 337,074
360,000 CFD No. 1, Southridge Village, 7.75%, 09/01/10..................... 362,228
390,000 CFD No. 1, Southridge Village, 7.75%, 09/01/11..................... 392,414
420,000 CFD No. 1, Southridge Village, 7.75%, 09/01/12..................... 422,600
450,000 CFD No. 1, Southridge Village, 7.75%, 09/01/13..................... 452,785
Colton Public Financing Authority Revenue, Tax Allocation,
5,855,000 Series A, 7.60%, 05/15/19 ......................................... 6,269,241
20,830,000 Series B, 7.60%, 05/15/19 ......................................... 22,303,723
4,100,000 Colton RDA, MFR, Seniors Housing Project, Series A, 7.75%, 07/01/22...... 4,255,267
1,555,000 Colusa County COP, ABAG Finance Corp., Series B, 7.00%, 02/01/18......... 1,563,895
Commerce RDA, Tax Allocation, Project Area No. 1,
1,000,000 Series 1988-A, 7.60%, 08/01/98..................................... 1,107,420
1,655,000 Series 1988-A, 7.70%, 08/01/99..................................... 1,852,359
1,420,000 Series 1988-A, 7.75%, 08/01/00..................................... 1,586,183
16,000,000 Series 1988-A, 8.00%, 08/01/10..................................... 17,926,240
31,825,000 Commerce Refuse to Energy Authority Revenue, Series 1984-A, 11.50%,
11/01/10............................................................... 34,003,103
18,885,000 Compton COP, Refunding, Tax Allocation, Convention Center Project, 8.00%,
08/01/16............................................................... 20,547,258
13,000,000 Compton CRDA, Tax Allocation, Walnut Industrial Park, Series 1985, AMBAC
Insured, Pre-Refunded, 10.20%, 08/01/09................................ 16,453,710
Compton Public Finance Authority Revenue,
1,075,000 Rosecrans Redevelopment Project Area No. 1, Series B, 9.25%,
08/01/01......................................................... 1,204,376
25,165,000 Walnut Industrial Park Project, Series A, Pre-Refunded, 9.30%,
08/01/13......................................................... 29,031,854
Compton Sewer Revenue,
1,405,000 Series 1993, 6.60%, 07/01/12....................................... 1,333,570
4,535,000 Series 1993, 6.75%, 07/01/23....................................... 4,313,148
5,895,000 Concord RDA, Refunding, Tax Allocation, Central Concord Redevelopment
Project, Sub-Series A, 6.00%, 07/01/19................................. 5,232,166
10,000 Concord-Walnut Creek Home Financing Authority, SFR, 13.00%, 06/01/14..... 10,050
Contra Costa County, COP,
11,000,000 Merrithew Memorial Hospital, Replacement, 6.60%, 11/01/12.......... 11,107,470
49,500,000 Merrithew Memorial Hospital, Replacement, 6.625%, 11/01/22......... 49,701,960
2,870,000 Contra Costa County MFHR, Del Norte Place, GNMA Collateralized, 7.85%,
08/20/33............................................................... 3,135,532
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 5,930,000 Contra Costa County MFHR, Refunding, Byron Park Project, Series C, GNMA
Collateralized, 6.40%, 01/20/31........................................ $ 5,854,867
Contra Costa Transportation Authority Revenue, Sales Tax,
13,900,000 Series A, ETM 03/01/05, 6.875%, 03/01/07........................... 14,600,838
1,000,000 Series A, FGIC Insured, ETM 03/01/09, 6.50%, 03/01/09.............. 1,022,250
7,400,000 Contra Costa Water District Revenue, Series B, Pre-Refunded, 7.625%,
10/01/18............................................................... 8,369,400
1,555,000 Corcoran Hospital District Revenue, Series A, 6.55%, 07/01/12............ 1,549,868
Corcoran Joint Powers Finance Authority Revenue, Tax Allocation,
1,250,000 Corcoran Industrial Sector Redevelopment Project, 8.75%, 12/01/11.. 1,365,575
840,000 Corcoran Industrial Sector Redevelopment Project, 8.75%, 12/01/12.. 917,666
Corona 1915 ACT,
800,000 AD No. 79-2, Northeast Area, Series B, 7.625%, 09/02/98............ 827,168
855,000 AD No. 79-2, Northeast Area, Series B, 7.75%, 09/02/99............. 883,574
920,000 AD No. 79-2, Northeast Area, Series B, 7.80%, 09/02/00............. 949,992
995,000 AD No. 79-2, Northeast Area, Series B, 7.80%, 09/02/01............. 1,027,039
1,070,000 AD No. 79-2, Northeast Area, Series B, 7.85%, 09/02/02............. 1,104,229
1,155,000 AD No. 79-2, Northeast Area, Series B, 7.85%, 09/02/03............. 1,191,475
1,250,000 AD No. 79-2, Northeast Area, Series B, 7.85%, 09/02/04............. 1,288,975
1,565,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/99..................... 1,619,431
1,695,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/00..................... 1,752,223
1,830,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/01..................... 1,891,049
1,980,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/02..................... 2,045,241
2,135,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/03..................... 2,204,067
2,305,000 Refunding, AD No. 79-2 & 80-1, 8.10%, 09/02/04..................... 2,378,622
23,500,000 Corona CFD No. 90-1, Special Tax, Series A, 8.40%, 09/01/20.............. 22,342,860
Corona COP,
15,000,000 Corona Community Hospital Project, Pre-Refunded, 7.00%, 09/01/20... 18,234,300
5,765,000 Public Improvement Corp., Waste Water Treatment Facility, 7.625%,
08/01/16......................................................... 6,165,610
22,325,000 Refunding, Vista Hospital System, Series C, 9.50%, 07/01/20........ 23,513,136
980,000 Corona RDAR, SFRMR, 10.20%, 02/01/17 .................................... 1,006,313
Corona-Norco USD, Special Tax,
4,705,000 CFD No. 6, 8.00%, 10/01/12......................................... 5,086,058
4,360,000 CFD No. 7, 9.30%, 11/01/07......................................... 4,899,288
5,195,000 CFD No. 88-1, 7.55%, 10/01/14...................................... 5,432,671
5,000,000 Coronado CDA, Tax Allocation, Coronado Community Development Project,
MBIA Insured, 6.30%, 09/01/22.......................................... 4,960,350
6,000,000 Costa Mesa RDA, Refunding, Tax Allocation, Pre-Refunded, 8.00%, 02/01/17. 6,515,940
2,390,000 Cotati Facilities Financing Authority, Tax Allocation, Series A, 5.70%,
09/01/23............................................................... 2,065,414
17,345,000 Covina CDA, Tax Allocation, Covina Revitalization No. 1, 9.75%, 11/01/09. 19,828,284
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 1,750,000 Cucamonga School District, COP, 7.60%, 12/01/15.......................... $ 1,842,820
Culver City Redevelopment Finance Authority Revenue, Subordinated Lien
Project Loans,
1,630,000 Series B, AMBAC Insured, 7.50%, 12/01/08........................... 1,796,032
7,955,000 Series B, AMBAC Insured, 7.60%, 12/01/15........................... 8,750,500
3,370,000 Series B, Pre-Refunded, 7.50%, 12/01/08............................ 3,848,675
16,445,000 Series B, Pre-Refunded, 7.60%, 12/01/15............................ 18,861,099
Cupertino COP,
4,110,000 Memorial Park Expansion Project, Bank Qualified, Pre-Refunded,
7.25%, 07/01/10.................................................. 4,636,203
7,000,000 Open Space Acquisition Project, Pre-Refunded, 7.125%, 04/01/16..... 7,878,150
19,750,000 Refunding, Series A, 5.75%, 01/01/16............................... 17,887,575
2,000,000 Refunding, Series B, 6.25%, 07/01/10............................... 1,946,160
3,440,000 Cypress COP, Civic Center, Refunding & Improvement Project, 6.80%,
08/01/17............................................................... 3,502,023
Daly City, COP,
1,710,000 Daly City Public Facilities Co., Pre-Refunded, 8.00%, 06/01/00..... 1,755,828
1,845,000 Daly City Public Facilities Co., Pre-Refunded, 8.00%, 06/01/01..... 1,894,446
1,990,000 Daly City Public Facilities Co., Pre-Refunded, 8.10%, 06/01/02..... 2,043,630
2,145,000 Daly City Public Facilities Co., Pre-Refunded, 8.10%, 06/01/03..... 2,202,808
2,315,000 Daly City Public Facilities Co., Pre-Refunded, 8.15%, 06/01/04..... 2,377,551
Davis RDA, Tax Allocation,
2,490,000 Davis Redevelopment Project, 7.35%, 09/01/11....................... 2,523,839
3,600,000 Davis Redevelopment Project, ETM 09/01/95, 7.40%, 09/01/12......... 4,134,636
2,900,000 Delano CRDA, Tax Allocation, Delano Redevelopment Project Area No. 1,
Notes, 7.25%, 03/01/98................................................. 3,074,580
1,800,000 Desert Hot Springs County, COP, Water District Improvement Corp.,
Pre-Refunded, 7.875%, 08/01/06 ........................................ 1,827,108
Desert Hot Springs RDA, Refunding, Tax Allocation, Redevelopment Project
No. 1,
2,190,000 Series A, 7.90%, 07/15/07.......................................... 2,328,167
1,460,000 Series A, MBIA Insured, 5.625%, 09/01/21........................... 1,330,294
1,625,000 Series B, Pre-Refunded, 8.00%, 07/15/12............................ 1,824,046
2,120,000 Desert Hot Springs RDA, Tax Allocation, Redevelopment Project No. 2,
Series A, 6.625%, 09/01/20............................................. 2,051,397
Desert Sands USD, COP, Measure O Project,
5,305,000 Refunding, Series C, 5.10%, 03/01/04............................... 4,881,449
6,405,000 Refunding, Series D, MBIA Insured, 4.60%, 03/01/03................. 5,981,886
6,665,000 Refunding, Series D, MBIA Insured, 4.70%, 03/01/04................. 6,189,586
20,000,000 Series B, Pre-Refunded, 7.30%, 03/01/04............................ 21,525,800
5,370,000 Duarte COP, City Civic Center, Refunding, 7.00%, 06/15/22................ 5,336,545
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Duarte RDA, Refunding, Tax Allocation,
$ 13,085,000 Davis Addition Project, 8.375%, 06/01/17........................... $ 14,678,230
2,240,000 Las Lomas Redevelopment Project, 8.00%, 08/01/07................... 2,384,726
230,000 Duarte RDA, RMR, Participation Purchase & Loan to Lender Program, 13.00%,
10/01/13............................................................... 237,286
9,515,000 Dublin, COP, Refunding, Civic Center Project, Pre-Refunded, 7.875%,
02/01/10............................................................... 10,654,992
5,000,000 East Bay MUD Revenue, Waste Water Treatment System, AMBAC Insured,
Pre-Refunded, 6.375%, 06/01/21......................................... 5,450,500
East Bay MUD Revenue, Water System,
10,100,000 Refunding, Series 1992, 6.00%, 06/01/20............................ 9,839,218
13,905,000 Series 1986-D, Pre-Refunded, 7.50%, 03/01/12....................... 15,080,529
15,000,000 Series 1990, MBIA Insured, Pre-Refunded, 7.50%, 06/01/18........... 17,140,800
1,000,000 East Bay MUD, Special District, Series D, Pre-Refunded, 7.00%, 04/01/16.. 1,075,690
East Bay Regional Park District,
1,220,000 Series 1989, 6.25%, 09/01/13....................................... 1,252,550
2,000,000 Series B, 5.75%, 09/01/15.......................................... 1,905,360
2,930,000 Series B, 5.75%, 09/01/16.......................................... 2,771,282
Eastern Municipal Water District Revenue, Water & Sewer, COP,
16,055,000 Refunding, Series A, 6.90%, 07/01/23............................... 16,620,136
1,750,000 Series 1991, MBIA Insured, 6.00%, 07/01/23......................... 1,668,852
10,975,000 Eden Township Hospital District Revenue, COP, Insured Health Facility,
Eden Hospital Health Service Corp., Pre-Refunded, 7.80%, 07/01/18...... 12,423,041
1,500,000 El Camino Hospital District Revenue, Crossover Refunding, COP, Series A,
Pre-Refunded, 8.50%, 09/01/17.......................................... 1,684,905
8,945,000 El Camino Hospital District Revenue, Refunding, Series A, 7.25%, 08/15/09 9,778,048
5,500,000 El Dorado County Board Authority Lease Revenue, Capital Facilities
Project, 7.40%, 11/01/09............................................... 5,893,745
3,390,000 El Dorado Union High School District, COP, Capital Projects, 6.30%,
08/01/12............................................................... 3,216,940
2,620,000 El Monte Public Financing Authority Revenue, Tax Allocation, Downtown
El Monte Redevelopment Project, Series A, 6.35%, 12/01/23 ............. 2,345,450
Elsinore Valley Municipal Water District, COP,
2,590,000 Refunding, Series A, FGIC Insured, 5.75%, 07/01/19................. 2,389,430
10,000,000 Series A, BIG Insured, Pre-Refunded, 7.30%, 08/01/19............... 11,167,200
12,185,000 Series A, Pre-Refunded, 8.20%, 08/01/06............................ 12,613,668
Emeryville Public Financing Authority Revenue, Subordinated Lien,
Emeryville Redevelopment,
1,805,000 Series A, Pre-Refunded, 8.00%, 02/01/08............................ 1,974,814
6,000,000 Series A, Pre-Refunded, 8.10%, 02/01/17............................ 6,687,120
3,620,000 Series A, Pre-Refunded, 8.10%, 02/01/18............................ 4,034,562
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 1,165,000 Empire Union School District, COP, Garst School Supplies Financing
Project, 6.75%, 12/01/17............................................... $ 1,109,511
2,700,000 Empire Union School District, Refunding, Special Tax, Community
Facilities District No. 1989-1, Series A, MBIA Insured, 6.50%, 10/01/17 2,740,905
5,000,000 Encino Financing Authority Revenue, Joint Powers Waste Water, Phase IV,
Expansion Project, Series A, AMBAC Insured, 6.50%, 08/01/14............ 5,080,650
Escondido, COP,
120,000 Escondido Mobile Home Park, 5.65%, 03/01/96........................ 119,335
135,000 Escondido Mobile Home Park, 5.85%, 03/01/97........................ 133,898
140,000 Escondido Mobile Home Park, 6.05%, 03/01/98........................ 138,516
1,305,000 Escondido Mobile Home Park, 7.25%, 03/01/07........................ 1,263,566
6,390,000 Escondido Mobile Home Park, 7.40%, 03/01/21........................ 6,098,552
2,405,000 Eureka Public Financing Authority Revenue, Tax Allocation, Eureka
Redevelopment Projects, CGIC Insured, Pre-Refunded, 7.40%, 11/01/13.... 2,692,975
1,290,000 Fairfield 1915 ACT, Green Valley Road, Mangels Boulevard, 8.00%, 09/02/11 1,337,407
505,000 Fairfield 1915 ACT, North Cordelia, ID, 8.00%, 09/02/11.................. 523,276
135,000 Fairfield Lincoln HFAR, Home Mortgage, Series 1985-A, FGIC Insured,
9.25%, 11/01/13........................................................ 141,932
Fairfield Public Financing Authority Revenue, Fairfield Redevelopment
Project,
21,300,000 Series A, 7.80%, 08/01/19.......................................... 23,356,941
4,000,000 Series C, CGIC Insured, 5.50%, 08/01/23 ........................... 3,516,280
Fairfield RDA, Tax Allocation,
4,045,000 Highway 12 Redevelopment Project, Pre-Refunded, 8.00%, 10/01/10.... 4,272,774
4,045,000 Highway 12 Redevelopment Project, Pre-Refunded, 8.50%, 10/01/16.... 4,318,563
2,120,000 Highway 12 Redevelopment Project, Pre-Refunded, 9.00%, 10/01/18.... 2,287,374
1,960,000 Fairoaks Fire Protection District, COP, 8.00%, 12/01/15.................. 2,019,976
2,590,000 Fillmore COP, Water System Improvement Project, AMBAC Insured, 7.70%,
05/01/19............................................................... 2,913,828
Folsom Public Financing Authority Revenue,
3,000,000 Local Agency, 7.25%, 10/01/10...................................... 3,080,010
7,590,000 Local Agency, 8.00%, 10/01/18...................................... 7,981,644
11,520,000 Local Agency, Pre-Refunded, 8.00%, 10/01/18........................ 12,519,360
Folsom Special Tax,
2,000,000 CFD No. 1, Willow Creek, 8.25%, 12/01/06........................... 2,141,040
3,910,000 CFD No. 2, 7.60%, 12/01/09......................................... 4,142,528
3,950,000 CFD No. 2, 7.70%, 12/01/19......................................... 4,185,262
4,000,000 Fontana COP, 1915 ACT, Police Facilities Project, Pre-Refunded, 7.75%,
04/01/16............................................................... 4,340,760
2,750,000 Fontana COP, Refunding, Police Facility Project, 5.625%, 04/01/16........ 2,423,822
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Fontana Public Financing Authority Revenue, Tax Allocation, North
Fontana, Redevelopment,
$ 3,005,000 Series B, 6.25%, 01/15/18.......................................... $ 2,703,839
1,905,000 Series B, 6.30%, 01/15/24.......................................... 1,699,831
2,000,000 Subordinated Lien, Series A, Pre-Refunded, 7.65%, 12/01/09......... 2,332,760
11,005,000 Subordinated Lien, Series A, Pre-Refunded, 7.75%, 12/01/20......... 12,904,683
Fontana RDA, Tax Allocation,
16,830,000 Refunding, Jurupa Hills Redevelopment Project, Series A, 7.90%,
10/01/18......................................................... 18,072,727
10,000,000 Refunding, Jurupa Hills Redevelopment Project, Series A, 7.10%,
10/01/23......................................................... 10,677,900
16,610,000 Subordinated, North Fontana, Redevelopment Project, Pre-Refunded,
8.00%, 09/01/18.................................................. 19,034,230
31,750,000 Fontana Special Tax, CFD No. 2, Series B, 8.50%, 09/01/17................ 34,953,892
Foothill-De Anza Community College District, COP,
1,690,000 Parking Structure Project, Pre-Refunded, 8.20%, 07/01/08........... 1,952,457
3,110,000 Parking Structure Project, Pre-Refunded, 8.25%, 07/01/18........... 3,598,861
1,675,000 Refunding Project, Connie Lee Insured, 5.25%, 09/01/21............. 1,416,112
2,120,000 Fort Bragg COP, Capital Improvement Authority, Pre-Refunded, 7.85%,
08/01/14......................................................... 2,408,023
2,015,000 Fort Bragg, RDAR, Tax Allocation, Fort Bragg Redevelopment Project,
Series A, 6.875%, 05/01/18............................................. 1,949,412
2,000,000 Fortuna & Susanville Cities, COP, Series B, 7.375%, 09/01/17............. 2,058,300
Franklin McKinley School District,
4,640,000 COP, Refunding, Series 1993, 6.625%, 05/01/16...................... 4,390,925
1,070,000 Series E, 5.75%, 07/01/14.......................................... 997,315
Fremont, COP,
4,285,000 Series A, MBIA Insured, 5.80%, 08/01/18............................ 3,984,579
8,320,000 Series A, MBIA Insured, 5.90%, 08/01/25............................ 7,759,482
1,800,000 Series B, 6.10%, 08/01/18.......................................... 1,648,944
3,585,000 Series B, 6.10%, 08/01/25.......................................... 3,235,427
6,035,000 Fremont, COP, Park Facilities Corp., 6.75%, 08/01/11..................... 6,068,011
1,980,000 Fremont RDA, Tax Allocation, Irvington Redevelopment Project, 7.75%,
08/01/06............................................................... 2,073,634
Fresno County, COP,
225,000 American Avenue Landfill Project, 7.30%, 11/01/95.................. 229,822
240,000 American Avenue Landfill Project, 7.40%, 11/01/96.................. 244,987
255,000 American Avenue Landfill Project, 7.50%, 11/01/97.................. 259,960
275,000 American Avenue Landfill Project, 7.60%, 11/01/98.................. 279,939
295,000 American Avenue Landfill Project, 7.75%, 11/01/99.................. 299,856
320,000 American Avenue Landfill Project, 7.90%, 11/01/00.................. 324,813
345,000 American Avenue Landfill Project, 8.00%, 11/01/01.................. 349,720
7,185,000 American Avenue Landfill Project, 8.25%, 11/01/13.................. 7,258,862
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Fresno County HFR, Mortgage Loans,
$ 295,000 Series A, 12.50%, 09/15/12......................................... $ 301,006
175,000 SF, Issue A, AMBAC Insured, 13.00%, 12/01/13....................... 179,023
2,470,000 Fresno County Office of Education, COP, Capital Outlay Financing Program,
Series C, 7.50%, 12/01/10.............................................. 2,571,146
Fresno Health Facilities Revenue,
12,190,000 Holy Cross Health System Corp., 5.625%, 12/01/15................... 10,880,916
5,500,000 Refunding, Holy Cross Health System Corp., Series A, 5.625%,
12/01/18......................................................... 4,850,890
3,000,000 Fresno IDR, Refunding, Civic Center Square Project, 8.60%, 04/01/08...... 3,018,180
1,755,000 Fresno RDAR, Tax Allocation, Mariposa Redevelopment Project, Series A,
6.625%, 02/01/23....................................................... 1,653,070
7,065,000 Fresno USD, COP, Project Phase VI, Series A, 7.20%, 05/01/11............. 7,172,317
Fullerton Joint Union High School District, COP, Financing Project,
3,355,000 Series 1992, 6.50%, 09/01/07....................................... 3,336,950
1,070,000 Series 1993, 5.875%, 09/01/08...................................... 995,710
6,085,000 Galt 1915 ACT, Improvement Board, AD No. 92-1, 7.75%, 09/02/24........... 6,295,115
3,340,000 Galt COP, Waste Water Improvement, 7.80%, 09/01/10....................... 3,500,921
3,520,000 Galt High & Elementary School, Joint Powers Facilities Authority Revenue,
Series A, 7.00%, 11/01/17.............................................. 3,535,453
3,980,000 Galt Middle School, Joint Powers Authority, Special Tax, CFD No. 1,
8.00%, 09/01/15........................................................ 4,085,152
Garden Grove COP, Bahia Village/Emerald Isle Project,
1,060,000 FSA Insured, 5.50%, 08/01/08....................................... 1,015,342
3,250,000 FSA Insured, 5.70%, 08/01/23....................................... 2,934,458
Garden Grove CDA, Refunding, Tax Allocation,
3,275,000 Garden Grove Community Project, 5.70%, 10/01/08.................... 3,019,943
6,730,000 Garden Grove Community Project, 5.875%, 10/01/23................... 6,091,525
2,020,000 Gardena COP, Refunding, Civic Center Improvement Projects, 6.30%,
08/01/23............................................................... 1,798,972
Gilroy 1915 ACT,
255,000 AD No. 91-1, Century Estates, Phase I, 7.50%, 09/02/99............. 263,494
280,000 AD No. 91-1, Century Estates, Phase I, 7.60%, 09/02/00............. 289,327
295,000 AD No. 91-1, Century Estates, Phase I, 7.70%, 09/02/01............. 304,823
325,000 AD No. 91-1, Century Estates, Phase I, 7.80%, 09/02/02............. 335,832
345,000 AD No. 91-1, Century Estates, Phase I, 7.85%, 09/02/03............. 356,489
380,000 AD No. 91-1, Century Estates, Phase I, 7.90%, 09/02/04............. 392,654
405,000 AD No. 91-1, Century Estates, Phase I, 7.95%, 09/02/05............. 418,495
435,000 AD No. 91-1, Century Estates, Phase I, 8.00%, 09/02/06............. 450,760
25,515,000 Glendale Memorial Hospital & Health Revenue, Refunding, Series A, 9.00%,
11/01/17............................................................... 25,877,568
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,000,000 Glendale RDAR, Tax Allocation, Central Glendale Redevelopment Project,
AMBAC Insured, Pre-Refunded, 7.10%, 12/01/20........................... $ 2,225,920
7,250,000 dGlendale USD, COP, Series A, AMBAC Insured, 6.00%, 03/01/19 ............. 6,925,345
10,090,000 Golden Hills School District, COP, Capital Financing Project,
Pre-Refunded, 7.75%, 03/01/18.......................................... 10,941,798
Goleta Sanitation & Water Districts, COP,
600,000 Series 1991, Pre-Refunded, 7.25%, 12/01/01......................... 670,152
1,000,000 Series 1991, Pre-Refunded, 7.30%, 12/01/02......................... 1,118,980
1,000,000 Series 1991, Pre-Refunded, 7.35%, 12/01/03......................... 1,121,040
1,280,000 Series 1991, Pre-Refunded, 7.35%, 12/01/04......................... 1,437,786
1,315,000 Series 1991, Pre-Refunded, 7.40%, 12/01/05......................... 1,476,876
1,475,000 Series 1991, Pre-Refunded, 7.40%, 12/01/06......................... 1,656,572
11,380,000 Series 1991, Pre-Refunded, 7.50%, 12/01/12......................... 12,827,764
2,945,000 Grand Terrace Public Financing Authority, Series A, 7.85%, 06/01/21...... 3,030,464
Grass Valley 1915 ACT,
45,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.00%, 09/02/97........ 46,629
55,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.10%, 09/02/98........ 56,990
50,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.20%, 09/02/99........ 51,809
60,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.30%, 09/02/00........ 62,171
65,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.30%, 09/02/01........ 67,352
70,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.40%, 09/02/02........ 72,533
80,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.40%, 09/02/03........ 82,894
80,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.50%, 09/02/04........ 82,894
90,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.50%, 09/02/05........ 93,255
85,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.60%, 09/02/06........ 88,074
110,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.60%, 09/02/07........ 113,979
110,000 Limited Obligation, AD No. 1, Morgan Ranch, 8.60%, 09/02/08........ 113,979
105,000 Refunding, Whispering Pines ID, 7.70%, 09/02/03.................... 108,361
130,000 Refunding, Whispering Pines ID, 7.75%, 09/02/04.................... 134,455
135,000 Refunding, Whispering Pines ID, 7.75%, 09/02/05.................... 139,626
150,000 Refunding, Whispering Pines ID, 7.80%, 09/02/06.................... 155,140
170,000 Refunding, Whispering Pines ID, 7.85%, 09/02/07.................... 175,826
185,000 Refunding, Whispering Pines ID, 7.90%, 09/02/08.................... 191,340
205,000 Refunding, Whispering Pines ID, 7.90%, 09/02/09.................... 212,025
220,000 Refunding, Whispering Pines ID, 7.90%, 09/02/10.................... 227,539
235,000 Refunding, Whispering Pines ID, 7.90%, 09/02/11.................... 243,053
255,000 Refunding, Whispering Pines ID, 7.95%, 09/02/12.................... 264,228
275,000 Refunding, Whispering Pines ID, 7.95%, 09/02/13.................... 284,952
300,000 Refunding, Whispering Pines ID, 7.95%, 09/02/14.................... 310,857
325,000 Refunding, Whispering Pines ID, 7.95%, 09/02/15.................... 336,762
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Grass Valley 1915 ACT, (cont.)
$ 350,000 Refunding, Whispering Pines ID, 8.00%, 09/02/16.................... $ 362,667
380,000 Refunding, Whispering Pines ID, 8.00%, 09/02/17.................... 393,752
410,000 Refunding, Whispering Pines ID, 8.00%, 09/02/18.................... 424,838
440,000 Refunding, Whispering Pines ID, 8.00%, 09/02/19.................... 455,924
350,000 Refunding, Whispering Pines ID, 8.00%, 09/02/20.................... 362,666
3,000,000 Grass Valley Insured, Hospital Revenue, Sierra Nevada Memorial Hospital,
7.25%, 04/01/19........................................................ 3,167,550
Hawaiian Gardens Public Finance Authority, Tax Allocation,
3,105,000 Redevelopment Project No. 1, Series A, Pre-Refunded, 7.15%,
12/01/17......................................................... 3,052,463
9,375,000 Series 1988, Pre-Refunded, 7.90%, 12/01/13......................... 10,289,531
Hawaiian Gardens RDA, Refunding, Tax Allocation,
8,095,000 Project No. 1, 8.00%, 12/01/10..................................... 9,189,282
9,575,000 Project No. 1, 6.20%, 12/01/23..................................... 8,902,739
18,645,000 Project No. 1, 6.35%, 12/01/33 .................................... 17,376,021
5,000,000 Hawthorne CRDA, Special Tax, CFD No. 91-1, Southwest, 8.25%, 10/01/14.... 5,216,650
2,250,000 Hawthorne CRDA, Tax Allocation, Hawthorne Redevelopment Project No. 2,
Pre-Refunded, 7.875%, 07/01/15 ........................................ 2,553,255
1,985,000 Hayward RDA, Tax Allocation, Downtown Hayward Redevelopment Project,
7.75%, 03/01/14........................................................ 2,060,490
4,000,000 Hemet USD, COP, Series 1991, Pre-Refunded, 8.00%, 12/01/13............... 4,752,880
2,780,000 Hemet Valley Hospital District Revenue, COP, Hemacinto Community Corp.
Project, Series A, 7.75%, 05/01/19..................................... 2,871,045
Hemet Valley Hospital District Revenue, Moreno Valley Regional Medical
Center,
3,855,000 Series A, 8.25%, 07/01/05.......................................... 4,060,587
22,490,000 Series A, 8.50%, 07/01/18.......................................... 23,784,974
Hercules, COP, Capital Improvements Project,
2,145,000 Series 1986, 8.125%, 12/01/05...................................... 2,273,078
5,190,000 Series 1986, 8.25%, 06/01/15....................................... 5,512,766
Hercules RDA, Tax Allocation,
1,295,000 Dynamite Redevelopment Project, 8.50%, 09/01/13.................... 1,338,344
1,480,000 Dynamite Redevelopment Project, 8.50%, 09/01/14.................... 1,529,536
8,455,000 Hesperia Public Financing Authority Revenue, Highway & Street
Improvement, Series A, 6.10%, 10/01/10 ................................ 7,763,888
5,000,000 Hesperia Water District, COP, Refunding, Water Facilities Improvement
Project, FGIC Insured, 7.15%, 6/01/26.................................. 5,421,900
Highland Special Tax,
2,000,000 CFD No. 90-1, Series A, 8.50%, 09/01/10............................ 2,051,840
3,000,000 CFD No. 90-1, Series A, 8.60%, 09/01/15............................ 3,077,970
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 3,815,000 Hollister Joint Powers Financing Authority Revenue, Refunding, Sewer
System Improvement Project, 5.75%, 12/01/11............................ $ 3,439,070
Hollister RDA, Tax Allocation, Community Development Project,
2,000,000 Series 1989, 7.55%, 10/01/13....................................... 2,099,100
1,905,000 Series 1992-B, CGIC Insured, 6.625%, 10/01/07...................... 1,994,478
1,495,000 Series 1992-B, CGIC Insured, 6.75%, 10/01/13....................... 1,583,758
1,830,000 Huntington Beach, COP, Refunding, Emerald Cove Senior Citizens Housing
Project, 7.00%, 09/01/21............................................... 1,895,917
14,500,000 Huntington Beach, MFHR, Refunding, Huntington Breakers Project, 7.20%,
07/01/14............................................................... 15,221,955
14,855,000 Huntington Beach, Public Financing Authority Revenue, Huntington Beach
Redevelopment Project, Series A, Pre-Refunded, 8.375%, 05/01/18........ 17,068,544
5,500,000 Huntington Park IDA, IDR, Staff Development Co. Project, 10.00%, 12/01/97 5,658,565
5,000,000 Huntington Park Public Financing Authority Lease Revenue, Series A,
7.875%, 09/01/19....................................................... 5,239,300
Huntington Park RDA, Sales & Use Tax Revenue, Junior Lien, Tax
Allocation,
3,334,859 Merged Project, 8.50%, 01/01/19.................................... 4,257,947
11,665,000 Merged Project, 8.00%, 01/01/22.................................... 12,448,655
5,880,000 Huntington Park RDAR, Refunding, Tax Allocation, Huntington Par
Industrial Project, 8.25%, 04/01/12.................................... 6,239,386
2,715,000 Imperial County Local Transportation Authority, Sales Tax Revenue, 5.75%,
05/01/10............................................................... 2,426,613
Imperial Irrigation District, COP, Electric System Project,
20,000,000 Refunding, Series 1993, 5.20%, 11/01/09............................ 17,946,600
2,000,000 Series 1990, Pre-Refunded, 6.50%, 11/01/09......................... 2,154,440
21,010,000 dSeries 1994, 6.00%, 11/01/18 ...................................... 20,353,648
Indian Wells RDAR, Tax Allocation,
4,460,000 Whitewater Redevelopment Project No. 1, Pre-Refunded, 7.875%,
09/01/16......................................................... 4,789,371
6,690,000 Whitewater Redevelopment Project No. 2, Pre-Refunded, 7.875%,
09/01/16......................................................... 7,184,057
8,500,000 Indio MFMR, Refunding, 8.625%, 10/01/98.................................. 8,420,950
Indio Public Financing Authority Revenue, Refunding, Tax Allocation,
255,000 Series 1992, 6.85%, 08/15/01....................................... 260,868
275,000 Series 1992, 6.95%, 08/15/02....................................... 281,957
300,000 Series 1992, 7.10%, 08/15/03....................................... 309,252
12,120,000 Series 1992, 7.30%, 08/15/22....................................... 12,135,756
11,380,000 Industry, COP, Refunding, 6.625%, 06/01/06............................... 11,563,787
2,345,000 Industry, IDA, Camco Chemical Project, Series A, 7.00%, 12/01/00......... 2,377,572
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Industry, Refunding,
$ 4,250,000 Series 1994, MBIA Insured, 5.70%, 07/01/17......................... $ 3,882,673
3,250,000 Series 1994, MBIA Insured, 5.70%, 07/01/18 ........................ 2,963,967
5,860,000 Industry, Urban Development Agency, Refunding, Tax Allocation,
Transportation District No. 3 Project, 6.90%, 11/01/07................. 6,048,458
12,000,000 Inglewood Hospital Revenue, Daniel Freeman Hospital, Inc., 6.75%,
05/01/13............................................................... 12,144,960
7,410,000 Inglewood Public Financing Authority Revenue, La Cinega Redevelopment
Project, Series A, AMBAC Insured, 6.00%, 05/01/16...................... 7,070,177
3,330,000 Inglewood RDA, Tax Allocation, Century Redevelopment Project, Series B,
Pre-Refunded, 7.875%, 09/01/18......................................... 3,666,363
2,990,000 Inglewood USD, COP, 7.375%, 10/01/05..................................... 3,080,627
37,885,000 Intercommunity Hospital Financing Authority, COP, Solano County, 7.75%,
11/01/19............................................................... 38,055,104
Intermodal Container Transfer Facility, Joint Powers Authority Revenue,
Refunding,
9,640,000 Series A, 7.65%, 11/01/04.......................................... 10,564,380
17,465,000 Series A, 7.70%, 11/01/14.......................................... 19,137,099
1,470,000 Inyo County COP, Series 1990, 7.30%, 12/01/10............................ 1,492,814
2,500,000 Irvine COP, Series 1994, 5.625%, 02/01/11 ............................... 2,299,550
Irvine Ranch Water District Revenue, Joint Powers Agency,
13,000,000 Local Pool, 7.80%, 02/15/08........................................ 13,697,060
221,265,000 Local Pool, 7.875%, 02/15/23....................................... 234,629,406
15,000,000 Local Pool, Issue II, 8.20%, 08/15/08.............................. 16,144,950
250,995,000 Local Pool, Issue II, 8.25%, 08/15/23.............................. 269,945,123
2,000,000 Irwindale COP, Refunding, Municipal Facilities Project, 7.75%, 04/01/05.. 2,073,460
Irwindale CDA, Sales & Use Tax Revenue,
2,000,000 City Industrial Development Project, Pre-Refunded, 7.875%, 05/01/01 2,121,080
7,255,000 City Industrial Development Project, Pre-Refunded, 8.00%, 05/01/11. 7,711,630
10,000,000 Irwindale Public Finance Authority, Special Tax, CFD No. 1, 8.50%,
11/01/20............................................................... 10,701,900
Jurupa Community Service District, COP, Waste Water Facility Project,
800,000 Series 1990, Pre-Refunded, 7.55%, 10/01/05......................... 900,672
510,000 Series 1990, Pre-Refunded, 7.55%, 10/01/06......................... 574,178
980,000 Series 1990, Pre-Refunded, 7.55%, 10/01/07......................... 1,103,323
2,000,000 Keppel Union School District, Special Tax, Community Facilities District
No. 1,-91, Series A, 7.40%, 09/01/16................................... 2,058,180
95,000 Kern County-Downey HFA, RMR, Series 1983-A, 10.125%, 04/01/17............ 96,587
Kern County Housing Authority, RRMR,
1,305,000 Series 1984-A, 10.125%, 02/01/06................................... 1,311,538
5,250,000 Series 1985-A, 9.875%, 09/01/08.................................... 5,258,715
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Kern County Housing Authority, SFMR,
$ 465,000 Series A, GNMA Mortgage Backed Securities, 7.45%, 12/01/02......... $ 475,621
1,040,000 Series A, GNMA Mortgage Backed Securities, 7.55%, 12/01/07......... 1,058,481
1,505,000 Series A, GNMA Mortgage Backed Securities, 7.65%, 12/01/12......... 1,516,694
6,890,000 Series A, GNMA Mortgage Backed Securities, 7.70%, 12/01/23......... 6,913,013
14,390,000 Series A, GNMA Mortgage Backed Securities, 7.50%, 10/01/24......... 14,236,603
Kern County RMR,
260,000 Series 1985-A, 9.50%, 11/01/00..................................... 260,101
4,855,000 Series 1985-A, 9.80%, 05/01/18..................................... 4,863,156
3,000,000 La Habra COP, Park La Habra & Viewpark Projects, FSA Insured, 6.625%,
11/01/22............................................................... 3,095,220
4,810,000 La Mesa Parking Authority Lease Revenue, Refunding, Municipal Forwards,
AMBAC Insured, 6.00%, 10/01/07......................................... 4,841,650
2,960,000 La Mirada Public Financing Authority Revenue, Tax Allocation, Beach
Boulevard Redevelopment Project, 7.75%, 08/15/19....................... 3,130,200
La Mirada RDA, Special Tax, Civic Theatre Project,
295,000 CFD No. 89-1, 7.90%, 10/01/01...................................... 317,709
315,000 CFD No. 89-1, 8.00%, 10/01/02...................................... 340,691
340,000 CFD No. 89-1, 8.00%, 10/01/03...................................... 365,871
12,725,000 CFD No. 89-1, 8.25%, 10/01/20...................................... 13,697,445
La Mirada RDA, Tax Allocation, Industrial & Commercial Redevelopment
Project,
630,000 Series 1985, Pre-Refunded, 8.90%, 11/15/10......................... 693,762
3,300,000 Series A, 7.40%, 11/01/21.......................................... 3,392,268
1,915,000 Series B, 6.75%, 08/15/11.......................................... 1,891,675
3,520,000 La Mirada SFMR, 7.65%, 04/01/24.......................................... 3,544,746
La Palma Community Development Commission, Tax Allocation,
4,945,000 La Palma Community Development Project No. 1, 7.10%, 06/01/21...... 5,157,190
2,355,000 Refunding, La Palma Community Development Project No. 1, 6.10%,
06/01/22......................................................... 2,119,476
1,500,000 La Quinta RDA, Tax Allocation, La Quinta Redevelopment Project, 8.00%,
09/01/12............................................................... 1,582,020
La Verne COP,
3,500,000 RDA, Capital Improvement, Series 1987, Pre-Refunded, 8.375%,
06/01/17......................................................... 3,954,370
2,000,000 Series 1989, Pre-Refunded, 7.60%, 03/01/04......................... 2,264,000
4,000,000 Series 1989, 7.70%, 03/01/09....................................... 4,356,840
10,000,000 Lake Arrowhead Community Services District, COP, Refunding, FGIC Insured,
6.50%, 06/01/15........................................................ 10,269,500
5,150,000 Lake Elsinore USD, COP, Refunding, 6.90%, 02/01/20....................... 5,028,151
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Lake Elsinore USD, Special Tax,
$ 4,825,000 CFD No. 88-1, 7.50%, 09/01/14...................................... $ 4,946,590
4,200,000 CFD No. 88-1, 8.25%, 09/01/16...................................... 4,479,174
6,705,000 Lakewood RDA, Refunding, Tax Allocation, Redevelopment Project No. 1,
Series A, CGIC Insured, 6.50%, 09/01/17................................ 6,810,671
4,155,000 Lancaster CFD No. 89-1, 7.60%, 09/01/20.................................. 4,235,482
Lancaster COP, Refunding, School District Project,
2,640,000 CGIC Insured, 6.95%, 03/01/12...................................... 2,845,498
3,555,000 CGIC Insured, 7.00%, 03/01/22...................................... 3,854,118
990,000 Lancaster RDA, RMR, Los Angeles County, Series 1983-A, 10.125%, 09/01/16. 1,015,918
Lancaster RDA, Tax Allocation,
3,250,000 Lancaster Residential, Sub-Notes, 6.625%, 10/01/97................. 3,311,620
5,000,000 Redevelopment Project Areas, MBIA Insured, 5.70%, 08/01/23......... 4,563,400
6,055,000 Refunding, Amargosa Redevelopment Project, MBIA Insured, 6.85%,
02/01/19......................................................... 6,381,304
1,630,000 Refunding, Central Business District Redevelpment, 6.125%, 08/01/23 1,441,246
1,070,000 Refunding, Fox Field Redevelopment Project Area, 6.125%, 08/01/22.. 949,208
4,250,000 School District Notes, Redevelopment Project No. 5, 6.90%, 10/01/97 4,305,463
Lassen County COP, Public Facility Project,
1,260,000 Series A, 7.50%, 11/01/04.......................................... 1,331,984
1,840,000 Series A, 7.60%, 11/01/09.......................................... 1,911,999
1,045,000 Series B, 7.50%, 11/01/04.......................................... 1,104,701
1,050,000 Series B, 7.60%, 11/01/09.......................................... 1,091,087
18,370,000 Lassen MUD, COP, Lassen District Electric System, 8.75%, 05/01/08........ 19,480,467
1,000,000 Lemon Grove CDA Revenue, Tax Allocation, Lemon Redevelopment Project,
6.90%, 08/01/20........................................................ 1,028,080
Lincoln USD, Special Tax,
3,000,000 CFD No. 1-A, AMBAC Insured, 6.90%, 09/01/21........................ 3,207,240
1,210,000 CFD No. 1-B, 7.20%, 09/01/21....................................... 1,310,599
Little Lake City School District, COP, Refunding,
250,000 Series A, 6.00%, 06/01/04.......................................... 240,255
265,000 Series A, 6.10%, 06/01/05.......................................... 254,026
280,000 Series A, 6.15%, 06/01/06.......................................... 266,636
300,000 Series A, 6.20%, 06/01/07.......................................... 284,985
315,000 Series A, 6.25%, 06/01/08.......................................... 298,557
335,000 Series A, 6.25%, 06/01/09.......................................... 312,910
355,000 Series A, 6.25%, 06/01/10.......................................... 329,124
5,810,000 Livermore COP, 6.00%, 05/01/20........................................... 5,162,011
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Local Government Finance Authority Revenue, Refunding, Santa Maria,
$ 3,700,000 Series A, Pre-Refunded, 7.50%, 08/01/19............................ $ 4,192,803
10,000,000 Series B, Pre-Refunded, 7.625%, 08/01/19........................... 10,136,100
15,000,000 Local Government Finance Joint Powers Authority Revenue, Anaheim RDA,
Series A, Pre-Refunded, 8.20%, 09/01/15................................ 17,274,750
9,995,000 Local Medical Facilities Financing Authority, COP, 7.55%, 03/01/20....... 10,527,234
Local Medical Facilities Financing Authority II, COP,
4,365,000 California Health Clinic Project, 7.55%, 11/01/20.................. 4,612,234
3,115,000 California Health Clinic Project, Series B, 6.85%, 10/01/21........ 2,970,900
3,790,000 Local Medical Facilities Financing Authority III, COP, Insured Health
Clinic Projects, 6.90%, 07/02/22....................................... 3,817,705
11,525,000 Loma Linda Hospital Revenue, Refunding, Loma Linda University Medical
Center, Series A, AMBAC Insured, 6.55%, 12/01/18....................... 11,700,180
3,000,000 Long Beach COP, Airport Improvement Project, MBIA Insured, Pre-Refunded,
6.95%, 06/01/16........................................................ 3,323,310
Long Beach COP, Fleet Services Project,
7,715,000 Series A, 6.60%, 05/01/14.......................................... 7,697,487
3,680,000 Series A, 6.00%, 05/01/17.......................................... 3,391,525
2,500,000 Long Beach Health Care System Revenue, Sisters Charity Incarnate Word,
6.50%, 01/01/15........................................................ 2,542,600
6,040,000 Long Beach HMR, Series 1983-A, 9.60%, 11/01/14........................... 6,280,513
Long Beach RDA, Downtown Redevelopment Project,
3,080,000 Series B, Pre-Refunded, 8.20%, 11/01/05............................ 3,519,270
3,410,000 Series B, Pre-Refunded, 8.30%, 11/01/10............................ 3,908,781
3,735,000 Long Beach USD, COP, Los Angeles County Schools, Series A, 6.30%,
12/01/12............................................................... 3,522,703
Los Angeles COP,
3,500,000 Ararat Mission Hills Project, Series A, 7.25%, 06/01/21............ 3,661,280
5,335,000 Bay Harbor Hospital, Inc., 7.30%, 04/01/20......................... 5,624,477
3,500,000 Woodbury University, Series A, 8.00%, 06/01/18..................... 3,674,580
Los Angeles Community College District, COP,
7,175,000 Capital Improvement Project, Series A, Pre-Refunded, 7.50%,
08/15/09......................................................... 8,154,100
1,405,000 Refunding, Series A, CGIC Insured, 5.15%, 08/15/03................. 1,357,356
1,500,000 Refunding, Series A, CGIC Insured, 5.25%, 08/15/04................. 1,445,370
1,600,000 Refunding, Series A, CGIC Insured, 5.35%, 08/15/05................. 1,538,016
5,000,000 Refunding, Series A, CGIC Insured, 6.00%, 08/15/20................. 4,746,400
4,000,000 Series 1990, Pre-Refunded, 7.00%, 08/15/10......................... 4,477,320
Los Angeles CRDA, Community Redevelopment Financing Authority Revenue,
Grand Center Redevelopment,
1,165,000 Series A, 5.90%, 12/01/13.......................................... 1,037,130
1,300,000 Series A, 5.90%, 12/01/26.......................................... 1,112,787
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Los Angeles CRDA, Financing Authority Revenue,
$ 975,000 Hoover Redevelopment Project, Series C, 5.375%, 09/01/98........... $ 963,875
5,000,000 Pooled Financing, Bunker Harbor, Series A, 6.375%, 09/01/14........ 4,772,200
100,000 Los Angeles CRDA, Housing Revenue, Angelus Plaza Project, FHA Insured
Mortgage, 11.00%, 04/01/23............................................. 101,968
Los Angeles CRDA, RMR,
1,920,000 Series 1982-A, AMBAC Insured, 10.625%, 10/01/08.................... 1,952,947
125,000 Series 1982-B, AMBAC Insured, 10.00%, 12/01/07..................... 125,317
25,000 Series 1983-A, 10.375%, 12/01/05................................... 25,942
Los Angeles CRDA, Tax Allocation,
10,000,000 Bunker Hill Project, Series E, Pre-Refunded, 6.65%, 12/01/14....... 11,039,500
2,500,000 Normandie/5 Redevelopment Project, Series B, Pre-Refunded, 9.20%,
08/15/10......................................................... 2,737,300
Los Angeles Convention & Exhibition Center Authority, COP, Refunding,
102,780,000 Series A, Pre-Refunded, 7.375%, 08/15/18........................... 115,551,443
20,330,000 Series A, Pre-Refunded, 6.50%, 08/15/21............................ 21,794,167
Los Angeles County COP,
3,250,000 Civic Center Heating & Refrigeration Plant, Pre-Refunded, 8.00%,
06/01/10......................................................... 3,696,550
34,995,000 Correctional Facilities Projects, MBIA Insured, 6.50%, 09/01/13.... 35,602,513
5,950,000 Correctional Facilities Projects, MBIA Insured, 6.00%, 09/01/15.... 5,721,103
2,500,000 Disney Parking Project, 5.50%, 09/01/21............................ 2,139,500
2,300,000 Disney Parking Project, 6.50%, 03/01/23............................ 2,241,350
1,000,000 Hospital Information System, Medical Center, 5.90%, 12/01/97....... 1,009,360
15,545,000 Insured Health Clinic Program, Series A, 7.30%, 01/01/21........... 16,393,135
7,175,000 Insured Health Clinic Program, Series B , 7.05%, 08/01/21.......... 7,411,129
1,310,000 Insured Health Clinic Program, Series C, 6.90%, 01/01/22........... 1,328,314
1,955,000 Insured Health Clinic Program, Series E, 5.80%, 12/01/23........... 1,729,413
3,750,000 Insured Health Clinic Program, Series D, 5.75%, 01/01/24........... 3,284,100
6,000,000 Multiple Capital Facilities Project III, 6.25%, 11/01/07........... 5,913,540
3,400,000 Refunding, Retirement Housing Foundation, 6.625%, 04/15/12......... 3,384,020
7,665,000 Refunding, Retirement Housing Foundation, 6.75%, 04/15/22.......... 7,681,403
1,605,000 Refunding, Sheriffs Training Academy, Pre-Refunded, 7.75%, 07/01/06 1,754,217
1,500,000 Refunding, Sheriffs Training Academy, Pre-Refunded, 7.75%, 07/01/16 1,639,455
1,000,000 Series 1992, 6.625%, 07/01/22...................................... 987,910
3,920,000 Los Angeles County Home Improvement Loan Revenue, Series C-1, 6.90%,
06/01/10............................................................... 4,103,378
Los Angeles County Metropolitan Transportation Authority, Sales Tax
Revenue, Refunding,
9,000,000 Series A, 5.50%, 07/01/08.......................................... 8,352,810
8,000,000 Series A, 5.50%, 07/01/09.......................................... 7,385,600
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Los Angeles County SFMR,
$ 2,965,000 Issue 1986-A, GNMA Mortgage Backed Securities, 7.875%, 08/01/16.... $ 3,171,364
3,905,000 Issue 1987-A, GNMA Mortgage Backed Securities, 8.00%, 03/01/17..... 3,964,629
Los Angeles County Special Tax, CFD No. 1,
230,000 Palmdale/Lancaster Waterworks, Series A, 8.00%, 09/01/06........... 239,513
4,350,000 Palmdale/Lancaster Waterworks, Series A, 8.125%, 09/01/18.......... 4,557,408
Los Angeles County Special Tax, CFD No. 2,
1,070,000 Rowland Heights Area, 7.90%, 09/01/08.............................. 1,133,986
6,255,000 Rowland Heights Area, 8.00%, 09/01/18.............................. 6,647,751
5,785,000 Los Angeles County Special Tax, CFD No. 3, Series A, 7.60%, 09/01/14..... 6,049,953
19,455,000 Los Angeles County Transportation Commission Lease Revenue, FSA Insured,
7.375%, 12/15/06....................................................... 21,158,869
Los Angeles County Transportation Commission Sales Tax Revenue,
26,410,000 Refunding, Series A, 7.40%, 07/01/09............................... 28,693,673
1,830,000 Refunding, Series A, 7.40%, 07/01/15............................... 1,988,240
8,240,000 Refunding, Series A, Pre-Refunded, 8.00%, 07/01/18................. 9,406,702
2,000,000 Refunding, Series B, 5.75%, 07/01/18............................... 1,843,080
5,000,000 Refunding, Series B, FGIC Insured, 6.50%, 07/01/13................. 5,103,600
21,800,000 Refunding, Series B, FGIC Insured, 5.75%, 07/01/18................. 20,266,588
1,200,000 Series A, FGIC Insured, 6.25%, 07/01/16............................ 1,188,480
2,400,000 Series A, FGIC Insured, Pre-Refunded, 6.75%, 07/01/18.............. 2,662,368
1,355,000 Series A, Pre-Refunded, 7.60%, 07/01/06............................ 1,478,210
5,625,000 Series A, Pre-Refunded, 7.60%, 07/01/12............................ 6,136,481
56,750,000 Series A, Pre-Refunded, 6.75%, 07/01/20............................ 62,953,910
68,335,000 Series A, Pre-Refunded, 6.90%, 07/01/21............................ 76,416,980
29,590,000 Series A, Proposition C, Second Senior, MBIA Insured, 6.625%,
07/01/09......................................................... 30,893,144
17,515,000 Series A, Proposition C, Second Senior, MBIA Insured, 6.00%,
07/01/23......................................................... 16,725,073
1,000,000 Series A, Proposition C, Second Senior, MBIA Insured, Pre-Refunded,
6.50%, 07/01/20.................................................. 1,095,620
Los Angeles Department of Airport Revenue, Refunding,
28,750,000 Series B, 7.375%, 05/01/06......................................... 30,981,287
6,065,000 Series B, 7.40%, 05/01/10.......................................... 6,529,215
Los Angeles Department of Water & Power Electric Plant Revenue,
1,250,000 Crossover Refunding, Second Issue, 5.40%, 11/15/13................. 1,130,775
37,080,000 Crossover Refunding, Series 1989, Pre-Refunded, 7.40%, 09/01/20.... 41,342,717
7,775,000 Crossover Refunding, Series 1989, Pre-Refunded, 7.40%, 09/01/25.... 8,668,814
7,385,000 Crossover Refunding, Series 1993, 5.75%, 09/01/12.................. 7,046,102
36,690,000 Crossover Refunding, Series 1993, 5.875%, 09/01/30................. 33,884,683
1,000,000 Refunding, Series 1992, 6.375%, 02/01/20........................... 1,004,340
7,790,000 Refunding, Series 1992, 6.00%, 02/01/28............................ 7,360,070
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Los Angeles Department of Water & Power Electric Plant Revenue, (cont.)
$ 3,470,000 Second Issue, 6.75%, 12/15/29...................................... $ 3,774,354
30,340,000 Second Issue, 6.00%, 08/15/32...................................... 28,405,522
14,535,000 Series 1987, Pre-Refunded, 7.60%, 07/15/27......................... 16,124,693
22,800,000 Series 1988, Pre-Refunded, 7.90%, 05/01/28......................... 25,801,620
9,305,000 Series 1989, Pre-Refunded, 7.375%, 02/01/29........................ 10,280,443
4,875,000 Series 1990, 7.125%, 05/15/30...................................... 5,390,775
25,890,000 Series 1990, 7.25%, 09/15/30....................................... 28,905,926
26,450,000 Series 1990, 7.10%, 01/15/31....................................... 29,257,667
3,000,000 Series 1992, 6.50%, 04/01/11....................................... 3,230,550
86,700,000 Series 1992, 6.75%, 04/01/32....................................... 94,747,494
10,000,000 Series 1993, 6.125%, 01/15/33...................................... 9,578,900
31,660,000 Third Issue, 6.625%, 10/01/31...................................... 34,445,447
Los Angeles Department of Water & Power Waterworks Revenue,
4,135,000 Crossover Refunding, Series 1993, 5.75%, 04/15/13.................. 3,906,707
7,620,000 Crossover Refunding, Series 1993, 5.80%, 04/15/24.................. 7,060,844
21,900,000 Refunding, Pre-Refunded, 7.00%, 04/01/31........................... 24,217,020
2,000,000 Refunding, Second Issue, 7.375%, 11/15/22.......................... 2,177,480
20,000,000 Refunding, Series 1992, 6.40%, 05/15/28............................ 19,998,200
1,000,000 Second Issue, 6.50%, 11/01/14...................................... 1,026,160
14,815,000 Second Issue, 6.40%, 11/01/31...................................... 14,814,111
15,010,000 Second Issue, 6.00%, 07/15/32...................................... 14,154,280
2,200,000 Second Issue, Pre-Refunded, 6.50%, 11/01/11........................ 2,377,936
3,850,000 Series 1989, 7.20%, 02/15/19....................................... 4,288,861
3,500,000 Series 1992, 6.50%, 04/15/32....................................... 3,525,515
Los Angeles Health Facilities Revenue, COP, Insured, Keiro Nursing Home,
2,935,000 Series A, Pre-Refunded, 7.25%, 01/01/09............................ 3,053,192
5,935,000 Series A, Pre-Refunded, 7.35%, 01/01/19............................ 6,185,694
Los Angeles HMR,
280,000 Series 1982, 13.00%, 08/01/14...................................... 285,793
725,000 Series 1985, 9.00%, 06/15/18....................................... 748,483
Los Angeles MFHR,
240,000 Refunding, Series G, FSA Insured, 5.20%, 01/01/05.................. 228,593
285,000 Refunding, Series G, FSA Insured, 5.20%, 07/01/05.................. 271,004
260,000 Refunding, Series G, FSA Insured, 5.30%, 01/01/06.................. 246,901
300,000 Refunding, Series G, FSA Insured, 5.30%, 07/01/06.................. 284,442
280,000 Refunding, Series G, FSA Insured, 5.40%, 01/01/07.................. 265,163
325,000 Refunding, Series G, FSA Insured, 5.40%, 07/01/07.................. 307,333
300,000 Refunding, Series G, FSA Insured, 5.50%, 01/01/08.................. 283,389
4,875,000 Refunding, Series G, FSA Insured, 5.65%, 01/01/14.................. 4,545,401
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Los Angeles MFHR, (cont.)
$ 16,000,000 Refunding, Series G, FSA Insured, 5.75%, 01/01/24.................. $ 14,722,080
5,930,000 Series A, 8.00%, 05/01/05.......................................... 6,045,161
Los Angeles Municipal Improvement Corp., Lease Revenue, Refunding, Center
Library Project,
3,935,000 Series B, 5.375%, 06/01/12......................................... 3,501,442
4,150,000 Series B, 5.375%, 06/01/13......................................... 3,658,930
3,500,000 Series B, 5.375%, 06/01/14......................................... 3,075,100
4,605,000 Series B, 5.375%, 06/01/15......................................... 4,008,837
Los Angeles USD, COP, Refunding,
3,040,000 Dr. Francisco Bravo Medical, 6.50%, 06/01/04....................... 3,163,333
1,145,000 Dr. Francisco Bravo Medical, 6.60%, 06/01/05....................... 1,194,464
3,610,000 Dr. Francisco Bravo Medical, 6.60%, 06/01/06....................... 3,744,075
8,505,000 Dr. Francisco Bravo Medical, 6.625%, 06/01/08...................... 8,780,052
Los Angeles Waste Water System Revenue,
15,985,000 Refunding, Series A, MBIA Insured, 5.70%, 06/01/20................. 14,647,375
6,000,000 Refunding, Series A, MBIA Insured, 5.80%, 06/01/21................. 5,567,640
15,495,000 Refunding, Series C, 7.10%, 06/01/18............................... 16,753,969
4,000,000 Refunding, Series D, FGIC Insured, 6.00%, 11/01/14................. 3,858,040
30,000,000 Series 1989, Pre-Refunded, 6.80%, 08/01/19......................... 32,860,500
12,175,000 Series A, FGIC Insured, 6.00%, 12/01/18............................ 11,631,873
54,740,000 Series B, MBIA Insured, 5.70%, 06/01/23............................ 49,969,956
7,815,000 Lynwood RDA, Tax Allocation, Project Area, Series A, 6.50%, 07/01/13..... 7,302,805
Lynwood USD, COP,
675,000 Series 1986, Financing Project, 8.25%, 06/01/07.................... 691,038
490,000 Series A, 7.70%, 11/01/07.......................................... 502,598
300,000 Series A, 7.70%, 11/01/08.......................................... 306,930
1,140,000 Series A, 7.70%, 11/01/09.......................................... 1,166,334
M-S-R Public Power Agency Revenue, San Juan Project,
13,705,000 Series C, 6.875%, 07/01/19......................................... 14,304,868
9,775,000 Series C, 5.50%, 07/01/21.......................................... 8,477,857
2,500,000 Madera COP, Madera Community Hospital, Refunding, 5.50%, 03/01/11........ 2,176,275
3,420,000 Madera-Chowchilla Power Authority Revenue, Hydroelectric, Madera Canal
Project, 10.50%, 08/01/13.............................................. 3,543,428
3,300,000 Madera County IDA, IDR, Regency Thermographers Project, 7.40%, 10/01/99.. 3,388,011
1,250,000 Madera USD, COP, 6.50%, 12/01/07......................................... 1,191,362
4,165,000 Madera USD, COP, Education Facilities Project, 5.75%, 09/01/13........... 3,697,312
2,330,000 Marin County COP, Capital Improvement Project, 6.625%, 08/01/06.......... 2,437,553
3,400,000 Martinez MFMR, Refunding, Muirwood Garden Apartments, Series A, 5.90%,
10/01/28............................................................... 3,219,358
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Martinez USD, Refunding,
$ 1,260,000 Series 1992, 6.00%, 08/01/06....................................... $ 1,253,372
1,580,000 Series 1992, 6.00%, 08/01/09....................................... 1,533,690
1,265,000 Series 1992, 6.00%, 08/01/10....................................... 1,220,282
2,065,000 Series 1992, 6.00%, 08/01/13....................................... 1,984,981
1,110,000 Marysville COP, Capital Improvement, Financing Project, 7.125%, 02/01/13. 1,110,999
Mayer's Memorial Hospital District, Health Facility Revenue,
7,465,000 Fall River Mills, IDBI Insured, Pre-Refunded, 7.70%, 02/01/19...... 8,451,948
1,000,000 Refunding, Series A, 5.625%, 06/01/19.............................. 879,920
6,310,000 Mendocino County COP, Refunding, BIG Insured, 7.40%, 08/15/06............ 6,942,262
Mendota & Parlier USD, COP,
1,580,000 Capital Outlay Financing Program, 7.50%, 01/01/11.................. 1,583,350
1,455,000 Capital Outlay Financing Program, 7.55%, 01/01/17.................. 1,458,085
3,475,000 Menlo Park CDA, MFHR, Gateway Project, Series A, FHA Insured, 8.25%,
12/01/28............................................................... 3,638,256
3,580,000 Merced Irrigation District, COP, Water Facilities Project, 6.40%,
11/01/10............................................................... 3,367,742
Metropolitan Water District Revenue,
17,100,000 Refunding, Southern California Waterwork, 6.00%, 07/01/21.......... 16,179,336
10,125,000 Refunding, Southern California Waterwork, 6.75%, 06/01/22.......... 10,521,900
6,470,000 Refunding, Southern California Waterwork, Pre-Refunded, 6.75%,
06/01/22......................................................... 6,923,224
8,250,000 Southern California Waterworks, 6.625%, 07/01/12................... 8,365,335
4,750,000 Southern California Waterworks, Pre-Refunded, 6.75%, 07/01/18...... 5,254,022
Mid Peninsula Regional Open Space District,
1,215,000 Series 1990, 7.50%, 09/01/07....................................... 1,300,414
1,305,000 Series 1990, 7.50%, 09/01/08....................................... 1,393,649
1,400,000 Series 1990, 7.50%, 09/01/09....................................... 1,487,164
1,500,000 Series 1990, 7.50%, 09/01/10....................................... 1,593,390
Mid Peninsula Regional Open Space District, COP,
1,150,000 Series 1990, Pre-Refunded, 7.55%, 09/01/10......................... 1,225,267
5,000,000 Series 1990, Pre-Refunded, 7.60%, 09/01/20......................... 5,338,500
1,500,000 Special Districts Association Finance Corp., 5.70%, 09/01/14....... 1,348,185
5,200,000 Special Districts Association Finance Corp., 5.75%, 09/01/20....... 4,615,104
2,750,000 Mill Valley Revenue, COP, 7.10%, 12/01/20................................ 2,876,005
1,625,000 Millbrae Elementary School District, COP, Green Hills School Project,
7.10%, 09/01/11........................................................ 1,607,743
9,000,000 Modesto COP, Water System Improvement Project, AMBAC Insured, 6.25%,
10/01/22............................................................... 8,755,020
2,270,000 Modesto EDR, Evergreen Convalescent Home, FHA Insured Mortgage, 10.50%,
08/01/19............................................................... 2,375,305
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Modesto Health Facility Revenue, Memorial Hospital Association,
$ 3,800,000 Series A, MBIA Insured, 6.85%, 06/01/16............................ $ 4,032,674
6,800,000 Series A, Pre-Refunded, 7.875%, 08/01/18........................... 7,730,444
Modesto Irrigation District, COP,
12,120,000 Geysers Geothermal Power Project, Series 1986-A, 7.25%, 10/01/15... 12,837,504
6,000,000 Refunding & Capital Improvement Project, Series A, MBIA Insured,
6.00%, 10/01/21.................................................. 5,632,440
3,000,000 Modesto Irrigation District, Financing Authority Revenue, Domestic Water
Project, Series A, AMBAC Insured, 6.125%, 09/01/19....................... 2,904,180
7,645,000 Modesto MFHR, First Nationwide Program, Series A, 6.70%, 09/01/07........ 7,882,071
Mohave Water Agency ID,
5,500,000 MBIA Insured, 6.95%, 09/01/21...................................... 5,896,110
670,000 Morongo Basin, 6.20%, 09/01/01..................................... 680,653
545,000 Morongo Basin, 6.375%, 09/01/03.................................... 544,760
5,295,000 Morongo Basin, 6.70%, 09/01/08..................................... 5,370,189
1,200,000 Morongo Basin, 6.60%, 09/01/13..................................... 1,194,696
3,100,000 Morongo Basin, 6.60%, 09/01/22..................................... 3,045,130
1,000,000 Monrovia Residential Rehabilitation Mortgage Revenue, 10.125%, 10/01/14.. 999,520
735,000 Montclair-Pomona HFA, RMR, Series A, 9.60%, 04/01/16..................... 742,115
Montclair RDA, Tax Allocation,
1,645,000 Redevelopment Project No. IV, 6.90%, 10/01/22...................... 1,632,794
4,245,000 Redevelopment Project No. V, 6.90%, 10/01/22....................... 4,213,502
9,725,000 Montebello COP, Police Facilities Expansion Project, 7.20%, 11/01/24..... 9,969,875
1,505,000 Monterey Bay Unified Air Pollution Control District, COP, 7.375%,
12/01/15............................................................... 1,435,258
Monterey County COP, Natividad Medical Center, Improvement Project,
1,095,000 Series A, 6.10%, 08/01/23.......................................... 1,047,466
1,330,000 Series A, 6.10%, 08/01/27.......................................... 1,269,871
7,265,000 Monterey County COP, Refunding, Sheriff's Facility Project, Series 1985,
USF & G Insured, Pre-Refunded, 7.875%, 12/01/17........................ 8,204,147
Monterey Hospital Revenue,
1,795,000 Monterey Peninsula Hospital Project, Series A, 7.375%, 07/01/14.... 1,841,975
1,205,000 Refunding, Community Monterey Peninsula Hospital, Series B, 7.375%,
07/01/14......................................................... 1,236,535
13,680,000 Monterey Park RDA, Refunding, Tax Allocation, Atlantic Garvey
Redevelopment No. 1, 6.85%, 09/01/14................................... 13,530,614
5,000,000 Moreno Valley Special Tax, Towngate, CFD No. 87-1, 8.40%, 10/01/09....... 5,273,450
Moreno Valley USD, COP,
30,000 Palm Middle School, 7.00%, 09/01/01................................ 30,169
35,000 Palm Middle School, 7.10%, 09/01/02................................ 35,106
40,000 Palm Middle School, 7.20%, 09/01/03................................ 40,131
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Moreno Valley USD, COP, (cont.)
$ 40,000 Palm Middle School, 7.25%, 09/01/04................................ $ 40,130
40,000 Palm Middle School, 7.30%, 09/01/05................................ 40,130
45,000 Palm Middle School, 7.35%, 09/01/06................................ 45,146
145,000 Palm Middle School, 7.375%, 09/01/11............................... 145,713
205,000 Palm Middle School, 7.40%, 09/01/16................................ 202,265
1,000,000 Refunding, Series 1992, 6.70%, 02/01/99............................ 1,003,940
Moulton-Niguel Water District, Orange Water & Sewer,
10,000,000 ID No. 6, Series I, Pre-Refunded, 7.875%, 02/01/10................. 11,086,200
3,350,000 ID No. 6, Series I, Pre-Refunded, 8.00%, 05/01/13.................. 3,740,376
5,000,000 Mount Diablo, USD, Special Tax, CFD No. 1, AMBAC Insured, 6.30%, 08/01/22 4,927,950
4,395,000 Mount Shasta Hospital Revenue, COP, Mercy Medical Center, Series A,
Pre-Refunded, 7.25%, 07/01/19.......................................... 4,772,662
Mountain View, Capital Improvements, Financing Authority Revenue,
3,110,000 City Hall, MBIA Insured, 6.25%, 08/01/12........................... 3,111,804
2,000,000 City Hall, MBIA Insured, 6.50%, 08/01/16........................... 2,030,440
10,000,000 Mountain View COP, Revitalization Authority, Pre-Refunded, 8.00%,
12/01/15............................................................... 11,316,200
2,175,000 Mountain View-Los Altos UHSD, COP, Financing Project, 7.40%, 08/01/16.... 2,169,932
Mountain View School District, COP, Santa Clara County,
1,010,000 Financing Project, 6.75%, 04/01/07................................. 1,016,727
1,430,000 Financing Project, 6.90%, 04/01/12................................. 1,306,648
3,000,000 Mountain View Shoreline Regional Park Community, Tax Allocation,
Series A, 5.75%, 08/01/18.............................................. 2,676,390
1,510,000 Murieta County Water District, Special Tax, CFD No. 88-1, 8.10%, 10/01/18 1,635,224
1,580,000 Needles Public Financing Authority Revenue, Tax Allocation, Redevelopment
Project, Series A, 7.50%, 08/15/22..................................... 1,624,398
Nevada County COP Jail & Government Center, Refunding Project,
4,185,000 FSA Insured, 5.80%, 10/01/14....................................... 3,955,202
6,275,000 FSA Insured, 5.875%, 10/01/19...................................... 5,916,007
3,195,000 Nevada Irrigation District COP, Water System Improvement Project,
Pre-Refunded, 7.40%, 01/01/13.......................................... 3,579,103
8,800,000 Nevada Power Authority Revenue, Hydroelectric, Bowman Project, 10.50%,
11/01/13............................................................... 9,659,232
Norco RDA, Tax Allocation,
8,820,000 Redevelopment Project Area No. 1, Pre-Refunded, 8.10%, 03/01/18.... 10,040,071
5,350,000 Redevelopment Project Area No. 1, Pre-Refunded, 8.10%, 03/01/19.... 6,090,066
14,325,000 North City West School Facilities Financing Authority, Special Tax, CFD
No. 1, Series A, 7.85%, 09/01/19....................................... 15,003,289
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Northern California Public Power Agency Revenue,
$ 19,000,000 Crossover Refunding, Geothermal Project No. 3, Series A, 5.65%,
07/01/07......................................................... $ 18,312,580
410,000 Crossover Refunding, Geothermal Project No. 3, Series A, 5.75%,
07/01/08......................................................... 394,547
6,395,000 Crossover Refunding, Geothermal Project No. 3, Series A, 5.80%,
07/01/09....................................................... 6,120,207
8,120,000 Crossover Refunding, Geothermal Project No. 3, Series A, 5.85%,
07/01/10....................................................... 7,758,904
1,000,000 Crossover Refunding, Hydroelectric Project No. 1, Series B-3,
Pre-Refunded, 7.875%, 07/01/06.................................... 1,120,420
116,385,000 Hydroelectric Project No. 1, Series E, 7.15%, 07/01/24............. 123,837,132
39,280,000 Hydroelectric Project No. 1, Series F, 7.15%, 07/01/24............. 41,795,098
39,280,000 Hydroelectric Project No. 1, Series G, 7.15%, 07/01/24............. 41,795,098
83,715,000 Refunding, Hydroelectric Project No. 1, Series B-1, Pre-Refunded,
8.00%, 07/01/24.................................................. 94,192,769
60,945,000 Refunding, Hydroelectric Project No. 1, Series B-2, Pre-Refunded,
8.00%, 07/01/24.................................................. 68,572,876
17,755,000 Refunding, Hydroelectric Project No. 1, Series B-3, Pre-Refunded,
8.00%, 07/01/24.................................................. 19,977,216
15,850,000 Norwalk Community Facilities Financing Authority Revenue, Tax Allocation,
Projects No. 1 & 2, 8.00%, 12/01/19.................................... 16,791,649
Novato Special Tax,
490,000 CFD No. 1, 7.60%, 10/01/01......................................... 536,687
4,950,000 CFD No. 1, 8.65%, 10/01/11......................................... 5,528,853
17,730,000 CFD No. 1, 8.75%, 10/01/21......................................... 19,900,861
1,720,000 Novato USD, COP, Capital Improvement Project, Series A, 6.70%, 10/01/12.. 1,693,134
Oakland Housing Finance Revenue,
420,000 Issue C, 9.125%, 03/15/17.......................................... 434,024
410,000 Issue D-1, 6.80%, 01/01/99......................................... 415,547
435,000 Issue D-1, 6.80%, 07/01/99......................................... 441,416
450,000 Issue D-1, 6.875%, 01/01/00........................................ 451,089
460,000 Issue D-1, 6.875%, 07/01/00........................................ 461,201
485,000 Issue D-1, 6.95%, 01/01/01......................................... 484,413
1,605,000 Issue D-1, 6.95%, 07/01/01......................................... 1,602,962
6,180,000 Issue D-1, 7.10%, 01/01/10......................................... 6,225,608
500,000 Issue D-2, 6.95%, 07/01/01......................................... 499,365
3,090,000 Issue D-2, 7.10%, 01/01/10......................................... 3,054,959
5,800,000 Issue D-2, 7.15%, 01/01/24......................................... 5,673,386
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 16,700,000 Oakland RDA, COP, Oakland Convention Center, George P. Scotland Memorial,
Pre-Refunded, 10.25%, 09/01/14......................................... $ 17,650,731
Oakland Revenue, Refunding,
6,000,000 Series A, FGIC Insured, 7.60%, 08/01/21............................ 6,569,880
5,405,000 YMCA Project, Series 1990, 7.40%, 06/01/10......................... 5,826,158
Oakland USD, Alameda County, COP,
1,910,000 Refunding, Series 1994, 4.95%, 09/15/98............................ 1,883,795
10,000,000 Series 1989, Pre-Refunded, 7.50%, 09/15/99......................... 10,219,800
6,460,000 Oceanside Building Authority Revenue, Refunding, 7.75%, 11/01/04......... 7,195,342
Oceanside COP, Refunding,
3,185,000 Series A, 6.375%, 04/01/12......................................... 3,093,845
9,000,000 Series A, 6.625%, 04/01/23......................................... 8,801,550
4,205,000 Oceanside COP, La Salina Waste Water Treatment, Pre-Refunded, 7.00%,
05/01/21............................................................... 4,706,026
4,750,000 Oceanside COP, Waste Water System, Refunding Plan, AMBAC Insured,
5.80%, 08/01/21........................................................ 4,389,570
4,500,000 Oceanside COP, Water System, Refunding Project, AMBAC Insured, 5.80%,
05/01/21............................................................... 4,159,980
Oceanside Community Development, Refunding, Tax Allocation, Downtown
Redevelopment Project,
370,000 Series 1993, 6.00%, 09/01/07....................................... 350,113
395,000 Series 1993, 6.00%, 09/01/08....................................... 371,063
4,680,000 Series 1993, 6.10%, 09/01/18....................................... 4,333,914
2,145,000 Ontario Montclair School District, COP, Series A, 7.50%, 10/01/12........ 2,157,098
Ontario Redevelopment Financing Authority Revenue, Ontario Redevelopment
Project No. 1,
6,910,000 MBIA Insured, 5.85%, 08/01/22...................................... 6,432,174
11,000,000 MBIA Insured, 5.80%, 08/01/23...................................... 10,157,400
5,625,000 Ontario Special Tax, CFD No. 1, Etiwanda Drainage System, Series A,
9.50%, 07/01/05........................................................ 5,972,513
Orange County 1915 ACT,
1,145,000 AD No. 87-1, 8.00%, 09/02/05....................................... 1,182,934
1,285,000 AD No. 87-1, 8.00%, 09/02/06....................................... 1,327,572
1,070,000 AD No. 87-1, 8.00%, 09/02/07....................................... 1,105,449
Orange County Airport Revenue, GO, John Wayne International Airport,
10,505,000 Series 1987, 8.10%, 07/01/07....................................... 11,448,874
32,910,000 Series 1987, 8.125%, 07/01/16...................................... 36,023,944
4,495,000 Series 1987, Pre-Refunded, 8.10%, 07/01/07......................... 5,032,197
14,090,000 Series 1987, Pre-Refunded, 8.125%, 07/01/16........................ 15,784,323
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Orange County COP,
$ 5,000,000 Juvenile Justice Center Facilities, Refunding, AMBAC Insured,
6.375%, 06/01/11................................................. $ 5,016,100
13,800,000 Juvenile Justice Center Project, 7.50%, 06/01/09................... 15,595,104
16,500,000 Juvenile Justice Center Project, Pre-Refunded, 7.625%, 06/01/19.... 18,738,885
3,250,000 Public Facilities Corp., 7.875%, 12/01/13.......................... 3,565,153
Orange County Financing Authority Revenue, Refunding, Tax Allocation,
5,700,000 Series A, MBIA Insured, 6.50%, 09/01/21............................ 5,751,300
8,000,000 Series A, MBIA Insured, 6.50%, 09/01/22............................ 8,072,000
Orange County Purchaser Certificates, Master Lease,
2,500,000 Series 1990, 7.00%, 09/01/95....................................... 2,573,625
2,500,000 Series 1990, 7.00%, 09/01/96....................................... 2,606,300
2,000,000 Series 1990, 7.00%, 09/01/97....................................... 2,104,920
2,000,000 Series 1990, 7.00%, 09/01/98....................................... 2,120,420
1,000,000 Series 1990, 7.00%, 09/01/99....................................... 1,069,630
1,975,000 Series 1990, 7.00%, 09/01/00....................................... 2,105,883
Orange County Special Tax,
4,700,000 CFD No. 87-1, Dimensions Business Park, 8.25%, 08/15/13............ 4,952,249
5,000,000 CFD No. 87-4, Foothill Ranch, 8.00%, 08/15/10...................... 5,174,250
9,900,000 CFD No. 88-1, Aliso Viejo, Series 1988-A, 8.00%, 08/15/05.......... 10,306,890
43,265,000 CFD No. 88-1, Aliso Viejo, Series 1988-A, 8.10%, 08/15/13.......... 45,260,814
2,865,000 Orange County Transit District, COP, Bus Acquisition Project, 6.75%,
12/01/05............................................................... 3,014,639
4,000,000 Orange County USD, COP, Pre-Refunded, 6.875%, 06/01/21................... 4,407,960
Orange County Water District, COP,
2,000,000 AMBAC Insured, 6.50%, 08/15/11..................................... 2,041,880
9,430,000 Series 1993, 5.50%, 08/15/14....................................... 8,580,451
3,400,000 Orange Cove Irrigation District Revenue, COP, Rehabilitation Project,
7.25%, 02/01/12........................................................ 3,531,682
Orange RDA Revenue, Tax Allocation, Refunding,
8,530,000 Northwest Redevelopment Project, Series B, 5.70%, 10/01/23......... 7,773,901
4,650,000 Southwest Redevelopment Project, Pre-Refunded, 7.35%, 08/01/16..... 5,053,806
8,935,000 Southwest Redevelopment Project, Series A, AMBAC Insured, 5.70%,
10/01/23......................................................... 8,121,022
3,045,000 Orangevale Recreation & Park District, COP, Series A, CGIC Insured,
6.65%, 10/01/12........................................................ 3,132,848
12,150,000 Oroville Public Financing Authority Revenue, Series A, AMBAC Insured,
6.30%, 09/15/20........................................................ 11,980,143
11,385,000 Oroville Wyandotte Irrigation Distric Revenue, Refunding, Hydroelectric,
6.20%, 01/01/09........................................................ 10,948,271
2,895,000 Otay Water District, COP, Water Facilities Project, MBIA Insured, 5.70%,
09/01/23............................................................... 2,659,984
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Oxnard 1915 ACT,
$ 965,000 AD No. 86-3, Northeast Industrial Area, 8.10%, 09/02/00............ $ 968,011
2,035,000 AD No. 86-3, Northeast Industrial Area, 8.10%, 09/02/01............ 2,037,625
975,000 AD No. 86-3, Northeast Industrial Area, 8.20%, 09/02/02............ 974,688
1,505,000 AD No. 86-3, Northeast Industrial Area, 8.20%, 09/02/03............ 1,502,171
1,335,000 AD No. 86-3, Northeast Industrial Area, 8.20%, 09/02/04............ 1,330,581
1,610,000 AD No. 86-3, Northeast Industrial Area, 8.20%, 09/02/05............ 1,602,497
2,260,000 AD No. 86-3, Northeast Industrial Area, 8.20%, 09/02/06............ 2,246,711
790,000 AD No. 86-4, Rose/Santa Clara Corridor, Ventura County, 8.25%,
09/02/02......................................................... 776,949
860,000 AD No. 86-4, Rose/Santa Clara Corridor, Ventura County, 8.25%,
09/02/03......................................................... 844,683
930,000 AD No. 86-4, Rose/Santa Clara Corridor, Ventura County, 8.25%,
09/02/04......................................................... 912,274
1,005,000 AD No. 86-4, Rose/Santa Clara Corridor, Ventura County, 8.25%,
09/02/05......................................................... 984,739
1,090,000 AD No. 86-4, Rose/Santa Clara Corridor, Ventura County, 8.25%,
09/02/06......................................................... 1,066,925
6,625,000 Oxnard COP, Refunding, River Ridge Golf Course Project, Pre-Refunded,
7.60%, 02/01/16........................................................ 7,148,839
Oxnard Public Facilities Corp., COP,
22,585,000 AMBAC Insured, Pre-Refunded, 7.50%, 09/01/06....................... 25,338,789
3,750,000 Civic Library Project, Pre-Refunded, 8.00%, 10/01/08............... 4,289,213
11,650,000 a,bOxnard Special Tax, CFD No. 88-1, 8.15%, 10/01/13........................ 2,912,500
1,445,000 Palm Desert, 1915 ACT, Improvement Board, AD No. 92-1, 7.60%, 09/02/12... 1,458,034
5,595,000 Palm Desert, Financing Authority Revenue, Tax Allocation, Project Area
No.1, Series A, MBIA Insured, 6.625%, 04/01/23......................... 5,753,115
1,890,000 Palm Desert RDA, Tax Allocation, Project Area No. 1, MBIA Insured, 7.40%,
05/01/09............................................................... 2,022,413
5,000,000 Palm Springs COP, Municipal Gold Course Expansion Project, 7.40%,
11/01/18............................................................... 5,342,150
5,000,000 Palm Springs Financing Authority Revenue, Tax Allocation, Series B,
6.875%, 08/01/21....................................................... 5,064,000
4,930,000 Palm Springs Housing Authority, MFHR, GNMA Mortgage Backed Securities,
7.50%, 12/20/30........................................................ 4,969,785
Palmdale 1915 ACT,
570,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/00......................... 589,585
635,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/01......................... 656,819
715,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/02......................... 739,567
800,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/03......................... 827,488
890,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/04......................... 920,580
975,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/05......................... 1,008,501
1,085,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/06......................... 1,122,281
1,195,000 AD No. 87-1, Rancho Vista, 8.20%, 09/02/07......................... 1,236,060
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Palmdale CRDA, RMR, Refunding,
$ 2,060,000 Series A, ETM 02/01/00, 6.50%, 02/01/00............................ $ 2,208,670
2,190,000 Series A, ETM 02/01/01, 6.60%, 02/01/01............................ 2,370,325
2,335,000 Series A, ETM 02/01/02, 6.70%, 02/01/02............................ 2,549,493
2,495,000 Series A, ETM 02/01/03, 6.80%, 02/01/03............................ 2,746,346
2,675,000 Series A, ETM 02/01/04, 6.90%, 02/01/04............................ 2,966,522
Palmdale School District, COP,
495,000 Series 1990, 7.40%, 08/01/20....................................... 479,898
3,360,000 Series 1990, Pre-Refunded, 7.40%, 08/01/20......................... 3,714,547
20,400,000 Palo Alto Medical Foundation, Insured Revenue, Series 1987, ETM 05/15/02,
7.875%, 05/15/17....................................................... 22,323,924
3,000,000 Panoche Water District, COP, 7.50%, 12/01/08............................. 3,153,210
Paramount RDA, Tax Allocation,
34,640,000 Redevelopment Project No. 1, Pre-Refunded, 7.35%, 08/01/21......... 38,518,641
1,820,000 Refunding, Redevelopment Project No. 1, 6.10%, 08/01/06............ 1,760,231
1,925,000 Refunding, Redevelopment Project No. 1, 6.10%, 08/01/07............ 1,850,233
51,420,000 Refunding, Redevelopment Project No. 1, 6.25%, 08/01/23............ 46,578,293
4,320,000 Pasadena Area Community College District, COP, Los Angeles County Schools
Regional, Series A, 5.625%, 06/01/13................................... 3,869,770
Pasadena COP,
10,510,000 Pasadena Civic Improvement Corp., Series 1987, Pre-Refunded, 8.00%,
11/01/12......................................................... 11,869,048
2,000,000 Pasadena Civic Improvement Corp., Series 1989, Pre-Refunded, 7.00%,
12/01/14......................................................... 2,230,020
2,130,000 Refunding & Capital Project, 5.75%, 01/01/13....................... 1,949,525
7,500,000 Series 1990, Pre-Refunded, 6.75%, 08/01/15......................... 8,269,275
4,000,000 Pasadena Water Revenue, 6.00%, 07/01/13.................................. 3,888,520
4,215,000 Perris CFD No. 88-3, Series A, 7.40%, 09/01/19........................... 4,260,143
6,985,000 Perris Public Financing Authority Revenue, Local Agency, Series A, 6.90%,
08/15/18............................................................... 6,855,009
Perris Public Financing Authority Revenue, Refunding, Tax Allocation,
5,280,000 Series B, MBIA Insured, 6.35%, 08/15/17............................ 5,260,306
3,330,000 Series C, 7.10%, 11/15/17.......................................... 3,322,075
Perris Public Financing Authority Revenue, Special Tax,
205,000 Series A, 7.45%, 09/01/01.......................................... 212,942
235,000 Series A, 7.50%, 09/01/02.......................................... 244,097
270,000 Series A, 7.55%, 09/01/03.......................................... 280,446
305,000 Series A, 7.60%, 09/01/04.......................................... 316,791
325,000 Series A, 7.60%, 09/01/05.......................................... 336,843
5,595,000 Series A, 7.80%, 09/01/19.......................................... 5,811,638
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Perris RDA, Tax Allocation,
$ 4,535,000 Central & North Perris Redevelopment Project, Series B,
Pre-Refunded, 7.875%, 10/01/14................................... $ 5,316,743
2,935,000 Refunding, Central & North Perris Redevelopment Project, Series A,
Pre-Refunded, 7.875%, 10/01/10................................... 3,455,258
865,000 Series 1991, 7.15%, 08/01/11....................................... 873,053
2,040,000 Series 1991, 7.20%, 08/01/21....................................... 2,058,952
Perris Special Tax,
50,000 CFD No. 88-1, Series A, ETM 09/01/99, 8.00%, 09/01/99.............. 57,142
65,000 CFD No. 88-1, Series A, ETM 09/01/00, 8.05%, 09/01/00.............. 75,350
85,000 CFD No. 88-1, Series A, ETM 09/01/01, 8.10%, 09/01/01.............. 99,970
100,000 CFD No. 88-1, Series A, ETM 09/01/02, 8.15%, 09/01/02.............. 119,107
6,040,000 CFD No. 88-1, Series A, Pre-Refunded, 8.30%, 09/01/18.............. 7,365,116
5,395,000 CFD No. 91-1, 8.75%, 09/01/21...................................... 5,964,658
10,615,000 Perris Union High School District, CFD No. 87-1, 8.25%, 10/01/13......... 11,344,781
4,930,000 Perris USHD, COP, Refunding, Projects 1993, 5.90%, 09/01/23.............. 4,295,706
1,040,000 Petaluma COP, Pre-Refunded, 7.55%, 12/15/02.............................. 1,090,003
1,000,000 Petaluma COP, Refunding, Series A, AMBAC Insured, 5.50%, 08/01/08........ 956,950
5,050,000 Petaluma Hospital District Revenue, Petaluma Hospital Building Corp.
Project, Loan Program, Series A, 6.50%, 03/01/08....................... 4,932,385
20,595,000 Pico Rivera RDA, Tax Allocation, Refunding, Redevelopment Project Area
No. 1, 8.15%, 05/01/07................................................. 22,189,877
1,200,000 Pismo Beach Public Financing Authority Revenue, 6.90%, 09/15/22.......... 1,201,728
Pittsburg RDA, Tax Allocation,
5,090,000 Los Medanos Community Development Project, AMBAC Insured,
Pre-Refunded, 6.375%, 08/01/18................................... 5,055,184
6,565,000 Los Medanos Community Development Project, Pre-Refunded, 7.75%,
08/01/08......................................................... 7,200,098
7,050,000 Los Medanos Community Development Project, Pre-Refunded, 7.75%,
08/01/15......................................................... 7,732,017
10,000,000 Los Medanos Community Development Project, Series B, CGIC Insured,
5.70%, 08/01/32................................................... 9,029,200
20,000,000 Los Medanos Community Development Project, Series B, CGIC Insured,
5.80%, 08/01/34................................................... 18,324,200
Pittsburg SFMR,
1,695,000 Series A, Mortgage Backed Securities Program, 6.75%, 11/01/01...... 1,712,848
4,385,000 Series A, Mortgage Backed Securities Program, 7.15%, 11/01/11...... 4,362,987
13,070,000 Series A, Mortgage Backed Securities Program, 7.25%, 11/01/24...... 13,100,976
2,985,000 Placer County Water Agency Revenue, Refunding, COP, MBIA Insured, 5.60%,
07/01/21............................................................... 2,703,485
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 5,605,000 Pleasant Hill RDA, Residential Mortgage Revenue, Refunding, 5.75%,
08/01/11............................................................... $ 5,254,183
3,230,000 Pleasant Valley School District, Ventura County COP, Woodcreek Road,
Elementary School Project, 6.375%, 08/01/18............................ 2,963,686
Pleasanton 1915 ACT,
1,400,000 AD No. 86-9, Series 1988-B, Pre-Refunded, 7.80%, 09/02/08.......... 1,466,752
1,515,000 AD No. 86-9, Series 1988-B, Pre-Refunded, 7.90%, 09/02/09.......... 1,587,841
1,640,000 AD No. 86-9, Series 1988-B, Pre-Refunded, 7.90%, 09/02/10.......... 1,722,459
1,775,000 AD No. 86-9, Series 1988-B, Pre-Refunded, 7.90%, 09/02/11.......... 1,860,342
1,920,000 AD No. 86-9, Series 1988-B, Pre-Refunded, 7.90%, 09/02/12.......... 2,012,314
550,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/00..................... 568,898
600,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/01..................... 620,616
650,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/02..................... 672,334
700,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/03..................... 724,052
750,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/04..................... 775,770
850,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/05..................... 879,206
910,000 Refunding, AD No. 86-5, Meyer, 8.00%, 09/02/06..................... 941,268
1,295,000 Refunding, AD No. 86-5, Meyer, Pre-Refunded, 7.80%, 09/02/07....... 1,356,746
Pleasanton COP,
2,180,000 Capital Improvements, 6.70%, 10/01/11.............................. 2,181,679
3,500,000 Capital Projects No. 1 & 2, 8.75%, 10/01/08........................ 3,828,650
4,585,000 Pleasanton Public Facilities Corp., 7.875%, 09/01/14............... 4,926,078
Pomona 1915 ACT, Rio Rancho Road,
500,000 AD No. 294, Series 1986, 8.00%, 09/02/99........................... 517,180
1,000,000 AD No. 294, Series 1986, 7.70%, 09/02/00........................... 1,034,380
1,000,000 AD No. 294, Series 1986, 7.80%, 09/02/01........................... 1,034,370
1,000,000 AD No. 294, Series 1986, 7.90%, 09/02/02........................... 1,034,370
1,000,000 AD No. 294, Series 1986, 8.00%, 09/02/03........................... 1,034,360
1,000,000 AD No. 294, Series 1986, 8.00%, 09/02/04........................... 1,034,360
1,420,000 AD No. 294, Series 1986, 8.00%, 09/02/05........................... 1,468,791
10,205,000 Pomona Public Financing Authority Revenue, Series H, AMBAC Insured,
7.40%, 05/01/18........................................................ 11,158,963
Pomona RDA, Tax Allocation,
2,370,000 Holt Ave./Indian Hill Blvd., Redevelopment Project, 8.25%, 06/01/16 2,516,063
2,795,000 Refunding, Reservoir Street Industrial Redevelopment Project,
8.25%, 06/01/13.................................................. 2,967,256
16,385,000 Southwest Pomona Redevelopment Project, 11.45%, 01/01/07........... 21,841,533
4,675,000 West Holt Ave. Redevelopment Project, 7.875%, 02/01/15............. 4,919,830
3,080,000 Port Hueneme COP, Capital Improvements Project, Pre-Refunded, 8.15%,
04/01/18............................................................... 3,397,055
3,320,000 Port Hueneme RDA, Refunding, Tax Allocation, R-76 Project, 6.50%,
05/01/23............................................................... 3,122,560
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Port of Oakland, Revenue,
$ 2,310,000 Series A, BIG Insured, 7.60%, 11/01/16............................. $ 2,495,632
1,525,000 Series E, MBIA Insured, 6.25%, 11/01/05............................ 1,587,113
1,050,000 Series E, MBIA Insured, 6.30%, 11/01/06............................ 1,088,461
500,000 Series E, MBIA Insured, 6.40%, 11/01/07............................ 518,225
Port of Oakland, Special Facilities Revenue, Mitsui O.S.K. Lines Limited,
6,100,000 Series A, 6.70%, 01/01/07.......................................... 6,351,198
3,860,000 Series A, 6.75%, 01/01/12.......................................... 3,971,438
3,625,000 Series A, 6.80%, 01/01/19.......................................... 3,801,501
1,950,000 Porterville COP, Refunding, Public Building Project, AMBAC Insured,
6.30%, 10/01/18........................................................ 1,930,753
8,100,000 Poway COP, RDA, Poinsettia Mobile Home Park, Pre-Refunded, 8.375%,
06/01/18............................................................... 9,326,097
Poway RDA, Tax Allocation,
15,000,000 Paguay Redevelopment Project, Series A, Pre-Refunded, 7.60%,
12/15/22......................................................... 17,174,700
3,325,000 Refunding, Series 1991, Pre-Refunded, 7.75%, 12/15/21.............. 3,901,023
10,600,000 Refunding, Sub-Parguay Redevelopment Project, FGIC Insured, 5.75%,
12/15/26......................................................... 9,659,568
1,320,000 Poway Special Tax, CFD No. 88-1, Parkway Business Center, 8.625%,
08/15/15............................................................... 1,284,941
610,000 Ramona Municipal Water District, COP, 8.50%, 07/15/11.................... 653,109
9,245,000 Rancho Cucamonga-Palmdale-Potterville-Colton HFA, SFMR, Series 1986,
GNMA Mortgage Backed Securities, 7.55%, 08/01/18....................... 9,787,589
1,100,000 Rancho Cucamonga, Refunding, Special Tax, CFD No. 7, CGIC Insured, 6.40%,
08/01/04............................................................... 1,156,815
Rancho Murieta Community Services District, 1915 ACT,
980,000 ID No. 1, 8.25%, 09/02/01.......................................... 991,397
950,000 ID No. 1, 8.25%, 09/02/02.......................................... 959,813
985,000 ID No. 1, 8.30%, 09/02/03.......................................... 993,993
990,000 ID No. 1, 8.40%, 09/02/04.......................................... 998,039
995,000 ID No. 1, 8.40%, 09/02/05.......................................... 1,002,035
995,000 ID No. 1, 8.40%, 09/02/06.......................................... 1,001,099
4,200,000 Redding Joint Powers Financing Authority, Waste Water Revenue, Refunding,
Series A, FGIC Insured, 5.50%, 12/01/18................................ 3,743,502
225,000 Redding-Shasta Home Financing Authority, SFMR, 9.875%, 01/01/17.......... 224,831
6,000,000 Redlands COP, Refunding, AMBAC Insured, 5.80%, 09/01/17.................. 5,586,420
825,000 Redlands RDA, Refunding, Tax Allocation, Redlands Redevelopment Project,
AMBAC Insured, 6.625%, 07/01/15........................................ 856,812
3,795,000 Redwood City MFHR, Refunding, Collateralized, Redwood Plaza Project,
Series 1987-A, GNMA Mortgage Backed Securities, 8.25%, 09/01/26........ 3,834,810
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 3,750,000 Redwood City Public Financing Authority Revenue, Local Agency, Series B,
7.25%, 07/15/11........................................................ $ 3,817,650
Rialto COP,
145,000 Series 1989, 7.50%, 11/01/01....................................... 159,043
3,165,000 Series 1989, 7.50%, 11/01/15....................................... 3,288,435
3,500,000 Rialto RDA, Tax Allocation, Agua Mansa Redevelopment Project, 6.75%,
03/01/24............................................................... 3,311,385
3,150,000 Rialto RDA, Tax Allocation, Industrial Redevelopment, Sub-Areas A & B,
Series A, 6.00%, 09/01/23.............................................. 3,056,728
2,000,000 Richmond Joint Power Finance Authority, Series B, 7.00%, 05/15/07........ 2,124,060
3,715,000 Richmond Revenue, West Contra Costa YMCA Project, 7.75%, 06/01/17........ 4,040,285
4,420,000 Ridgecrest COP, RDA, 7.60%, 03/01/13..................................... 4,624,734
Ridgecrest RDA, Tax Allocation,
235,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/09.................. 250,961
255,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/10.................. 272,320
275,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/11.................. 293,678
295,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/12.................. 315,036
315,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/13.................. 336,395
340,000 Ridgecrest Redevelopment Project, 8.00%, 02/01/14.................. 363,093
365,000 Ridgecrest Redevelopment Project, 7.80%, 02/01/15.................. 387,356
395,000 Ridgecrest Redevelopment Project, 7.40%, 02/01/16.................. 413,928
5,220,000 Riverside Community College District, COP Financing Project, 5.80%,
10/01/17............................................................... 4,679,208
Riverside County Asset Leasing Corp., Leasehold Revenue,
23,000,000 Hospital Project, Series A, 6.375%, 06/01/09....................... 22,701,230
20,125,000 Hospital Project, Series A, 6.50%, 06/01/12........................ 19,995,596
11,500,000 Hospital Project, Series A, 6.25%, 06/01/19........................ 11,035,170
2,000,000 Hospital Project, Series A, BIG Insured, 6.25%, 06/01/19........... 1,955,200
28,200,000 Hospital Project, Series A, Pre-Refunded, 7.40%, 06/01/14.......... 31,741,356
Riverside County Board of Education, COP,
7,945,000 Financing Projects, Series A, 6.65%, 11/01/17...................... 7,972,331
2,550,000 Refunding, Financing Project, 5.50%, 11/01/14...................... 2,239,257
1,330,000 Series 1989, Pre-Refunded, 7.40%, 11/01/14......................... 1,510,468
Riverside County CFD
660,000 No. 84-2, Refunding, Lakehills Project, 7.60%, 09/01/00............ 695,330
5,130,000 No. 84-2, Refunding, Lakehills Project, 7.50%, 09/01/06............ 5,300,367
575,000 No. 85-1, Crossover Refunding, Golden Triangle Project, 7.50%,
09/01/06......................................................... 614,784
2,425,000 No. 85-1, Crossover Refunding, Golden Triangle Project, 7.50%,
09/01/06......................................................... 2,592,786
440,000 No. 85-2, California Oaks Project, 7.70%, 09/01/97................. 470,571
260,000 No. 85-2, California Oaks Project, 7.80%, 09/01/98................. 281,159
295,000 No. 85-2, California Oaks Project, 7.90%, 09/01/99................. 321,482
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Riverside County CFD, (cont.)
$ 485,000 No. 85-2, California Oaks Project, 8.00%, 09/01/00................. $ 530,716
585,000 No. 85-2, California Oaks Project, 8.05%, 09/01/01................. 638,878
8,375,000 No. 85-2, California Oaks Project, 8.30%, 09/01/06................. 8,889,644
11,970,000 No. 85-2, California Oaks Project, 8.25%, 09/01/13................. 13,066,452
24,000,000 No. 86-1, Menifee Village Project, 7.875%, 09/01/11................ 24,134,640
305,000 No. 87-5, Special Tax, 7.90%, 09/01/98............................. 320,717
325,000 No. 87-5, Special Tax, 7.95%, 09/01/99............................. 354,916
355,000 No. 87-5, Special Tax, 8.00%, 09/01/00............................. 377,184
380,000 No. 87-5, Special Tax, 8.05%, 09/01/01............................. 402,971
7,500,000 No. 87-5, Special Tax, 8.20%, 09/01/13............................. 7,966,050
2,820,000 No. 87-5, Special Tax, 8.75%, 09/01/13............................. 3,053,158
4,730,000 No. 89-1, Special Tax, 8.25%, 09/01/16............................. 4,737,095
8,900,000 Riverside County CFD No. 85-2, California Care Project, 8.20%, 09/01/07.. 9,146,975
16,000,000 Riverside County CFD No. 86-1, Mello Roos, Series 1987, 8.75%, 09/01/16.. 14,780,160
Riverside County COP,
4,975,000 Capital Projects, Series A, 6.875%, 11/01/09....................... 5,102,460
15,900,000 Capital Projects, Series A, 6.125%, 11/01/21....................... 14,737,551
Riverside County COP,
3,945,000 Refunding, Juvenile Facility, Pre-Refunded, 8.00%, 10/01/18........ 4,512,252
3,800,000 Refunding, Master Project, 5.75%, 11/01/12......................... 3,453,212
2,000,000 Refunding, Master Project, 5.75%, 11/01/18......................... 1,781,280
4,500,000 Refunding, Public Facilities Financing Project, Type 1, 7.75%,
12/01/03......................................................... 4,858,470
38,615,000 Refunding, Public Facilities Financing Project, Type 1, 7.875%,
12/01/15........................................................ 41,759,033
Riverside County Flood Control & Water, Conservation District, Elsinore
Valley AD, Zone 3,
165,000 Series 1993, 7.875%, 09/01/03...................................... 183,576
180,000 Series 1993, 7.875%, 09/01/04...................................... 200,351
190,000 Series 1993, 7.875%, 09/01/05...................................... 211,271
205,000 Series 1993, 7.875%, 09/01/06...................................... 227,427
225,000 Series 1993, 7.875%, 09/01/07...................................... 248,746
240,000 Series 1993, 7.875%, 09/01/08...................................... 264,125
260,000 Series 1993, 7.875%, 09/01/09...................................... 286,398
280,000 Series 1993, 7.875%, 09/01/10...................................... 307,983
305,000 Series 1993, 7.875%, 09/01/11...................................... 336,467
325,000 Series 1993, 7.875%, 09/01/12...................................... 359,512
350,000 Series 1993, 7.875%, 09/01/13...................................... 386,155
380,000 Series 1993, 7.875%, 09/01/14...................................... 420,196
410,000 Series 1993, 7.875%, 09/01/15...................................... 454,321
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Riverside County Flood Control & Water, Conservation District, Elsinore
Valley AD, Zone 3, (cont.)
$ 440,000 Series 1993, 7.875%, 09/01/16...................................... $ 485,835
475,000 Series 1993, 7.875%, 09/01/17...................................... 525,383
Riverside County Housing Authority Revenue,
6,750,000 Riverside Apartment Project, 7.875%, 11/01/19...................... 6,999,210
13,980,000 Series 1988-A, 7.85%, 10/01/08..................................... 14,756,729
33,080,000 Series 1988-A, 7.90%, 10/01/18..................................... 34,784,612
Riverside County RDA, Tax Allocation,
1,100,000 Series A, 7.60%, 10/01/25.......................................... 1,185,294
2,750,000 Series B, 7.60%, 10/01/25.......................................... 2,963,235
1,600,000 Series C, 7.60%, 10/01/25.......................................... 1,724,064
2,100,000 Series D, 7.60%, 10/01/25.......................................... 2,262,834
5,600,000 Series E, 7.60%, 10/01/25.......................................... 6,034,224
Riverside County SFMR,
715,000 Series 1989-B, GNMA Mortgage Backed Securities, 7.60%, 11/01/19.... 763,892
7,535,000 Series 1991-A, GNMA Mortgage Backed Securities, 6.00%, 10/01/24.... 7,576,292
Riverside Hospital Revenue,
5,000,000 Parkview Community Hospital Medical Center Project, 8.25%, 08/01/14 5,374,300
7,000,000 Refunding, Parkview Community Hospital Medical Center Project,
9.25%, 12/01/05.................................................. 7,689,640
Riverside MFHR,
3,060,000 Mortgage, Refunding, Olive Grove, Series A, 5.75%, 09/01/25........ 2,886,406
6,210,000 Palm Shadows, Apartments, Series A, 6.50%, 01/01/18................ 6,347,986
Riverside MFR, First Nationwide Saving Program,
1,725,000 Series H, 9.50%, 11/01/97.......................................... 1,791,309
510,000 Series I, 9.50%, 11/01/97.......................................... 529,604
Riverside Public Financing Authority Revenue, Airport & Central
Industrial Redevelopment Project,
750,000 Series A, Pre-Refunded, 7.80%, 02/01/08............................ 829,995
9,155,000 Series A, Pre-Refunded, 7.90%, 02/01/18............................ 10,155,458
6,500,000 Riverside RDA, Tax Allocation, Refunding, Merged Redevelopment Project,
Series A, MBIA Insured, 5.625%, 08/01/23............................... 5,812,820
Rocklin 1915 ACT,
460,000 Refunding, 7.55%, 09/02/03......................................... 475,815
495,000 Refunding, 7.60%, 09/02/04......................................... 512,018
535,000 Refunding, 7.65%, 09/02/05......................................... 553,393
580,000 Refunding, 7.65%, 09/02/06......................................... 599,940
625,000 Refunding, 7.65%, 09/02/07......................................... 646,487
675,000 Refunding, 7.65%, 09/02/08......................................... 698,206
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 6,085,000 Rocklin USD, CFD No. 1, 7.70%, 09/01/12.................................. $ 6,378,845
7,500,000 Rohnert Park CDA, Tax Allocation, Rohnert Park Redevelopment Project,
Pre-Refunded, 8.20%, 06/01/18.......................................... 8,586,375
7,275,000 Rosemead RDA, Tax Allocation, Refunding, Redevelopment Project Area 1,
Series A, 5.60%, 10/01/33.............................................. 6,074,116
Roseville 1915 ACT, Limited Obligation, Refunding,
120,000 North Roseville, Rocklin Sewer District No. 88-3, 8.00%, 09/02/99.. 124,250
125,000 North Roseville, Rocklin Sewer District No. 88-3, 8.00%, 09/02/00.. 129,427
135,000 North Roseville, Rocklin Sewer District No. 88-3, 8.00%, 09/02/01.. 139,782
145,000 North Roseville, Rocklin Sewer District No. 88-3, 8.10%, 09/02/02.. 150,136
160,000 North Roseville, Rocklin Sewer District No. 88-3, 8.15%, 09/02/03.. 165,667
170,000 North Roseville, Rocklin Sewer District No. 88-3, 8.20%, 09/02/04.. 176,020
350,000 North Roseville, Rocklin Sewer District No. 88-3, 8.20%, 09/02/05.. 362,394
200,000 North Roseville, Rocklin Sewer District No. 88-3, 8.20%, 09/02/06.. 207,082
220,000 North Roseville, Rocklin Sewer District No. 88-3, 8.25%, 09/02/07.. 227,790
235,000 North Roseville, Rocklin Sewer District No. 88-3, 8.25%, 09/02/08.. 243,321
205,000 North Roseville, Rocklin Sewer District No. 88-3, 8.25%, 09/02/09.. 212,259
220,000 Rocky Ridge-Harding, District No. 88-4, 8.00%, 09/02/99............ 227,792
245,000 Rocky Ridge-Harding, District No. 88-4, 8.00%, 09/02/00............ 253,678
260,000 Rocky Ridge-Harding, District No. 88-4, 8.00%, 09/02/01............ 269,209
285,000 Rocky Ridge-Harding, District No. 88-4, 8.10%, 09/02/02............ 295,095
305,000 Rocky Ridge-Harding, District No. 88-4, 8.15%, 09/02/03............ 315,803
330,000 Rocky Ridge-Harding, District No. 88-4, 8.20%, 09/02/04............ 341,685
185,000 Rocky Ridge-Harding, District No. 88-4, 8.20%, 09/02/05............ 191,551
4,500,000 Roseville COP, Golf Course Project, 6.00%, 08/01/23...................... 4,065,615
2,050,000 Roseville City School District, COP, 7.50%, 09/01/15..................... 2,065,970
Roseville Special Tax,
715,000 CFD No. 1, 7.50%, 09/01/02......................................... 748,827
825,000 CFD No. 1, 7.60%, 09/01/04......................................... 859,559
15,660,000 CFD No. 1, 7.70%, 09/01/20......................................... 16,313,805
355,000 CFD No. 2, 8.00%, 09/01/06......................................... 389,339
7,165,000 CFD No. 2, 8.25%, 09/01/21......................................... 7,911,163
1,725,000 Northcentral Roseville CFD No. 1, 8.00%, 11/01/02.................. 1,764,779
1,860,000 Northcentral Roseville CFD No. 1, 8.10%, 11/01/03.................. 1,900,976
10,000,000 Northcentral Roseville CFD No. 1, 8.40%, 11/01/10.................. 10,222,700
12,000,000 Northcentral Roseville CFD No. 1, 8.60%, 11/01/17.................. 12,268,920
1,000,000 Northeast Roseville CFD No. 1, 7.95%, 12/01/00..................... 1,075,000
1,000,000 Northeast Roseville CFD No. 1, 8.00%, 12/01/01..................... 1,070,730
1,000,000 Northeast Roseville CFD No. 1, 8.00%, 12/01/02..................... 1,072,810
6,000,000 Northeast Roseville CFD No. 1, 8.30%, 12/01/08..................... 6,457,980
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,535,000 Rossmoor Community Services District, 1915 ACT, AD 91-1, 6.20%, 09/02/21. $ 2,524,860
Sacramento 1915 ACT,
1,000,000 North Natomas AD No. 88-03, 8.20%, 09/02/10........................ 925,840
2,210,000 North Natomas AD No. 88-03, 8.20%, 09/02/11........................ 2,044,604
2,865,000 North Natomas AD No. 88-03, 8.25%, 09/02/12........................ 2,649,008
3,105,000 North Natomas AD No. 88-03, 8.25%, 09/02/13........................ 2,869,268
3,350,000 North Natomas AD No. 88-03, 8.25%, 09/02/14........................ 3,093,892
1,500,000 Sacramento Area Council of Governments, COP, Sacog Administrative
Building Project, 7.125%, 07/01/16..................................... 1,532,010
Sacramento COP,
3,795,000 Sacramento City Public Facilities Financing Authority, 7.75%,
07/01/06......................................................... 4,144,595
14,700,000 Series 1989, Pre-Refunded, 6.50%, 11/01/09......................... 15,712,683
Sacramento City Financing Authority Revenue,
4,415,000 Series 1991, 6.60%, 11/01/05....................................... 4,543,918
1,405,000 Series 1991, 6.70%, 11/01/11....................................... 1,441,783
20,920,000 Series 1991, Pre-Refunded, 6.70%, 11/01/11......................... 23,144,424
7,500,000 Series 1991, Pre-Refunded, 6.80%, 11/01/20......................... 8,343,900
Sacramento County 1915 ACT, Cordova Industrial Park,
250,000 Unit 3, Series C-I, 8.25%, 09/02/05................................ 259,400
270,000 Unit 3, Series C-I, 8.25%, 09/02/06................................ 280,152
290,000 Unit 3, Series C-I, 8.25%, 09/02/07................................ 300,904
315,000 Unit 3, Series C-I, 8.25%, 09/02/08................................ 326,844
340,000 Unit 3, Series C-I, 8.25%, 09/02/09................................ 352,784
370,000 Unit 3, Series C-I, 8.25%, 09/02/10................................ 383,912
400,000 Unit 3, Series C-I, 8.25%, 09/02/11................................ 415,040
Sacramento County CFD, Special Tax,
2,250,000 Improvement Area 1, Series 1990, 8.20%, 12/01/10................... 2,361,645
7,610,000 Improvement Area 1, Series 1990, 8.25%, 12/01/20................... 7,962,267
1,500,000 Laguna, Series 1987, Pre-Refunded, 8.00%, 12/01/98................. 1,710,165
1,500,000 Laguna, Series 1987, Pre-Refunded, 8.20%, 12/01/99................. 1,720,140
1,500,000 Laguna, Series 1987, Pre-Refunded, 8.30%, 12/01/00................. 1,725,120
1,500,000 Laguna, Series 1987, Pre-Refunded, 8.40%, 12/01/01................. 1,730,115
13,000,000 Laguna, Series 1987, Pre-Refunded, 8.625%, 12/01/06................ 15,091,570
Sacramento County COP,
2,735,000 Cherry Island Golf Course Project, Pre-Refunded, 8.125%, 12/01/18.. 3,170,576
3,500,000 Cherry Island Golf Course Project, Series B, 6.80%, 07/01/18....... 3,579,590
1,495,000 Refunding, Cherry Island Golf Course Project, Series B, 6.80%,
07/01/12........................................................ 1,533,556
2,325,000 Refunding, Parking Facility Project, Series 1987-A, 6.80%, 07/01/12 2,384,962
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Sacramento MUD, Electric Revenue,
$ 9,250,000 Refunding, Series R, 6.00%, 02/01/17............................... $ 8,661,052
20,000,000 Refunding, Series R, Pre-Refunded, 7.125%, 02/01/13................ 21,807,600
3,950,000 Refunding, Series V, Pre-Refunded, 7.50%, 08/15/18................. 4,380,431
5,740,000 Refunding, Series Z, FGIC Insured, 6.25%, 07/01/04................. 6,022,293
3,000,000 Refunding, Series Z, FGIC Insured, 6.35%, 07/01/05................. 3,157,920
16,110,000 Refunding, Subordinated, 8.00%, 11/15/10........................... 16,161,874
1,200,000 Series B, MBIA Insured, 6.25%, 08/15/11............................ 1,204,404
6,795,000 Series E, 5.75%, 05/15/22.......................................... 6,148,388
5,265,000 Series Q, FGIC Insured, Pre-Refunded, 7.50%, 05/01/16.............. 5,706,944
3,100,000 Series S, FGIC Insured, Pre-Refunded, 6.625%, 02/01/17............. 3,339,568
1,860,000 Series S, Pre-Refunded, 7.125%, 02/01/11........................... 2,028,107
3,225,000 Series W, 7.60%, 08/15/00.......................................... 3,553,047
12,875,000 Series W, Pre-Refunded, 7.75%, 08/15/03............................ 14,613,769
5,405,000 Series W, Pre-Refunded, 7.875%, 08/15/16........................... 6,161,214
15,000,000 Series W, Pre-Refunded, 7.50%, 08/15/18............................ 16,634,550
2,830,000 Sacramento Public Television Facility Revenue, KVIE, Inc., Series A,
7.50%,........................................................ 07/01/20 2,733,129
2,500,000 Sacramento RDA, Tax Allocation, Merged Downtown Project, Series A, MBIA
Insured, 6.50%, 11/01/13............................................... 2,549,100
Sacramento Regional Transit District, COP,
1,605,000 Series A, 6.20%, 03/01/00.......................................... 1,645,398
1,100,000 Series A, 6.25%, 03/01/01.......................................... 1,128,358
1,000,000 Series A, 6.375%, 03/01/02......................................... 1,030,200
1,200,000 Series A, 6.40%, 03/01/03.......................................... 1,233,456
1,000,000 Series A, 6.375%, 03/01/04......................................... 1,020,870
1,100,000 Series A, 6.375%, 03/01/05......................................... 1,106,721
Sacramento-Yolo Port District Revenue, Refunding,
3,620,000 Facilities Improvement, Series A, Pre-Refunded, 8.875%, 12/01/12... 4,208,431
11,645,000 Port Facilities, Series A, 7.25%, 07/01/13......................... 11,958,018
Salida Area Public Facility Financing Agency, Special Tax,
215,000 CFD No. 88-1, 7.70%, 09/01/99...................................... 222,325
250,000 CFD No. 88-1, 7.75%, 09/01/00...................................... 259,120
290,000 CFD No. 88-1, 7.80%, 09/01/01...................................... 300,562
260,000 CFD No. 88-1, 7.85%, 09/01/02...................................... 269,454
385,000 CFD No. 88-1, 7.90%, 09/01/03...................................... 398,976
435,000 CFD No. 88-1, 7.95%, 09/01/04...................................... 451,891
495,000 CFD No. 88-1, 7.95%, 09/01/05...................................... 514,221
460,000 CFD No. 88-1, 8.00%, 09/01/06...................................... 476,647
630,000 CFD No. 88-1, 8.00%, 09/01/07...................................... 652,800
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Salida Area Public Facility Financing Agency, Special Tax, (cont.)
$ 700,000 CFD No. 88-1, 8.00%, 09/01/08...................................... $ 725,333
6,075,000 CFD No. 88-1, 8.05%, 09/01/14...................................... 6,294,490
5,585,000 Salinas Facility Revenue, Villa Serra Project, Series A, GNMA
Collateralized, 7.95%, 04/20/31......................................... 5,859,726
2,495,000 Salinas Union High School District, COP, Refunding, Facility Financing
Projects, 7.375%, 01/01/14............................................. 2,378,533
San Bernardino 1915 ACT,
245,000 AD No. 86-1, Chino Hills, Series B, 8.10%, 09/02/00................ 254,070
270,000 AD No. 86-1, Chino Hills, Series B, 8.20%, 09/02/01................ 280,101
295,000 AD No. 86-1, Chino Hills, Series B, 8.25%, 09/02/02................ 306,092
335,000 AD No. 86-1, Chino Hills, Series B, 8.30%, 09/02/03................ 347,663
360,000 AD No. 86-1, Chino Hills, Series B, 7.70%, 09/02/04................ 372,402
365,000 AD No. 86-1, Chino Hills, Series B, 8.35%, 09/02/04................ 378,866
295,000 AD No. 86-1, Chino Hills, Series B, 7.70%, 09/02/05................ 305,163
420,000 AD No. 86-1, Chino Hills, Series B, 8.35%, 09/02/05................ 435,956
305,000 AD No. 86-1, Chino Hills, Series B, 7.70%, 09/02/06................ 315,507
460,000 AD No. 86-1, Chino Hills, Series B, 8.375%, 09/02/06............... 477,521
290,000 AD No. 86-1, Chino Hills, Series B, 7.70%, 09/02/07................ 299,991
310,000 AD No. 86-1, Chino Hills, Series B, 7.70%, 09/02/08................ 320,680
435,000 Refunding, AD No. 85-1, Chino Hills, 7.80%, 09/02/00............... 451,273
480,000 Refunding, AD No. 85-1, Chino Hills, 7.85%, 09/02/01............... 497,304
525,000 Refunding, AD No. 85-1, Chino Hills, 7.85%, 09/02/02............... 543,926
570,000 Refunding, AD No. 85-1, Chino Hills, 7.85%, 09/02/03............... 591,432
615,000 Refunding, AD No. 85-1, Chino Hills, 7.90%, 09/02/04............... 638,247
670,000 Refunding, AD No. 85-1, Chino Hills, 7.80%, 09/02/05............... 694,281
730,000 Refunding, AD No. 85-1, Chino Hills, 7.95%, 09/02/06............... 756,601
795,000 Refunding, AD No. 85-1, Chino Hills, 7.95%, 09/02/07............... 825,202
870,000 Refunding, AD No. 85-1, Chino Hills, 7.95%, 09/02/08............... 901,703
950,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/09............... 984,799
1,030,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/10............... 1,067,729
1,120,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/11............... 1,161,026
1,215,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/12............... 1,259,505
1,320,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/13............... 1,368,352
1,435,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/14............... 1,487,564
1,560,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/15............... 1,617,143
1,690,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/16............... 1,751,905
1,830,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/17............... 1,897,033
1,985,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/18............... 2,057,711
2,150,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/19............... 2,232,926
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Bernardino 1915 ACT, (cont.)
$ 2,335,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/20............... $ 2,420,531
1,915,000 Refunding, AD No. 85-1, Chino Hills, 8.00%, 09/02/21............... 1,985,146
San Bernardino County 1915 ACT,
85,000 AD No. 86-1, Series A, 8.25%, 09/02/98............................. 88,196
140,000 AD No. 86-1, Series A, 8.30%, 09/02/99............................. 145,292
175,000 AD No. 86-1, Series A, 8.35%, 09/02/00............................. 181,648
275,000 AD No. 86-1, Series A, 8.35%, 09/02/01............................. 285,447
380,000 AD No. 86-1, Series A, 8.35%, 09/02/02............................. 394,436
415,000 AD No. 86-1, Series A, 8.35%, 09/02/03............................. 430,766
530,000 AD No. 86-1, Series A, 8.35%, 09/02/04............................. 550,135
670,000 AD No. 86-1, Series A, 8.35%, 09/02/05............................. 695,453
770,000 AD No. 86-1, Series A, 8.35%, 09/02/06............................. 799,252
900,000 AD No. 86-1, Series A, 8.35%, 09/02/07............................. 934,191
855,000 Refunding, AD No. 961, 7.60%, 09/02/02............................. 697,842
920,000 Refunding, AD No. 961, 7.65%, 09/02/03............................. 749,478
990,000 Refunding, AD No. 961, 7.70%, 09/02/04............................. 805,187
1,065,000 Refunding, AD No. 961, 7.75%, 09/02/05............................. 864,940
San Bernardino County COP,
4,000,000 Capital Facilities Project, Series B, Pre-Refunded, 6.75%, 08/01/10 4,440,680
9,515,000 Capital Facilities Project, Series B, Pre-Refunded, 6.25%, 08/01/19 10,145,274
55,200,000 Capital Facilities Project, Series B, Pre-Refunded, 7.00%, 08/01/28 62,113,800
9,230,000 Refunding & Capital Improvement Projects, Pre-Refunded, 7.80%,
07/01/16......................................................... 9,786,200
3,705,000 West Valley Detention Center Project, MBIA Insured, 6.25%, 11/01/04 3,844,012
3,935,000 West Valley Detention Center Project, MBIA Insured, 6.35%, 11/01/05 4,081,933
4,185,000 West Valley Detention Center Project, MBIA Insured, 6.40%, 11/01/06 4,324,277
20,000,000 West Valley Detention Center Project, MBIA Insured, 6.50%, 11/01/12 20,319,400
555,000 San Bernardino County Mortgage Revenue, Refunding, Don Miguel Apartments
Projects, MBIA Insured, 6.00%, 09/01/03................................ 571,012
San Bernandino County SFMR,
915,000 Series A, GNMA Mortgage Backed Securities, 7.50%, 12/01/07......... 931,626
4,455,000 Series A, GNMA Mortgage Backed Securities, 7.65%, 06/01/23......... 4,742,838
San Bernardino Joint Powers Financing Authority Revenue, Tax Allocation,
3,000,000 Central City Merged Project, Series B, 7.50%, 11/01/20............. 3,139,230
450,000 Refunding, Central City Merged Project, Series A, 6.75%, 11/01/00.. 464,130
480,000 Refunding, Central City Merged Project, Series A, 6.90%, 11/01/01.. 498,254
510,000 Refunding, Central City Merged Project, Series A, 7.00%, 11/01/02.. 531,267
550,000 Refunding, Central City Merged Project, Series A, 7.00%, 11/01/03.. 570,911
585,000 Refunding, Central City Merged Project, Series A, 7.00%, 11/01/04.. 603,036
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Bernardino Joint Powers Financing Authority Revenue, Tax Allocation,
(cont.)
$ 625,000 Refunding, Central City Merged Project, Series A, 7.05%, 11/01/05.. $ 644,225
670,000 Refunding, Central City Merged Project, Series A, 7.05%, 11/01/06.. 688,217
720,000 Refunding, Central City Merged Project, Series A, 7.05%, 11/01/07.. 739,577
15,585,000 Refunding, Central City Merged Project, Series A, 7.10%, 11/01/20.. 15,691,134
2,250,000 South Valley Redevelopment Project, Series A , 7.50%, 01/01/15..... 2,377,710
1,695,000 Tri-City Redevelopment Project, Series B, 7.60%, 01/01/08.......... 1,795,039
3,705,000 Tri-City Redevelopment Project, Series B, 7.65%, 01/01/15.......... 3,947,789
905,000 San Bernandino Municipal Water Department, COP, FGIC Insured, 6.25%,
02/01/12............................................................... 898,176
75,000,000 San Bernardino PBA Revenue, Capital Improvement, 8.30%, 09/02/19......... 78,079,500
18,230,000 San Bernardino RDA, Tax Allocation, Refunding, Central City Redevelopment
Project, Pre-Refunded, 9.375%, 11/01/20................................ 20,158,187
5,090,000 San Buenaventura Municipal Improvement Revenue, Series A, 10.375%,
12/01/13............................................................... 5,179,228
2,000,000 San Diego COP, Balboa Park & Mission Bay, 5.60%, 11/01/23................ 1,764,760
2,200,000 San Diego Community College District, COP, Financing Project, Series
1987, Pre-Refunded, 8.625%, 12/01/09................................... 2,535,280
San Diego County COP,
3,570,000 Capital Project, Series A, 5.75%, 08/01/13......................... 3,194,507
2,260,000 Children's Center Project, 6.00%, 10/01/02......................... 2,256,994
3,500,000 Clairemont Health Services Complex, Pre-Refunded, 6.00%, 12/01/10.. 3,728,970
1,910,000 Interim Justice Facility Project, Pre-Refunded, 7.875%, 08/01/07... 2,142,313
7,130,000 Series A, Pre-Refunded, 7.00%, 08/01/12............................ 7,804,926
6,750,000 Vista Detention Facility Expansion Project, Pre-Refunded, 7.875%,
04/01/07......................................................... 7,496,955
San Diego County Regional Transportation Commission, Sales Tax Revenue,
1,250,000 Series A, 6.00%, 04/01/08.......................................... 1,230,263
9,000,000 Series A, Pre-Refunded, 7.375%, 04/01/06........................... 10,115,190
9,050,000 San Diego County Water Authority Revenue, COP, Series A, Pre-Refunded,
7.30%, 05/01/09........................................................ 9,938,891
San Diego IDR, San Diego Gas & Electric Co. Project,
54,000,000 Refunding, Series 1993-A, 5.90%, 06/01/18.......................... 50,823,720
20,400,000 Series 1985-A, 9.25%, 09/01/20..................................... 22,065,252
11,605,000 Series 1986-A, 7.625%, 07/01/21.................................... 12,459,708
12,230,000 Series 1987-A, 8.75%, 03/01/23..................................... 13,499,474
15,400,000 Series 1992-A, 6.40%, 09/01/18..................................... 15,514,884
6,145,000 San Diego Mortgage Revenue, Refunding, Mariners Cove, Series B-1, 5.80%,
09/01/15............................................................... 5,718,045
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,200,000 San Diego RDA, Refunding, Tax Allocation, Columbia Redevelopment Project,
Series A, Pre-Refunded, 8.75%, 12/01/08................................ $ 2,539,108
San Diego Regional Building Authority, Lease Revenue, Metropolitan
Transit System Tower Project,
7,500,000 Series A, Pre-Refunded, 7.70%, 11/01/09............................ 8,409,825
22,000,000 Series A, Pre-Refunded, 7.75%, 11/01/19............................ 24,704,460
100,000 San Diego SFMR, Issue A, 9.20%, 07/15/16................................. 105,471
28,845,000 San Diego, Special Tax, CFD No.1, Series A, 8.50%, 09/01/16.............. 29,916,015
1,440,000 San Francisco Bay Area Rapid Transportation District Revenue, Sales Tax,
FGIC Insured, 6.60%, 07/01/12.......................................... 1,489,032
1,750,000 San Francisco Building Authority, COP, Pre-Refunded, 7.375%, 07/01/13.... 1,898,855
6,100,000 San Francisco City & County, MBIA Insured, 5.50%, 06/15/12............... 5,631,276
4,000,000 San Francisco City & County Public Utilities Commission, Water Revenue,
Crossover Refunding, Series A, 6.50%, 11/01/09......................... 4,173,720
17,000,000 San Francisco City & County RDA Lease Revenue, George R. Moscone,
Crossover Refunding, Series 1992, 5.50%, 07/01/18...................... 14,826,040
3,500,000 San Francisco City & County RDA Mortgage Revenue, Refunding, Series A,
MBIA Insured, 6.65%, 07/01/24.......................................... 3,485,930
San Francisco City & County Sewer Revenue,
8,400,000 Series 1991, AMBAC Insured, Pre-Refunded, 6.50%, 10/01/16.......... 9,167,844
3,285,000 Series 1992, AMBAC Insured, Pre-Refunded, 6.50%, 10/01/21.......... 3,585,282
2,400,000 Series A, Pre-Refunded, 7.25%, 10/01/15............................ 2,641,248
2,325,000 San Francisco City & County SFMR, Series 1985, 9.375%, 10/01/12.......... 2,344,855
5,000,000 San Francisco USD, COP, Civic Improvement & Financing Corp.,
Pre-Refunded, 8.40%, 07/01/03.......................................... 5,533,300
1,000,000 San Gabriel Valley Mosquito Abatement, Special District, COP, Lease
Finance, Series R, 6.60%, 08/01/12.................................... 975,020
San Gabriel Valley Schools Financing Authority Revenue,
4,515,000 Refunding, Pomona USD, 5.50%, 02/01/24............................. 3,809,080
1,765,000 Series A, 7.70%, 11/01/19.......................................... 1,736,601
San Jacinto RDA, COP,
1,065,000 Fire Station Project, 7.90%, 12/01/08.............................. 1,129,454
2,375,000 Fire Station Project, 8.00%, 12/01/15.............................. 2,518,379
San Jacinto, Special Tax,
540,000 CFD No. 2, 7.55%, 09/01/00......................................... 564,030
520,000 CFD No. 2, 7.60%, 09/01/01......................................... 543,119
775,000 CFD No. 2, 7.65%, 09/01/02......................................... 809,418
1,000,000 CFD No. 2, 7.70%, 09/01/04......................................... 1,044,370
1,275,000 CFD No. 2, 7.75%, 09/01/06......................................... 1,330,080
1,465,000 CFD No. 2, 7.75%, 09/01/07......................................... 1,526,633
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Jose RDA, Tax Allocation, (cont.)
$ 10,525,000 Merged Area Redevelopment Project, Series 1993-D, MBIA Insured,
5.75%, 08/01/24.................................................. $ 9,283,050
1,160,000 Park Center Redevelopment Project, 7.00%, 10/01/07................. 1,195,809
1,240,000 Park Center Redevelopment Project, 7.00%, 10/01/08................. 1,271,682
1,325,000 Park Center Redevelopment Project, 7.00%, 10/01/09................. 1,330,419
25,400,000 Refunding, Merged Area Redevelopment Project, Series 1986-A,
Pre-Refunded, 7.80%, 08/01/11.................................... 27,855,164
10,000,000 Refunding, Merged Area Redevelopment Project, Series 1986-B,
Pre-Refunded, 7.50%, 08/01/04.................................... 10,912,800
1,590,000 San Juan USD, COP 1986, Financing Project, 7.80%, 08/01/98............... 1,623,310
65,000 San Leandro RDA, RMR, Pre-Refunded, 11.25%, 04/01/13..................... 87,073
3,500,000 San Lorenzo USD, COP, Capital Facilities Project, 7.20%, 08/01/12........ 3,415,160
4,350,000 San Luis Obispo Capital Improvement Board Lease Revenue, Capital
Improvement Project, 8.25%, 06/01/06................................... 4,636,839
San Luis Obispo County COP,
1,830,000 Jail Expansion Project, 6.75%, 10/01/16............................ 1,753,597
1,475,000 Jail Expansion Project, 6.80%, 10/01/21............................ 1,409,141
1,980,000 San Luis Obispo County COP, Community College District, 7.00%, 07/01/21.. 1,909,868
San Marcos Public Facilities Authority Revenue,
18,260,000 Capital Improvement, 8.25%, 01/01/19............................... 20,480,051
54,315,000 Civic Center Mission Boulevard Project, Pre-Refunded, 7.40%,
09/02/22......................................................... 61,522,057
San Marcos Public Facilities Authority Revenue, Tax Allocation,
3,110,000 Series A, CGIC Insured, Pre-Refunded, 6.10%, 01/01/11.............. 3,317,561
3,825,000 Series A, CGIC Insured, Pre-Refunded, 6.15%, 01/01/17.............. 4,092,291
1,785,000 Series A, CGIC Insured, Pre-Refunded, 6.20%, 01/01/22.............. 1,915,341
25,000,000 dSan Marcos Public Financing Authority Revenue, Series A, 6.25%, 09/02/22. 24,671,000
San Marcos, Special Tax,
11,500,000 CFD No. 88-1, 7.75%, 09/01/18...................................... 11,771,170
10,670,000 CFD No. 88-1, 7.625%, 09/01/19..................................... 10,610,675
1,185,000 San Mateo County Board of Education, COP, Administrative Building
Project, 7.10%, 05/01/21............................................... 1,207,918
San Mateo County COP,
7,020,000 Capital Projects Program, MBIA Insured, Pre-Refunded, 6.50%,
07/01/17......................................................... 7,682,548
3,335,000 Capital Projects Program, Series 1985-A, 9.125%, 07/01/98.......... 3,596,297
4,930,000 San Mateo County Joint Powers Financing Authority, Lease Revenue, North
County Satellite Clinic, FSA Insured, 5.65%, 09/01/16.................. 4,471,066
2,175,000 San Mateo County Transit District, Sales Tax Revenue, Series A, MBIA
Insured, 6.50%, 06/01/20............................................... 2,318,441
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 9,305,000 San Mateo RDA, COP, Refunding, Bridge & Water Pumping Station,
Pre-Refunded, 8.10%, 08/01/13.......................................... $10,276,256
San Pablo 1915 ACT, Limited Obligation Improvement,
160,000 Town Center AD, Series A, 8.00%, 09/02/02.......................... 165,795
175,000 Town Center AD, Series A, 8.00%, 09/02/03.......................... 181,338
185,000 Town Center AD, Series A, 8.05%, 09/02/04.......................... 191,738
205,000 Town Center AD, Series A, 8.05%, 09/02/05.......................... 212,466
220,000 Town Center AD, Series A, 8.05%, 09/02/06.......................... 228,012
240,000 Town Center AD, Series A, 8.05%, 09/02/07.......................... 248,741
260,000 Town Center AD, Series A, 8.05%, 09/02/08.......................... 269,469
305,000 Town Center AD, Series A, 8.10%, 09/02/10.......................... 316,166
330,000 Town Center AD, Series A, 8.10%, 09/02/11.......................... 342,081
355,000 Town Center AD, Series A, 8.10%, 09/02/12.......................... 367,997
385,000 Town Center AD, Series A, 8.10%, 09/02/13.......................... 399,095
420,000 Town Center AD, Series A, 8.10%, 09/02/14.......................... 435,376
6,740,000 San Rafael RDA, Refunding, Tax Allocation, Central San Rafael
Redevelopment, FGIC Insured, 6.45%, 12/01/17........................... 6,780,507
2,200,000 San Rafael Sanitation District, COP, Waste Water Facilities Financing,
6.80%, 08/01/11........................................................ 2,199,692
San Ramon COP, San Ramon Capital Improvement Projects,
70,000 Series 1993, 4.25%, 03/01/96....................................... 68,455
70,000 Series 1993, 4.50%, 03/01/97....................................... 68,896
75,000 Series 1993, 4.75%, 03/01/98....................................... 73,098
1,730,000 Series 1993, 6.00%, 03/01/18....................................... 1,592,309
San Ramon Public Finance Authority,
49,235,000 Local Agency Revenue, 8.80%, 09/02/18.............................. 53,471,672
120,000 Tax Allocation, Series A, 7.00%, 02/01/96.......................... 123,995
130,000 Tax Allocation, Series A, 7.10%, 02/01/97.......................... 135,855
135,000 Tax Allocation, Series A, 7.20%, 02/01/98.......................... 142,546
145,000 Tax Allocation, Series A, 7.30%, 02/01/99.......................... 154,316
160,000 Tax Allocation, Series A, 7.40%, 02/01/00.......................... 170,837
170,000 Tax Allocation, Series A, 7.50%, 02/01/01.......................... 181,954
7,280,000 Tax Allocation, Series A, 7.625%, 02/01/20......................... 7,646,548
San Ramon Valley Fire Protection District,
8,545,000 COP, 7.30%, 07/01/19............................................... 8,747,516
210,000 COP, Refunding, Financing Corp., 4.00%, 07/01/95................... 207,904
215,000 COP, Refunding, Financing Corp., 4.25%, 07/01/96................... 210,780
225,000 COP, Refunding, Financing Corp., 4.50%, 07/01/97................... 219,116
235,000 COP, Refunding, Financing Corp., 4.75%, 07/01/98................... 228,063
245,000 COP, Refunding, Financing Corp., 5.00%, 07/01/99................... 236,886
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Ramon Valley Fire Protection District, (cont.)
$ 260,000 COP, Refunding, Financing Corp., 5.10%, 07/01/00................... $ 249,392
270,000 COP, Refunding, Financing Corp., 5.20%, 07/01/01................... 257,604
285,000 COP, Refunding, Financing Corp., 5.30%, 07/01/02................... 270,565
300,000 COP, Refunding, Financing Corp., 5.40%, 07/01/03................... 283,491
320,000 COP, Refunding, Financing Corp., 5.50%, 07/01/04................... 301,101
335,000 COP, Refunding, Financing Corp., 5.60%, 07/01/05................... 313,982
355,000 COP, Refunding, Financing Corp., 5.70%, 07/01/06................... 332,954
375,000 COP, Refunding, Financing Corp., 5.75%, 07/01/07................... 350,565
395,000 COP, Refunding, Financing Corp., 5.80%, 07/01/08................... 368,144
6,275,000 COP, Refunding, Financing Corp., 6.00%, 07/01/19................... 5,764,278
San Ramon Valley USD, COP,
970,000 Refunding, 7.40%, 02/01/98......................................... 1,017,579
1,040,000 Refunding, 7.40%, 02/01/99......................................... 1,097,169
6,505,000 Refunding, 7.55%, 02/01/04......................................... 6,839,942
6,000,000 Refunding, Pre-Refunded, 7.70%, 02/01/10........................... 6,721,800
21,765,000 Refunding, Series 1992, 7.00%, 02/01/22............................ 20,691,985
23,045,000 Series A, 6.35%, 10/01/01.......................................... 23,083,946
12,985,000 Santa Ana CRDA, COP, Downtown Parking Facilities Project, Pre-Refunded,
7.875%, 07/01/16....................................................... 13,379,614
Santa Ana CRDA, Tax Allocation,
2,000,000 Refunding, Mainplace Project, 7.40%, 09/01/19...................... 2,015,900
2,500,000 Refunding, Series A, 7.25%, 09/01/19............................... 2,680,775
10,105,000 Refunding, Series B, 7.375%, 09/01/09.............................. 10,893,291
6,000,000 Refunding, Series C, 7.25%, 09/01/17............................... 6,433,860
2,260,000 Refunding, Series C, Pre-Refunded, 6.75%, 09/01/19................. 2,350,603
2,255,000 Refunding, Series D, 6.75%, 09/01/19............................... 2,485,326
Santa Ana Financing Authority, Lease Revenue, Police Administration &
Holding Facility,
750,000 Series A, MBIA Insured, 5.30%, 07/01/05............................ 719,288
900,000 Series A, MBIA Insured, 5.40%, 07/01/06............................ 861,093
1,015,000 Series A, MBIA Insured, 5.50%, 07/01/07............................ 969,000
2,400,000 Series A, MBIA Insured, 5.60%, 07/01/08............................ 2,297,664
1,130,000 Series A, MBIA Insured, 5.625%, 07/01/09........................... 1,078,201
Santa Ana Mountains County Water District,
18,630,000 CFD No. 7, Special Tax, Pre-Refunded, 9.50%, 10/01/12.............. 21,142,628
10,625,000 CFD No. 7, Special Tax, Pre-Refunded, 8.40%, 10/01/13.............. 11,666,781
7,990,000 Refunding, CFD No. 2, Pre-Refunded, 7.875%, 04/15/15............... 8,546,583
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Santa Barbara COP,
$ 4,500,000 Municipal Improvements Program, Pre-Refunded, 8.00%, 08/01/17...... $ 4,825,260
7,090,000 Refunding, Harbor Project, 6.75%, 10/01/27......................... 7,251,936
1,945,000 Santa Barbara COP, California Health Facilities Loan Program, 7.65%,
05/01/15............................................................... 2,110,422
Santa Barbara County, COP,
9,960,000 Refunding, Series 1994, 5.70%, 03/01/11............................ 9,187,602
4,595,000 Series 1990, Pre-Refunded, 7.50%, 02/01/11......................... 5,177,600
4,000,000 Santa Barbara County Retirement Facility Revenue, COP, Montecito
Retirement Center, Pre-Refunded, 7.80%, 04/01/18...................... 4,434,360
6,725,000 Santa Barbara Housing Authority Revenue, Refunding & Acquisition, 8.50%,
11/15/20............................................................... 6,834,416
Santa Barbara SFMR,
940,000 GNMA Mortgage Backed Securities, 7.625%, 10/01/10.................. 943,910
2,730,000 GNMA Mortgage Backed Securities, 7.65%, 10/01/23................... 2,736,279
Santa Clara County COP,
10,000,000 American Baptist Homes West, Pre-Refunded, 8.00%, 03/01/18......... 11,348,000
10,000,000 Refunding, Santa Clara Convention Center, Pre-Refunded, 7.875%,
07/01/10......................................................... 10,956,000
3,090,000 Refunding, Terraces of Los Gatos Project, 6.125%, 03/01/11......... 2,896,813
12,200,000 Refunding, Terraces of Los Gatos Project, 6.125%, 03/01/18......... 11,327,700
4,000,000 Terraces of Los Gatos Project, 6.90%, 03/01/18..................... 4,071,320
Santa Clara Electric Revenue,
33,500,000 Crossover Refunding, Series B, 7.80%, 07/01/10..................... 36,119,365
10,585,000 Series A, MBIA Insured, 5.75%, 07/01/24............................ 9,761,275
3,500,000 Santa Cruz County COP, Capital Facilities Project, MBIA Insured, 6.70%,
09/01/20............................................................... 3,638,320
Santa Cruz County Housing Authority, MFHR,
3,840,000 Dominican Oaks, Series 1987, GNMA Collateralized, 8.20%, 12/20/10.. 4,040,179
7,080,000 Dominican Oaks, Series 1987, GNMA Collateralized, 8.25%, 12/20/17.. 7,463,311
9,230,000 Series 1990-B, 7.75%, 07/01/23..................................... 9,436,198
9,870,000 Santa Cruz County Public Finance Authority, Series 1990-C, 7.10%,
08/01/20............................................................... 10,022,886
Santa Margarita Water District,
2,000,000 ID No. 2A, Series C, 8.00%, 06/01/13............................... 2,145,500
2,400,000 ID No. 3A, Series A , 8.00%, 06/01/08.............................. 2,574,600
2,585,000 ID No. 3A, Series A, 8.00%, 06/01/13............................... 2,773,059
5,000,000 ID No. 4, Series D, 8.00%, 06/01/08................................ 5,363,750
11,000,000 ID No. 4, Series D, 8.00%, 06/01/13................................ 11,800,250
4,000,000 ID No. 4A, Series A, 7.75%, 08/01/06............................... 4,241,760
5,000,000 ID No. 4A, Series B, 8.00%, 06/01/08............................... 5,363,750
5,000,000 ID No. 4A, Series B, 8.00%, 06/01/13............................... 5,363,750
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,750,000 Santa Maria Bonita School District, COP, Refunding, MBIA Insured, 7.00%,
03/01/16............................................................... $ 2,609,145
1,800,000 Santa Maria COP, Revenue, Marian Medical Center, 6.75%, 09/01/22......... 1,755,468
3,865,000 Santa Maria COP, Town Center & Westside Parking Facilities, Pre-Refunded,
7.20%, 06/01/16........................................................ 4,171,108
3,910,000 Santa Maria RDAR, Refunding, Town Center & W. Side Parking Facilities,
FSA Insured, 5.40%, 06/01/09........................................... 3,605,215
12,080,000 Santa Monica COP, Santa Monica Improvements Project, Pre-Refunded,
7.875%, 08/01/16....................................................... 13,267,464
1,605,000 Santa Monica Community College District, Series A , 5.75%, 08/01/18...... 1,514,735
Santa Monica RDA, Refunding, Tax Allocation, Ocean Park Redevelopment
Project,
3,805,000 Series A, Pre-Refunded, 8.25%, 07/01/18............................ 4,371,945
1,260,000 Series B, Pre-Refunded, 8.25%, 07/01/18............................ 1,447,740
Santa Rosa 1915 ACT, Refunding,
290,000 Northpoint Park No. 85-1, 8.05%, 09/02/09.......................... 300,272
315,000 Northpoint Park No. 85-1, 8.10%, 09/02/10.......................... 326,469
340,000 Northpoint Park No. 85-1, 8.10%, 09/02/11.......................... 352,379
3,150,000 Santa Rosa Central Parking Service Facilities District Project No. 89-1,
7.60%, 07/02/15........................................................ 3,210,669
1,190,000 Santa Rosa Insured Revenue, Freind Association Services, Series A, 5.75%,
09/01/25............................................................... 1,042,476
Santa Rosa-Martinez Home Mortgage Finance Authority,
30,000 HMR, 10.75%, 01/01/06.............................................. 31,042
125,000 HMR, 10.80%, 01/01/14.............................................. 130,950
Saugus Union School District,
2,035,000 Series A, 5.65%, 09/01/11.......................................... 1,844,992
2,995,000 Series A, 5.70%, 09/01/18.......................................... 2,703,557
1,970,000 Sausalito School District, Marin County, COP, Capital Outlay Financing
Program, Series A, 7.75%, 04/01/09..................................... 1,976,816
2,880,000 Seal Beach RDA, Refunding, Sub Lien, Tax Allocation, Riverfront,
Series A, 6.70%, 09/01/13.............................................. 2,744,842
Sebastopol COP,
2,500,000 Capital Projects, Pre-Refunded, 7.40%, 06/01/14.................... 2,545,775
2,205,000 Refunding, 6.10%, 06/01/14......................................... 2,027,740
Sequoia Hospital District Revenue,
6,590,000 Refunding, Pre-Refunded, 7.50%, 09/01/08........................... 7,408,280
5,835,000 Refunding, Pre-Refunded, 7.60%, 09/01/14........................... 6,582,464
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Shasta Joint Powers Financing Authority Lease Revenue, Courthouse County
Improvement Project,
$ 1,000,000 Series A, 6.60%, 06/01/12.......................................... $ 1,002,080
2,500,000 Series A, 6.70%, 06/01/23.......................................... 2,434,200
Sierra Madre Financing Authority Revenue, Local Agency,
240,000 Series 1988-A, 7.50%, 11/01/98..................................... 260,134
260,000 Series 1988-A, 7.60%, 11/01/99..................................... 283,902
280,000 Series 1988-A, 7.70%, 11/01/00..................................... 307,031
5,500,000 Series 1988-A, 7.80%, 11/01/18..................................... 6,017,880
4,385,000 Sierra Sands USD, Refunding, Capital Improvement Project, 5.75%, 02/01/23 3,667,044
15,000,000 Sierra View Local Hospital District Revenue, Insured Health Facilities,
6.40%, 03/01/22......................................................... 14,288,850
Signal Hill RDA, Tax Allocation,
1,015,000 Redevelopment Project No. 1-B, Pre-Refunded, 7.10%, 10/01/01....... 1,125,818
1,100,000 Redevelopment Project No. 1-B, Pre-Refunded, 7.20%, 10/01/02....... 1,226,104
1,135,000 Redevelopment Project No. 1-B, Pre-Refunded, 7.25%, 10/01/03....... 1,268,215
1,225,000 Redevelopment Project No. 1-B, Pre-Refunded, 7.30%, 10/01/04....... 1,372,122
21,000,000 Redevelopment Project No. 1-B, Pre-Refunded, 7.40%, 10/01/15....... 23,636,760
3,000,000 Simi Valley CDA, Commercial Mortgage Revenue, Sycamore Plaza II, 8.20%,
09/01/12............................................................... 3,036,780
5,000,000 Simi Valley Public Financing Authority Revenue, Refunding, MBIA Insured,
5.75%, 09/01/23........................................................ 4,577,650
Simi Valley SFRMR,
4,900,000 a,b,gSeries 1989-A, 7.625%, 08/01/22.................................... 1,470,000
8,495,000 Series 1990-A, 7.70%, 03/01/25..................................... 8,666,259
1,000,000 Snowline Joint USD, COP, 7.25%, 04/01/18................................. 981,050
Solano County COP, Refunding,
2,000,000 Justice Facilities & Public Building Project, 5.875%, 10/01/05..... 1,932,820
2,765,000 MBIA Insured, 7.375%, 10/01/03..................................... 2,934,688
2,970,000 MBIA Insured, 7.375%, 10/01/04..................................... 3,150,071
4,210,000 Soledad RDA, Refunding, Tax Allocation, Soledad Redevelopment Project,
7.40%, 11/01/12........................................................ 4,299,294
Sonoma County Office of Education, COP,
3,115,000 Refunding, Capital Financing Project, 5.625%, 07/01/20............. 2,683,074
1,745,000 Series 1990, Pre-Refunded, 7.375%, 07/01/20........................ 1,979,929
South Coast Air Quality Management District Revenue, Building Corp.,
Installment Sale Headquarters,
5,280,000 Series 1992, 6.00%, 08/01/09....................................... 5,186,174
3,000,000 Series A, Pre-Refunded, 7.80%, 08/01/13............................ 3,408,120
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
South Gate Public Finance Authority Revenue, Tax Allocation,
$ 3,810,000 Series A-1, 7.60%, 09/01/09........................................ $ 3,841,623
13,265,000 Series A-2, 7.375%, 09/01/09....................................... 13,425,109
8,405,000 South Gate Redevelopment Project No. 1, AMBAC Insured, 5.875%,
09/01/24......................................................... 7,795,301
South San Francisco, 1915 ACT,
1,090,000 Gateway AD No. ST-82-2, 8.00%, 09/02/96............................ 1,129,262
1,175,000 Gateway AD No. ST-82-2, 8.00%, 09/02/97............................ 1,217,323
1,260,000 Gateway AD No. ST-82-2, 8.00%, 09/02/98............................ 1,305,385
1,335,000 Gateway AD No. ST-82-2, 8.00%, 09/02/99............................ 1,383,087
1,455,000 Gateway AD No. ST-82-2, 8.00%, 09/02/00............................ 1,507,409
1,570,000 Gateway AD No. ST-82-2, 8.00%, 09/02/01............................ 1,626,551
1,675,000 Gateway AD No. ST-82-2, 8.00%, 09/02/02............................ 1,735,334
1,560,000 South San Francisco Capital Improvements Financing Authority Revenue,
Conference Center Project, Pre-Refunded, 6.90%, 09/01/12............... 1,730,570
South Tahoe Joint Powers Financing Authority Revenue, Refunding, Tahoe
Redevelopment Project Area 1-A,
8,995,000 Series S, 6.90%, 10/01/13.......................................... 8,769,495
30,130,000 Series S, 7.20%, 10/01/23.......................................... 29,983,267
14,000,000 Southeast Resource Recovery Facilities Authority Lease Revenue, Long
Beach, 9.00%, 12/01/08................................................. 14,967,680
Southern California HFA, SFMR,
6,185,000 GNMA Mortgage Backed Securities, 7.625%, 10/01/22.................. 6,619,991
7,570,000 GNMA Mortgage Backed Securities, 7.75%, 03/01/24................... 8,215,872
845,000 Series A, GNMA Mortgage Backed Securities, 6.75%, 09/01/22......... 876,392
1,500,000 Series B, GNMA Mortgage Backed Securities, 6.90%, 10/01/24......... 1,570,020
Southern California Public Power Authority Revenue,
10,000,000 Multi Purpose Projects, 6.75%, 07/01/13............................ 10,439,200
9,475,000 Multi Purpose Projects, 6.00%, 07/01/18............................ 9,566,908
3,950,000 Refunding, Hydroelectric-Hoover Uprating, 6.00%, 10/01/17.......... 3,768,498
10,670,000 Refunding, Palo Verde Project, Pre-Refunded, 7.125%, 07/01/15...... 11,533,310
400,000 Refunding, Palo Verde Project, Series A, 6.875%, 07/01/15.......... 419,212
600,000 Refunding, Palo Verde Project, Series A, Pre-Refunded, 6.875%,
07/01/15......................................................... 645,384
24,130,000 Refunding, Palo Verde Project, Series B, 5.75%, 07/01/17........... 22,243,517
5,000,000 Refunding, Series A, 5.50%, 07/01/12............................... 4,579,600
Southern California Public Power Authority Revenue, Transmission Project,
33,470,000 Refunding, Series B, FGIC Insured, 7.375%, 07/01/21................ 36,058,570
7,000,000 Refunding, Transmission Project, Series B, 5.50%, 07/01/23......... 6,170,920
2,465,000 Southern Transmission Project, 6.00%, 07/01/20..................... 2,334,182
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Southern California Public Power Authority Revenue, Transmission
Project, (cont.)
$ 760,000 Southern Transmission Project, Pre-Refunded, 6.00%, 07/01/20....... $ 809,560
4,500,000 Sub-Crossover Refunding, Southern Trasmission Project, 5.50%,
07/01/20......................................................... 3,998,340
2,000,000 Sub-Crossover Refunding, Southern Trasmission Project, 5.75%,
07/01/21......................................................... 1,840,400
13,500,000 Sub-Crossover Refunding, Southern Trasmission Project, 5.75%,
07/01/21......................................................... 12,325,500
2,250,000 Southern Kern USD, COP, 7.10%, 09/01/17.................................. 2,122,650
1,390,000 Standard Elementary School District, COP, 7.375%, 06/01/11............... 1,421,859
26,000,000 Stanislaus County COP, Refunding, 7.55%, 04/01/18........................ 26,143,000
3,500,000 Stanislaus Solid Waste & Energy Finance Authority Revenue, 7.30%,
01/01/99............................................................... 3,721,445
a,bStockton 1915 ACT, Limited Obligation,
295,000 Weber/Sperry Ranch Project No. 88-1, 8.30%, 09/02/07............... 206,500
345,000 Weber/Sperry Ranch Project No. 88-1, 8.30%, 09/02/08............... 241,500
380,000 Weber/Sperry Ranch Project No. 88-1, 8.40%, 09/02/09............... 266,000
475,000 Weber/Sperry Ranch Project No. 88-1, 8.40%, 09/02/10............... 332,500
545,000 Weber/Sperry Ranch Project No. 88-1, 8.40%, 09/02/11............... 381,500
620,000 Weber/Sperry Ranch Project No. 88-1, 8.40%, 09/02/12............... 434,000
705,000 Weber/Sperry Ranch Project No. 88-1, 8.40%, 09/02/13............... 493,500
Stockton Central Parking District,
4,480,000 Project No. 86-1, Pre-Refunded, 8.00%, 09/01/01.................... 4,760,806
5,700,000 Refunding, Series 1991, 7.90%, 08/01/11............................ 5,760,591
2,250,000 Stockton COP, Water Enterprise Project, Series A, FSA Insured, 5.80%,
08/01/22............................................................... 2,074,252
3,200,000 Stockton COP, Water Facility Project, Participation 1986, Pre-Refunded,
7.50%, 08/01/16........................................................ 3,430,240
Stockton East Water District, COP,
32,175,000 Refunding, Series 1990-B, Pre-Refunded, 6.40%, 04/01/22............ 34,870,300
19,000,000 Series 1990-A, Pre-Refunded, 7.30%, 04/01/20....................... 21,464,680
28,575,000 Series 1990-B, 7.45%, 04/01/05..................................... 30,915,007
12,000,000 Stockton Health Facilities Revenue, Refunding, Dameron Hospital
Association, Series 1988, 8.30%, 12/01/14............................. 12,863,640
4,250,000 Stockton Hospital Revenue, St. Josephs Hospital Stockton, Series A,
6.70%, 06/01/15........................................................ 4,235,210
2,250,000 Stockton Port District Revenue, Port Facilities Improvement, Series A,
8.10%, 01/01/14........................................................ 2,463,750
8,000,000 Stockton Public Financing Authority, Special Tax, CFD No. 90-4, 8.50%,
09/01/16............................................................... 8,838,400
Stockton, South Stockton Special Tax,
3,000,000 CFD No. 90-1, 8.10%, 09/01/09...................................... 3,204,630
5,400,000 CFD No. 90-1, 8.125%, 09/01/15..................................... 5,741,550
Stockton Special Tax,
455,000 CFD No. 1, Weston Ranch, 7.80%, 09/01/99........................... 461,598
545,000 CFD No. 1, Weston Ranch, 7.85%, 09/01/00........................... 552,886
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Stockton Special Tax, (cont.)
$ 635,000 CFD No. 1, Weston Ranch, 7.90%, 09/01/01........................... $ 644,208
680,000 CFD No. 1, Weston Ranch, 7.95%, 09/01/02........................... 689,846
625,000 CFD No. 1, Weston Ranch, 7.95%, 09/01/03........................... 634,050
7,910,000 CFD No. 1, Weston Ranch, 8.00%, 09/01/09........................... 7,919,888
11,890,000 CFD No. 1, Weston Ranch, 8.10%, 09/01/14........................... 11,910,451
725,000 CFD No. 90-2, Series 002, 7.30%, 08/01/00.......................... 770,711
780,000 CFD No. 90-2, Series 002, 7.35%, 08/01/01.......................... 828,243
835,000 CFD No. 90-2, Series 002, 7.40%, 08/01/02.......................... 891,955
895,000 CFD No. 90-2, Series 002, 7.45%, 08/01/03.......................... 955,932
965,000 CFD No. 90-2, Series 002, 7.50%, 08/01/04.......................... 1,030,562
3,000,000 CFD No. 90-2, Series 002, 7.70%, 08/01/09.......................... 3,192,360
3,000,000 CFD No. 90-2, Series 006, 7.75%, 08/01/15.......................... 3,201,810
1,430,000 CFD No. 90-2, Series 305, Brookside, 8.50%, 08/01/09............... 1,580,951
2,710,000 CFD No. 90-2, Series 305, Brookside, 8.65%, 08/01/15............... 2,994,577
Suisun City COP,
2,205,000 Civic Center Financing Project, Pre-Refunded, 9.125%, 11/01/15..... 2,570,876
2,105,000 Refunding, Civic Center Project, 6.45%, 11/01/15................... 1,948,409
Suisun City RDA, Tax Allocation,
11,500,000 Refunding, Suisun City Redevelopment Project, MBIA Insured, 5.90%,
10/01/23......................................................... 10,218,095
5,500,000 Suisun City Redevelopment Project, Pre-Refunded, 7.50%, 10/01/19... 6,254,380
4,750,000 Suisun City Redevelopment Project, Pre-Refunded, 7.25%, 10/01/20... 5,340,948
4,735,000 Sunnyvale Financing Authority Revenue, Utilities Waste Water Reuse &
Shudge, Series A, 6.30%, 10/01/12..................................... 4,724,630
13,240,000 Sweetwater Authority Revenue, AMBAC Insured, 5.25%, 04/01/10............. 11,963,267
1,000,000 Tahoe City Public Utility District, COP, Capital Facilities Project,
Series A, 6.25%, 06/01/13.............................................. 910,670
2,500,000 Tehachapi COP, Series 1990, 8.20%, 11/01/20.............................. 2,702,125
2,325,000 Tehachapi USD, COP, Tompkins Elementary School Project, Pre-Refunded,
7.80%, 02/01/21........................................................ 2,700,627
Temecula Valley USD, COP,
1,195,000 Convertible, Capital Appreciation, Series A, FSA Insured, 7.25%,
09/01/25......................................................... 1,079,348
3,760,000 Financing Project, 6.125%, 09/01/23................................ 3,326,472
19,180,000 a,b,cTemecula Valley USD, Special Tax, CFD No. 89-3, 8.00%, 09/01/19.......... 11,891,600
2,150,000 Thousand Oaks COP, Thousand Oaks Public Financing Authority, 7.90%,
06/01/18............................................................... 2,189,388
Thousand Oaks SFHMR,
555,000 GNMA Mortgage Backed Securities, 7.45%, 09/01/10................... 563,886

800,000 GNMA Mortgage Backed Securities, 7.55%, 09/01/15................... 820,520
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Thousand Oaks SFHMR, (cont.)
$ 2,230,000 GNMA Mortgage Backed Securities, 7.625%, 03/01/23.................. $ 2,254,552
237,000 GNMA Mortgage Backed Securities, 8.00%, 09/01/23................... 298,620
Torrance Hospital Revenue, Refunding,
4,150,000 Little Co. of Mary Hospital, 6.87%, 07/01/15....................... 4,308,364
2,000,000 Torrance Memorial Hospital Medical Center, 6.75%, 01/01/12......... 2,031,980
7,500,000 Torrance RDA, Refunding, Tax Allocation, Industrial Redevelopment
Project, 7.75%, 09/01/13............................................... 8,061,975
dTrabuco Canyon Public Financing Authority, Special Tax Revenue,
Refunding,
13,775,000 Series A, FSA Insured, 6.00%, 10/01/10............................. 13,327,313
13,220,000 Series A, FSA Insured, 6.10%, 10/01/15............................. 12,730,331
3,040,000 Series C, FSA Insured, 6.00%, 07/01/12............................. 2,935,211
5,215,000 Series C, FSA Insured, 6.10%, 10/01/19............................. 5,007,182
Tracy Area Public Facilities Financing Agency, Special Tax,
6,100,000 CFD No. 87-1, Series A, 8.50%, 10/01/14............................ 6,433,426
5,000,000 CFD No. 87-1, Series C, 7.80%, 10/01/16............................ 5,155,150
2,050,000 Tracy COP, Public Facilities Corp., 8.30%, 03/01/18...................... 2,156,293
Travis USD, COP,
320,000 Foxboro Elementary School Construction Project, 6.00%, 09/01/99.... 316,643
335,000 Foxboro Elementary School Construction Project, 6.10%, 09/01/00.... 330,109
355,000 Foxboro Elementary School Construction Project, 6.20%, 09/01/01.... 349,199
170,000 Foxboro Elementary School Construction Project, 6.30%, 09/01/02.... 166,952
405,000 Foxboro Elementary School Construction Project, 6.40%, 09/01/03.... 394,944
430,000 Foxboro Elementary School Construction Project, 6.50%, 09/01/04.... 418,584
455,000 Foxboro Elementary School Construction Project, 6.60%, 09/01/05.... 442,215
490,000 Foxboro Elementary School Construction Project, 6.70%, 09/01/06.... 477,505
3,670,000 Foxboro Elementary School Construction Project, 7.00%, 09/01/12.... 3,516,227
2,665,000 Tri-Cities Municipal Water District, COP, Special District Lease Program,
Series T, 6.55%, 12/01/17.............................................. 2,614,472
6,895,000 Tri-City Hospital District Revenue, MBIA Insured, 7.50%, 02/01/17........ 7,659,793
59,000,000 Tri-Dam Power Authority Revenue, Hydroelectric, Sand Bar Project,
11.375%, 01/01/17...................................................... 59,000,000
Trinity County Public Utilities District, COP, Electric District
Facilities,
2,565,000 Refunding, 6.60%, 04/01/11......................................... 2,432,287
4,000,000 Refunding, 6.75%, 04/01/23......................................... 3,786,720
500,000 Truckee-Donner Public Utilities District, COP, Water System Improvement
Project, MBIA Insured, 6.75%, 11/15/21................................. 517,075
1,100,000 Tulare County COP, Financing Project, Series B, 6.875%, 11/15/12......... 1,085,711
3,560,000 Ukiah Electric Revenue, Refunding, Series A, Pre-Refunded, 8.00%,
06/01/03............................................................... 3,846,900

</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Union City Community RDAR, Tax Allocation, Community Redevelopment
Project,
$ 6,200,000 AMBAC Insured, 5.75%, 10/01/22..................................... $ 5,697,552
2,720,000 AMBAC Insured, 5.85%, 10/01/23..................................... 2,522,691
University of California Regents COP,
7,635,000 UCLA Central Chiller/Cogeneration Facilities, 5.40%, 11/01/10...... 6,919,677
4,750,000 UCLA Central Chiller/Cogeneration Facilities, 5.60%, 11/01/20...... 4,212,300
1,150,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 6.70%,
11/01/05......................................................... 1,264,299
1,000,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 6.75%,
11/01/06......................................................... 1,101,800
University of California Regents COP,
1,400,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 6.75%,
11/01/07......................................................... 1,542,520
1,000,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 7.00%,
11/01/13......................................................... 1,113,830
3,875,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 7.00%,
11/01/15......................................................... 4,316,091
15,945,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 7.00%,
11/01/18........................................................ 17,760,019
40,920,000 UCLA Central Chiller/Cogeneration Facilities, Pre-Refunded, 7.00%,
11/01/21........................................................ 45,577,924
University of California Revenues,
6,485,000 Multi Purpose Projects, Series 1989-B, AMBAC Insured, Pre-Refunded,
6.90%, 09/01/11.................................................. 7,193,032
5,820,000 Multi Purpose Projects, Series 1989-B, AMBAC Insured, Pre-Refunded,
6.90%, 09/01/12.................................................. 6,455,428
9,750,000 Multi Purpose Projects, Series 1989-B, AMBAC Insured, Pre-Refunded,
6.75%, 09/01/23.................................................. 10,745,865
6,995,000 Refunding, Housing Systems, Series A, MBIA Insured, 5.50%, 11/01/08 6,645,110
73,300,000 Refunding, Multi Purpose Projects, Series A, Pre-Refunded, 6.875%,
09/01/16......................................................... 81,982,385
5,750,000 Seismic Safety Project, Pre-Refunded, 7.30%, 09/01/20.............. 6,418,840
4,925,000 Series A, 5.70%, 09/01/14.......................................... 4,561,338
3,115,000 Series A, 5.75%, 09/01/18.......................................... 2,884,459
6,355,000 UCLA Medical Center, Pre-Refunded, 7.30%, 12/01/20................. 7,111,118
6,500,000 Upland Hospital Revenue, COP, San Antonio Community Hospital,
Pre-Refunded, 7.80%, 01/01/18.......................................... 7,389,980
4,440,000 Upland Housing Authority Revenue, Series 1990, Issue A, 7.85%, 07/01/20.. 4,641,487
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Upland Public Financing Authority Revenue, Refunding, Agency Loan,
$ 2,500,000 Series 1988-B, 8.10%, 12/01/08..................................... $ 2,714,825
10,645,000 Series 1988-B, 8.25%, 12/01/15..................................... 11,623,063
12,925,000 Vacaville COP, 9.40%, 10/01/15........................................... 14,652,814
75,880,000 Vacaville Public Financing Authority Revenue, Local Agency, 8.65%,
09/02/18............................................................... 78,566,152
5,400,000 Vacaville Public Financing Authority Revenue, Tax Allocation, Vacaville
Redevelopment Project, Pre-Refunded, 8.25%, 09/01/13................... 6,123,816
Vacaville, Special Tax, Nut Tree,
1,885,000 CFD No. 2, Series A, 8.25%, 09/01/10............................... 1,950,353
1,000,000 CFD No. 2, Series A, 8.20%, 09/01/15............................... 1,031,620
Val Verde School District, Special Tax,
2,855,000 CFD No. 87-1, 8.30%, 10/01/08...................................... 2,974,168
7,760,000 CFD No. 87-1, 8.375%, 10/01/13..................................... 8,101,440
Val Verde USD, COP,
2,785,000 Vista Verde Project, 6.95%, 06/01/21............................... 2,818,699
7,315,000 Thomas Rivera, Middle School, 6.50%, 06/01/22...................... 7,041,419
Val Verde USD, COP, Solano County Fairgrounds Drive, AD No. 65,..........
255,000 Phase I, 7.90%, 09/02/99........................................... 264,086
275,000 Phase I, 8.00%, 09/02/00........................................... 284,906
295,000 Phase I, 8.05%, 09/02/01........................................... 305,682
320,000 Phase I, 8.05%, 09/02/02........................................... 331,587
340,000 Phase I, 8.10%, 09/02/03........................................... 352,379
370,000 Phase I, 8.10%, 09/02/04........................................... 383,472
400,000 Phase I, 8.15%, 09/02/05........................................... 414,640
430,000 Phase I, 8.15%, 09/02/06........................................... 445,738
465,000 Phase I, 8.15%, 09/02/07........................................... 482,019
505,000 Phase I, 8.20%, 09/02/08........................................... 523,584
545,000 Phase I, 8.20%, 09/02/09........................................... 565,056
590,000 Phase I, 8.20%, 09/02/10........................................... 611,712
640,000 Phase I, 8.20%, 09/02/11........................................... 663,552
2,520,000 Vallejo Housing Authority Revenue, MF, First Nationwide Savings Program,
9.00%, 12/01/97........................................................ 2,568,157
2,485,000 Vallejo RDA, Tax Allocation, Waterfront Redevelopment Project, 7.90%,
05/01/19............................................................... 2,578,933
6,000,000 Vallejo Revenue, Golf Course Project, Series A, 7.90%, 06/01/17.......... 6,418,260
Vallejo USD, Special Tax Revenue,
2,300,000 CFD No. 2, 7.75%, 09/01/15......................................... 2,377,947
5,100,000 CFD No. 2, 8.125%, 09/01/16........................................ 5,409,315
5,100,000 Victor Valley UHSD, COP, 7.875%, 11/01/12................................ 5,376,879
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Victorville RDA, Tax Allocation,
$ 1,200,000 Bear Valley Road Redevelopment Project, 7.50%, 11/01/06............ $ 1,241,232
2,000,000 Bear Valley Road Redevelopment Project, 7.50%, 11/01/16............ 2,074,360
8,000,000 Victorville Special Tax, CFD No. 90-1, Series A, 8.30%, 09/01/16......... 8,146,400
Vista Joint Powers Financing Authority Revenue,
4,000,000 Series A, 7.45%, 01/01/09.......................................... 4,236,320
9,100,000 Series A, 7.50%, 01/01/16.......................................... 9,636,809
3,675,000 Series A, 7.625%, 02/01/20......................................... 3,895,169
Walnut Creek COP,
17,340,000 John Muir Medical Center, MBIA Insured, Pre-Refunded, 7.375%,
02/01/20......................................................... 19,117,177
2,790,000 Refunding, John Muir Medical Center, MBIA Insured, 5.00%, 02/15/07. 2,551,622
1,035,000 Refunding, John Muir Medical Center, MBIA Insured, 5.00%, 02/15/08. 937,565
810,000 Walnut Improvement Agency, RMR, Series A, 10.25%, 05/01/17............... 829,480
Walnut Improvement Agency, Tax Allocation, Walnut Improvement Project,
1,665,000 Series A, 8.00%, 09/01/18.......................................... 1,786,145
9,135,000 Series A, Pre-Refunded, 8.00%, 09/01/18............................ 10,468,253
8,285,000 Walnut Public Financing Authority Revenue, Refunding, Tax Allocation,
Improvement Project,MBIA Insured, 6.50%, 09/01/22...................... 8,402,978
1,745,000 Watsonville RDA, Tall Allocation, Watsonville Redevelopment Project,
6.30%, 08/01/06........................................................ 1,714,079
West Basin Municipal Water District, COP,
6,750,000 Water Reclamation Project, AMBAC Insured, Pre-Refunded, 6.85%,
08/01/16......................................................... 7,497,765
14,750,000 Water Reclamation Project, Pre-Refunded, 7.00%, 08/01/11........... 16,459,820
4,000,000 West & Center Basin Financing Authority Revenue, AMBAC Insured, 6.125%,
08/01/22............................................................... 3,881,960
7,750,000 West Covina COP, Refunding, Civic Center Complex, 6.875%, 09/01/14....... 8,004,045
23,000,000 West Covina RDA, Special Tax, CFD No. 1, 7.80%, 09/01/22................. 23,978,650
145,000 West Covina SFMR, 10.50%, 12/01/15....................................... 148,345
West Sacramento 1915 ACT,
360,000 Raleys Landing AD, 7.90%, 09/02/08................................. 372,827
630,000 Raleys Landing AD, 7.95%, 09/02/09................................. 652,573
835,000 Raleys Landing AD, 7.95%, 09/02/10................................. 864,918
900,000 Raleys Landing AD, 7.95%, 09/02/11................................. 932,247
970,000 Raleys Landing AD, 7.95%, 09/02/12................................. 1,004,755
1,045,000 Raleys Landing AD, 7.95%, 09/02/13................................. 1,082,442
6,455,000 Westminster RDAR, Refunding, Tax Allocation, Commercial Redevelopment
Project No. 1, Series A, 7.30%, 08/01/21............................... 6,651,619
5,550,000 Whittier Educational Facilities Revenue, Whittier College, Series A,
Pre-Refunded, 7.00%, 12/01/09.......................................... 5,927,900
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 5,095,000 Whittier Special Tax, CFD N0. 89-1, 7.75%, 09/01/19...................... $ 5,275,210
William S. Hart Union High School District, Special Tax,
1,210,000 CFD No. 87-1, 7.75%, 09/01/14...................................... 1,226,650
3,225,000 CFD No. 87-1, 8.10%, 09/01/18...................................... 3,274,536
3,000,000 Wilsona USD, COP, Ameri-Cal Improvement Corp., 8.50%, 06/01/07........... 3,015,510
2,895,000 Woodland ID, East Main St., Series 90-1, 7.90%, 09/02/15................. 3,000,031
Yucaipa Public Finance Authority Revenue, Public Improvement,
20,265,000 Series 1991, 7.50%, 09/02/01....................................... 20,655,912
21,990,000 Series 1991, 7.75%, 09/02/06....................................... 22,510,943
14,775,000 Yucaipa-Sweetwater School Facilities Financing Authority Revenue,
Special Tax, Sweetwater Project, 8.00%, 09/01/15....................... 15,061,783
---------------
TOTAL BONDS (COST $12,192,985,637)................................ 12,756,022,519
---------------
eZERO COUPON/STEP-UP BONDS 3.5%
Adelanto Improvement Agency, Refunding, Tax Allocation,..................
900,000 Series B, FGIC Insured, (original accretion rate 4.50%), 0.00%,
12/01/95......................................................... 837,864
840,000 Series B, FGIC Insured, (original accretion rate 4.90%), 0.00%,
12/01/96......................................................... 743,946
115,000 Series B, FGIC Insured, (original accretion rate 5.70%), 0.00%,
12/01/99......................................................... 85,869
155,000 Series B, FGIC Insured, (original accretion rate 5.90%), 0.00%,
12/01/00......................................................... 108,839
145,000 Series B, FGIC Insured, (original accretion rate 6.10%), 0.00%,
12/01/01......................................................... 95,472
175,000 Series B, FGIC Insured, (original accretion rate 6.20%), 0.00%,
12/01/02......................................................... 108,183
235,000 Series B, FGIC Insured, (original accretion rate 6.25%), 0.00%,
12/01/03......................................................... 136,130
290,000 Series B, FGIC Insured, (original accretion rate 6.30%), 0.00%,
12/01/04......................................................... 157,116
370,000 Series B, FGIC Insured, (original accretion rate 6.40%), 0.00%,
12/01/05......................................................... 187,116
270,000 Series B, FGIC Insured, (original accretion rate 6.45%), 0.00%,
12/01/06......................................................... 127,208
465,000 Series B, FGIC Insured, (original accretion rate 6.50%), 0.00%,
12/01/07......................................................... 203,707
540,000 Series B, FGIC Insured, (original accretion rate 6.60%), 0.00%,
12/01/08......................................................... 221,108
540,000 Series B, FGIC Insured, (original accretion rate 6.70%), 0.00%,
12/01/09......................................................... 205,519
350,000 Azusa RDA, SFRMR, Series A, GNMA Mortgage Backed Securities, zero
coupon (original accretion rate 9.875%) to 12/01/94, 9.875% thereafter,
12/01/18............................................................... 337,162
Baldwin Park RDA, Refunding, Tax Allocation, San Gabriel,
540,000 Series A, Pre-Refunded, (original accretion rate 7.50%), 0.00%,
02/01/99......................................................... 425,887
550,000 Series A, Pre-Refunded, (original accretion rate 7.60%), 0.00%,
02/01/00......................................................... 401,814
560,000 Series A, Pre-Refunded, (original accretion rate 7.70%), 0.00%,
02/01/01......................................................... 378,252
565,000 Series A, Pre-Refunded, (original accretion rate 7.75%), 0.00%,
02/01/02......................................................... 352,865
570,000 Series A, Pre-Refunded, (original accretion rate 7.80%), 0.00%,
02/01/03......................................................... 329,107
575,000 Series A, Pre-Refunded, (original accretion rate 7.85%), 0.00%,
02/01/04......................................................... 306,504
585,000 Series A, Pre-Refunded, (original accretion rate 7.90%), 0.00%,
02/01/05......................................................... 287,615
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
Burton Elementary School District, COP, Loan Acquisition,
Capital Appreciation,
$ 830,000 Series A, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/98, 6.60% thereafter, 09/01/27.......................... $ 634,776
1,315,000 Series B, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/00, 6.60% thereafter, 09/01/27.......................... 884,075
13,970,000 California Health Facilities Financing Authority Revenue, Kaiser
Permanente, Series A, (original accretion rate 7.15%), 0.00%,10/01/11.. 4,551,007
California HFAR,
1,620,000 Capital Appreciation, Home Mortgage, Series 1985-A, (original
accretion rate 10.989%), 0.00%, 08/01/16......................... 148,765
121,290,000 Capital Appreciation, Home Mortgage, Series 1990-A, (original
accretion rate 7.90%), 0.00%, 08/01/23.......................... 13,059,294
37,580,000 Home Mortgage, Series 1991-C, (original accretion rate 7.80%),
0.00%, 08/01/21.................................................. 4,706,519
10,720,000 Home Ownership Mortgage, Series 1985-A, zero coupon (original
accretion rate 9.875%) to 08/01/98, 9.875% thereafter, 08/01/17.. 7,072,949
California Public School District, Financing Authority Lease Revenue,
Los Banos School,
1,980,000 Series A, FSA Insured, zero coupon (original accretion rate 6.20%)
to 10/01/00, 6.20% thereafter, 10/01/23.......................... 1,282,486
10,035,000 Series B, FSA Insured, zero coupon (original accretion rate 6.20%)
to 10/01/00, 6.20% thereafter, 10/01/23.......................... 6,499,870
California State, GO,
7,500,000 Principal Eagles II, Series 3, (original accretion rate 7.15%),
0.00%, 03/01/09.................................................. 2,972,475
10,000,000 Principal Eagles II, Series 4, (original accretion rate 6.50%),
0.00%, 06/01/06.................................................. 4,893,900
5,000,000 Principal Eagles II, Series 6, (original accretion rate 6.50%),
0.00%, 03/01/09.................................................. 1,981,650
9,000,000 Principal M-Raes, Series 8, (original accretion rate 7.20%),
0.00%, 04/01/09.................................................. 3,548,610
California Statewide CDA Revenue, COP, Refunding, Insured Hospital,
6,450,000 Triad Health Care, (original accretion rate 7.00%), 0.00%,
08/01/09......................................................... 2,164,040
6,745,000 Triad Health Care, (original accretion rate 7.00%), 0.00%,
08/01/10......................................................... 2,107,273
3,115,000 Triad Health Care, (original accretion rate 7.00%), 0.00%,
08/01/11......................................................... 906,184
10,035,000 Center USD, COP, School Building Program, FSA Insured, zero coupon
(original accretion rate 6.00%) to 01/01/99, 6.00%, thereafter,
01/01/24............................................................... 7,283,604
Chino USD, COP, Land Acquisition,
2,250,000 dSeries A, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/99, 6.60% thereafter, 09/01/14.......................... 1,585,778
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
Chino USD, COP, Land Acquisition, (cont.)
$ 11,855,000 dSeries A, FSA Insured, zero coupon (original accretion rate 6.70%)
to 09/01/99, 6.70% thereafter, 09/01/29.......................... $ 8,311,659
2,810,000 dSeries B, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/02, 6.60% thereafter, 09/01/14.......................... 1,618,982
8,485,000 dSeries B, FSA Insured, zero coupon (original accretion rate 6.70%)
to 09/01/02, 6.70% thereafter, 09/01/29.......................... 4,849,093
2,710,000 Series C, BIG Insured, zero coupon (original accretion rate 7.45%)
to 09/01/94, 7.45% thereafter, 09/01/24.......................... 2,643,307
7,980,000 Series D, BIG Insured, zero coupon (original accretion rate 7.45%)
to 09/01/95, 7.45% thereafter, 09/01/24.......................... 7,312,553
525,000 Series E, BIG Insured, zero coupon (original accretion rate 7.50%)
to 09/01/96, 7.50% thereafter, 09/01/24.......................... 451,936
6,810,000 Contra Costa County, COP, Merrithew Memorial Hospital, (original
accretion rate 7.05%), 0.00%, 11/01/15.................................. 1,671,923
Contra Costa County Home Mortgage Finance Authority, HMR,
5,890,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.05%), 0.00%,
09/01/17......................................................... 872,015
6,275,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17......................................................... 1,054,075
7,135,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17......................................................... 1,147,736
7,700,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17.................................................... .... 1,261,029
8,095,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17......................................................... 1,245,820
8,615,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17......................................................... 1,350,746
9,635,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.10%), 0.00%,
09/01/17......................................................... 1,444,960
10,770,000 MBIA Insured, Pre-Refunded, (original accretion rate 7.05%), 0.00%,
09/01/17......................................................... 1,553,034
Contra Costa School Financing Authority Revenue,
1,785,000 Antioch USD Community, Capital Appreciation, Series B, (original
accretion rate 7.30%), 0.00%, 09/01/07........................... 783,633
1,000,000 Vista USD, Capital Appreciation, Series A, FSA Insured, (original
accretion rate 6.50%), 0.00%, 09/01/03........................... 551,710
3,820,000 Vista USD, Capital Appreciation, Series A, FSA Insured, (original
accretion rate 7.00%), 0.00%, 09/01/17........................... 780,770
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
$ 960,000 Escondido-Chula Vista HFA, HMR, Series 1985-A, AMBAC Insured, zero
coupon (original accretion rate 9.50%) to 12/01/96, 9.50% thereafter,
06/01/18............................................................... $ 750,864
Fairfield-Suisun USD, Special Tax,
445,000 CFD No. 1, (original accretion rate 9.25%), 0.00%, 06/01/97........ 370,240
390,000 CFD No. 1, Series A, (original accretion rate 8.75%), 0.00%,
06/01/95......................................................... 366,748
415,000 CFD No. 1, Series A, (original accretion rate 9.00%), 0.00%,
06/01/96........................................................ 367,972
4,325,000 CFD No. 1, zero coupon (original accretion rate 10.50%) to
12/01/97, 10.50% thereafter, 12/01/23............................ 3,684,684
1,675,000 Fontana RDA, SFRMR, AMBAC Insured, zero coupon (original accretion rate
9.50%) to 12/01/96, 9.50% thereafter, 06/01/18......................... 1,389,379
7,175,000 Grossmont UHSD, COP, Capital Appreciation, FSA Insured, zero coupon
(original accretion rate 7.375%) to 09/01/96,7.375% thereafter,
09/01/25............................................................... 6,052,184
12,260,000 Kern County Housing Authority, RRMR, Series 1985-A, (original accretion
rate 10.875%), 0.00%, 03/01/17......................................... 1,148,026
26,750,000 Los Angeles Convention & Exhibition Center Authority, COP, Series 1985,
ETM 12/01/05, (original accretion rate 6.85%), 0.00%, 12/01/05......... 13,821,993
Los Angeles County Transportation Commission Sales Tax Revenue,
Refunding,
4,895,000 Capital Appreciation, Series A, (original accretion rate 7.25%),
0.00%, 07/01/03.................................................. 2,845,120
4,895,000 Capital Appreciation, Series A, MBIA Insured, (original accretion
rate 7.30%), 0.00%, 07/01/04..................................... 2,625,874
4,145,000 Los Angeles HMR, Series 1986-A, GNMA Mortgage Backed Securities,
(original accretion rate 8.50%), 0.00%, 08/25/16....................... 680,236
38,500,000 Monterey Park CRDA, Tax Allocation Project No. 1, Pre-Refunded, (original
accretion rate 8.20%), 0.00%, 05/01/14................................. 9,114,875
Moreno Valley USD, COP,
470,000 Land Acquisition, Series E, FSA Insured, zero coupon (original
accretion rate 6.70%) to 09/01/96, 6.70% thereafter, 09/01/11.... 404,712
5,470,000 Land Acquisition, Series E, FSA Insured, zero coupon (original
accretion rate 6.75%) to 09/01/96, 6.75% thereafter, 09/01/27.... 4,724,548
8,430,000 Land Acquisition, Series F, FSA Insured, zero coupon (original
accretion rate 6.75%) to 09/01/98, 6.75% thereafter, 09/01/27.... 6,382,522
Orange County COP,
3,280,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.50%), 0.00%, 06/01/01..................................... 2,216,985
3,280,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.55%), 0.00%, 06/01/02...................................... 2,056,626
3,280,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.60%), 0.00%, 06/01/03..................................... 1,906,041
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
Orange County COP, (cont.)
$ 3,280,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.60%), 0.00%, 06/01/04..................................... $ 1,769,035
4,715,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.70%), 0.00%, 06/01/10..................................... 1,608,287
4,715,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.70%), 0.00%, 06/01/11..................................... 1,491,307
4,715,000 Juvenile Justice Center Project, Pre-Refunded, (original accretion
rate 7.70%), 0.00%, 06/01/12..................................... 1,382,768
4,090,000 Pasadena Special Tax, Community Facilities District No. 1, Civic Center
West, (original accretion rate 7.70%), 0.00%, 12/01/17................. 819,718
17,225,000 Perris SFMR, Series A, GNMA Mortgage Backed Securities, ETM 06/01/23,
(original accretion rate 8.705%), 0.00%, 06/01/23...................... 2,785,110
510,000 Placer Hills Union Elementary School District, COP, Series B, zero coupon
(original accretion rate 7.125%) to 03/01/00, 7.125% thereafter,
03/01/09.............................................................. 321,983
2,095,000 Placer Union High School District, COP, Series A, zero coupon (original
accretion rate 7.125%) to 03/01/00, 7.125% thereafter, 03/01/19........ 1,305,436
Port of Oakland, Revenue,
10,000,000 Series A, BIG Insured, (original accretion rate 7.70%), 0.00%,
11/01/19......................................................... 1,654,000
36,000,000 Series B, BIG Insured, (original accretion rate 7.45%), 0.00%,
11/01/19......................................................... 5,933,880
1,350,000 Porterville Union High School District, COP, Convertible, Capital
Appreciation, Land Acquisition, Series A, FSA Insured, zero coupon
(original accretion rate 6.60%) to 09/01/97, 6.60% thereafter, 09/01/27. 1,101,060
Rancho Water District Financing Authority Revenue,
1,250,000 AMBAC Insured, (original accretion rate 6.80%), 0.00%, 08/15/08.... 517,475
1,250,000 AMBAC Insured, (original accretion rate 6.80%), 0.00%, 08/15/09.... 476,600
8,605,000 AMBAC Insured, (original accretion rate 6.90%), 0.00%, 08/15/16.... 2,024,240
13,605,000 AMBAC Insured, (original accretion rate 6.90%), 0.00%, 08/15/17.... 2,966,026
13,605,000 AMBAC Insured, (original accretion rate 6.90%), 0.00%, 08/15/18.... 2,759,230
Redlands USD, COP,
750,000 Series A, FSA Insured, zero coupon (original accretion rate 6.15%)
to 09/01/96, 6.15% thereafter, 09/01/11.......................... 637,050
4,310,000 Series A, FSA Insured, zero coupon (original accretion rate 6.25%)
to 09/01/96, 6.25% thereafter, 09/01/27.......................... 3,625,572
Rialto USD, COP, Land Acquisition, Convertible, Capital Appreciation,
1,855,000 Series A, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/98, 6.60% thereafter, 09/01/11.......................... 1,391,250
6,665,000 Series A, FSA Insured, zero coupon (original accretion rate 6.70%)
to 09/01/98, 6.70% thereafter, 09/01/27.......................... 4,216,146
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
Rialto USD, COP, Land Acquisition, Convertible, Capital Appreciation,
(cont.)
$ 1,440,000 Series B, FSA Insured, zero coupon (original accretion rate 6.60%)
to 09/01/00, 6.60% thereafter, 09/01/11.......................... $ 975,571
5,095,000 Series B, FSA Insured, zero coupon (original accretion rate 6.70%)
to 09/01/00, 6.70% thereafter, 09/01/27.......................... 3,435,406
1,250,000 Riverside County Board of Education, COP, Financing Projects, Series A,
(original accretion rate 6.75%), 0.00%, 11/01/05....................... 597,238
Riverside County SFMR,
20,220,000 Series 1987-A, GNMA Mortgage Backed Securities, ETM 09/01/14,
(original accretion rate 8.50%), 0.00%, 09/01/14................. 5,377,307
25,055,000 Series 1988-A, GNMA Mortgage Backed Securities, (original accretion
rate 8.55%), 0.00%, 11/01/20...................................... 4,948,613
26,160,000 Series 1988-B, GNMA Mortgage Backed Securities, ETM 12/01/13,
(original accretion rate 8.75%), 0.00%, 06/01/23................. 3,831,917
6,500,000 Riverside USD, COP, Series B, zero coupon (original accretion rate
7.375%) to 09/01/98, 7.375% thereafter, 09/01/26.................. 4,535,700
Rocklin, USD,
3,660,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/08......................................................... 1,483,874
4,100,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/09......................................................... 1,577,598
4,595,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/10......................................................... 1,648,594
5,145,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/11......................................................... 1,719,510
5,760,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/12......................................................... 1,791,475
33,960,000 Series A, FGIC Insured, (original accretion rate 7.10%), 0.00%,
09/01/16......................................................... 8,017,616
Roseville City School District,
3,115,000 Series A, (original accretion rate 6.50%), 0.00%, 08/01/11......... 1,020,536
30,770,000 Series A, (original accretion rate 6.60%), 0.00%, 08/01/17......... 6,770,939
Roseville Joint, Union High School District,
1,820,000 Series A, (original accretion rate 6.50%), 0.00%, 08/01/10......... 635,963
1,965,000 Series A, (original accretion rate 6.50%), 0.00%, 08/01/11......... 643,773
18,155,000 Series A, (original accretion rate 6.60%), 0.00%, 08/01/17......... 3,995,008
San Bernardino County COP,
3,270,000 West Valley Detention Center Project, Pre-Refunded, (original
accretion rate 7.30%), 0.00%, 11/01/00........................... 2,329,254
3,270,000 West Valley Detention Center Project, Pre-Refunded, (original
accretion rate 7.35%), 0.00%, 11/01/01........................... 2,164,969
3,170,000 West Valley Detention Center Project, Pre-Refunded, (original
accretion rate 7.40%), 0.00%, 11/01/02........................... 1,948,821
3,250,000 West Valley Detention Center Project, Pre-Refunded, (original
accretion rate 7.45%), 0.00%, 11/01/03........................... 1,853,508
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
San Bernardino County COP, (cont.)
$ 3,135,000 West Valley Detention Center Project, Pre-Refunded, (original
accretion rate 7.50%), 0.00%, 11/01/04........................... $ 1,657,004
8,195,000 San Dieguito Union High School District, COP, Junior High School Project,
Series A, FSA Insured, zero coupon (original accretion rate 5.95%) to
04/01/00, 5.95% thereafter, 04/01/23................................... 5,253,569
San Francisco City & County RDA Lease Revenue, George R. Moscone,
12,820,000 Capital Appreciation, (original accretion rate 6.90%), 0.00%,
07/01/05......................................................... 6,284,364
11,320,000 Capital Appreciation, (original accretion rate 6.95%), 0.00%,
07/01/06......................................................... 5,152,524
4,570,000 Capital Appreciation, (original accretion rate 6.95%), 0.00%,
07/01/07......................................................... 1,938,000
7,785,000 Capital Appreciation, (original accretion rate 6.95%), 0.00%,
07/01/08......................................................... 3,072,895
16,300,000 Capital Appreciation, Pre-Refunded, (original accretion rate
8.50%), 0.00%, 07/01/16.......................................... 3,622,512
16,300,000 Capital Appreciation, Pre-Refunded, (original accretion rate
8.50%), 0.00%, 07/01/17.......................................... 3,344,760
16,300,000 Capital Appreciation, Pre-Refunded, (original accretion rate
8.50%), 0.00%, 07/01/18.......................................... 3,087,546
46,000,000 Capital Appreciation, Pre-Refunded, zero coupon (original
accretion rate 8.50%) to 07/01/02, 8.50% thereafter, 07/01/14.... 31,856,840
6,540,000 San Francisco City & County SFMR, Series 1985, (original accretion rate
10.375%), 0.00%, 10/01/18.............................................. 548,444
1,590,000 San Jacinto USD, COP, Series 1991-B, zero coupon (original accretion rate
9.24%) to 09/01/96, 6.75% thereafter, 09/01/26......................... 1,387,784
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
33,545,000 Senior Lien, (original accretion rate 7.75%), 0.00%, 01/01/28...... 2,498,432
37,050,000 Senior Lien, (original accretion rate 7.75%), 0.00%, 01/01/29...... 2,554,968
20,935,000 dSenior Lien, zero coupon (original accretion rate 7.60%) to
01/01/02, 7.60% thereafter, 01/01/11............................. 11,760,864
25,215,000 Senior Lien, zero coupon (original accretion rate 7.65%) to
01/01/02, 7.65% thereafter, 01/01/12............................. 14,207,140
27,350,000 Senior Lien, zero coupon (original accretion rate 7.65%) to
01/01/02, 7.65% thereafter, 01/01/13............................. 15,307,521
7,470,000 Senior Lien, zero coupon (original accretion rate 7.70%) to
01/01/02, 7.70% thereafter, 01/01/14............................. 3,898,294
60,155,000 Senior Lien, zero coupon (original accretion rate 7.70%) to
01/01/02, 7.70% thereafter, 01/01/15............................. 31,491,143
305,000 Santa Ana HMR, Series 1985-A, FGIC Insured, zero coupon (original
accretion rate 9.50%) to 06/01/98, 9.50% thereafter, 06/01/12.......... 220,039
26,375,000 Santa Cruz County Housing Authority, MFHR, Dominican Oaks, Series 1987,
GNMA Collateralized, (original accretion rate 9.00%), 0.00%, 06/20/29.. 1,219,844
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON/STEP-UP BONDS (CONT.)
$ 9,360,000 Simi Valley SFRMR, Series 1990-A, (original accretion rate 8.00%), 0.00%,
09/01/25............................................................... $ 797,378
Southern California Public Power Authority Revenue,
Refunding,
12,000,000 Series A, AMBAC Insured, (original accretion rate 7.25%), 0.00%,
07/01/11......................................................... 3,992,400
16,890,000 Series A, AMBAC Insured, (original accretion rate 7.25%), 0.00%,
07/01/12......................................................... 5,271,538
16,000,000 Series A, AMBAC Insured, (original accretion rate 7.25%), 0.00%,
07/01/13......................................................... 4,684,800
103,885,000 Stockton East Water District, COP, Refunding, Series 1990-A, AMBAC
Insured, (original accretion rate 7.00%), 0.00%, 04/01/16.............. 23,140,384
3,410,000 Temecula Valley USD, COP, Convertible, Capital Appreciation, Series B,
FSA Insured, zero coupon (original accretion rate 7.375%) to 09/01/96,
7.375% thereafter, 09/01/25............................................ 2,472,830
---------------
8,380,000 Vista USD, COP, MBIA Insured, Pre-Refunded, (original accretion rate
7.25%), 0.00%, 09/01/11.................................................. 2,594,029
---------------
TOTAL ZERO COUPON BONDS (COST $437,537,975)........................ 465,542,357
---------------
TOTAL LONG TERM INVESTMENTS (COST $12,630,523,612)................. 13,221,564,876
---------------
SHORT TERM INVESTMENTS .5%
Adelanto Improvement Agency, Tax Allocation,
790,000 Adelanto Improvement Project, 8.25%, 08/01/94...................... 798,967
90,000 Adelanto Improvement Project, Series 1990, 8.00%, 08/01/94......... 91,091
720,000 eRefunding, Series B, FGIC Insured, (original accretion rate
4.00%), 0.00%, 12/01/94.......................................... 703,159
4,900,000 fCalifornia Health Facilities Financing Authority Revenue, Refunding,
St. Joseph Health System, Series A, Daily VRDN and Put 2.75%, 07/01/13. 4,900,000
California PCFA, PCR, Refunding,
1,800,000 fShell Oil Co. Project, Series A, Daily VRDN and Put, 2.75%,
10/01/09......................................................... 1,800,000
1,700,000 fShell Oil Co. Project, Series A, Daily VRDN and Put, 2.75%,
10/01/11......................................................... 1,700,000
27,000,000 California State RAN, Warrants, Series B, 3.50%, 07/26/94................ 27,047,520
355,000 Coalinga Public Financing Authority Revenue, Series A, MBIA Insured,
3.00%, 08/01/94.......................................................... 354,748
10,000,000 Corona RDA, Sales & Use Tax Revenue Notes, Series G, 7.50%, 11/01/94..... 10,148,500
365,000 eFairfield-Suisun USD, Special Tax, CFD No. 1, Series A, (original
accretion rate 8.50%), 0.00%, 06/01/94................................... 362,237
210,000 Fresno County COP, American Avenue Landfill Project, 7.20%, 11/01/94..... 211,804
Irvine Ranch Water District,
2,300,000 fConsolidates Bonds, Series B, Daily VRDN and Put, 2.80%, 10/01/05.. 2,300,000
1,200,000 fConsolidates District, Nos. 105, 250, 290, Daily VRDN and Put,
2.80%, 08/01/16.................................................... 1,200,000
900,000 fRefunding, Series B, Daily VRDN and Put, 3.25%, 08/01/09........... 900,000
595,000 Irwindale IDR, B & B Partnership Project, 9.00%, 12/01/94................ 598,665
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS (CONT.)
$ 3,900,000 Los Angeles County TRAN, Series A, 3.00%, 06/30/94....................... $ 3,900,740
1,300,000 fOrange County COP, Office & Courthouse Project, Weekly VRDN and Put,
2.80%, 12/01/15........................................................ 1,300,000
2,000,000 Orange County Purchaser Certificates, Master Lease, Series 1990, 7.00%,
09/01/94............................................................... 2,019,720
65,000 San Ramon COP, San Ramon Capital Improvement Projects, Series 1993,
4.00%, 03/01/95........................................................ 64,557
110,000 San Ramon Public Finance Authority, Tax Allocation, Series A, 6.90%,
02/01/95............................................................... 111,988
200,000 San Ramon Valley Fire Protection District, COP, Refunding, Financing
Corp., 3.25%, 07/01/94................................................. 199,462
---------------
TOTAL SHORT TERM INVESTMENTS (COST $60,519,721).................... 60,713,158
---------------
TOTAL INVESTMENTS (COST $12,691,043,333) 99.5%................ 13,282,278,034
OTHER ASSETS AND LIABILITIES, NET .5%......................... 63,142,303
---------------
NET ASSETS 100.0%............................................. $13,345,420,337
===============
</TABLE>

<TABLE>
<S> <C>
At March 31, 1994, the net unrealized appreciation based on the cost of
investments for income tax purposes of $ 12,691,222,082 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost......................... $ 765,961,622
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value......................... (174,905,670)
---------------
Net unrealized appreciation........................................... $ 591,055,952
===============
</TABLE>

aNon-income producing.

bSee Note 6 regarding defaulted securities.

cSee Note 1a regarding Board of Directors priced securities.

dSee Note 1 regarding securities purchased on a when-issued basis.

eZero coupon/step-up bonds. The current effective yield may vary. The original
accretion rate by security, as reported, will remain constant.

fVariable rate demand notes (VRDN's) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MARCH 31, 1994 (CONT.)

PORTFOLIO ABBREVIATIONS:
<TABLE>
<S> <C>
1915 ACT -Improvement Bond Act of 1915
ABAG -The Association of Bay Area Governments
AD -Assessment District
AMBAC -American Municipal Bond Assurance Corp.
BIG -Bond Investors Guaranty Insurance Co.
CDA -Community Development Agency/Authority
CFD -Community Facilities District
CGIC -Capital Guaranty Insurance Co.
COP -Certificate of Participation
CRDA -Community Redevelopment Agency/Authority
CSAC -County Supervisors Association of California
EDR -Economic Development Revenue
ETM -Escrow to Maturing
FGIC -Financial Guaranty Insurance Corp.
FHA -Federal Housing Agency/Authority
FSA -Financial Security Assistance
GNMA -Government National Mortgage Association
GO -General Obligation
HFA -Housing Finance Agency/Authority
HFAR -Housing Finance Agency Revenue
HFR -Home Financial Revenue
HMR -Home Mortgage Revenue
ID -Improvement District
IDA -Industrial Development Agency/Authority
IDBI -Industrial Development Bond Insurance
IDR -Industrial Development Revenue
MBIA -Municipal Bond Investors Assurance Corp.
MF -Multi-Family
MFHR -Multi-Family Housing Revenue
MFMR -Multi-Family Mortgage Revenue
MFR -Multi-Family Revenue
MUD -Municipal Utility District
PBA -Public Building Authority
PCFA -Pollution Control Financing Authority
PCR -Pollution Control Revenue
RAN -Revenue Anticipation Notes
RDA -Redevelopment Agency
RDAR -Redevelopment Agency Revenue
RMR -Residential Mortgage Revenue
RRMR -Residential Rental Mortgage Revenue
SF -Single Family
SFHMR -Single Family Home Mortgage Revenue
SFMR -Single Family Mortgage Revenue
SFR -Single Family Revenue
SFRMR -Single Family Residential Mortgage Revenue
TRAN -Tax Revenue Anticipation Notes
UCLA -University of California, Los Angeles
UHSD -Unified High School District
USD -Unified School District
USF & G -United States Fidelity & Guaranty Co.
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1994
<TABLE>
<S> <C>
Assets:
Investment in securities, at value
(identified cost $12,691,043,333) $13,282,278,034
Cash 2,366,656
Receivables:
Interest 220,700,722
Investment securities sold 7,099,500
Capital shares sold 15,025,347
---------------
Total assets 13,527,470,259
---------------

Liabilities:
Payables:
Investment securities purchased:
Regular delivery 40,952,603
When-issued basis (Note 1) 118,832,897
Capital shares repurchased 16,781,958
Management fees 4,984,112
Shareholder servicing costs 115,001
Accrued expenses and other
liabilities 383,351
---------------
Total liabilities 182,049,922
---------------
Net assets, at value $13,345,420,337
===============

Net assets consist of:
Undistributed net investment income $ 16,578,607
Unrealized appreciation on
investments 591,234,701
Accumulated net realized loss (25,406,070)
Capital shares 18,732,905
Additional paid-in capital 12,744,280,194
---------------
Net assets, at value $13,345,420,337
===============

Computation of net asset value and
offering price per share:
Net asset value and redemption
price per share
($13,345,420,337(/)1,873,290,539) $7.12
===============

Maximum offering price+
(100/96 of $7.12) $7.42
</TABLE> ===============

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest (Note 1) $ 931,121,151
Expenses:
Management fees (Note 5) $62,407,624
Shareholder servicing costs
(Note 5) 1,342,192
Reports to shareholders 2,008,359
Custodian fees 1,522,022
Professional fees (Note 5) 348,854
Directors' fees and expenses 86,400
Other 702,739
---------
Total expenses 68,418,190
-------------
Net investment
income (Note 8) 862,702,961
-------------
Realized and
unrealized gain (loss)
on investments:
Net realized gain 4,885,643
Net unrealized
depreciation
during the year (424,924,120)
-------------
Net realized and unrealized
loss on investments (420,038,477)
-------------
Net increase in net assets
resulting from operations $ 442,664,484
=============
</TABLE>

+Effective July 1, 1994, the maximum offering price sales commission will be
increased to 4.25%. 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 CALIFORNIA TAX-FREE INCOME FUND, INC.
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income................................................... $ 862,702,961 $ 857,419,466
Net realized gain from security transactions............................ 4,885,643 43,702,335
Net unrealized appreciation (depreciation) during the year.............. (424,924,120) 491,620,473
--------------- ---------------
Net increase in net assets resulting from operations................ 442,664,484 1,392,742,274
Distributions to shareholders:
From undistributed net investment income (Note 8)........................ (857,116,079) (856,826,239)
From realized capital gain............................................... (34,681,662) --
Increase in net assets from capital share transactions (Note 2)........... 253,110,325 701,719,955
--------------- ---------------
Net increase (decrease) in net assets............................... (196,022,932) 1,237,635,990
Net assets:
Beginning of year........................................................ 13,541,443,269 12,303,807,279
=============== ===============

End of year (including undistributed net investment income of
$16,578,607 - 1994 and $10,991,725 - 1993).............................. $13,345,420,337 $13,541,443,269
=============== ===============
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin California Tax-Free Income Fund, Inc. (the Fund) is an open-end,
diversified management investment company (mutual fund), registered under the
Investment Company Act of 1940 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:

Tax-free bonds generally trade in the over-the-counter market rather than on a
national securities exchange. Often there are no transactions in a particular
security on any given day. In the absence of a recorded sale or reported bid
and asked prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities, and
various relationships between securities are used to determine the value of the
security. The Fund may also utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Directors. Short-term securities and
similar investments with remaining maturities of 60 days or less are valued at
amortized cost, which approximates value.

B. INCOME TAXES:

The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. 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:

Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount and premium, if
any, are amortized as required by the Internal Revenue Code.

Distributions from undistributed net investment income, and net realized
capital gains from security transactions, to the extent 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 differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities - see Note 6.

Net realized capital gains differs for financial statement and tax purposes
primarily due to differing treatments of wash sale transactions.

E. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS:

The fund may trade securities on a when-issued or delayed delivery basis, with
payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of acquiring
such securities, they may sell such securities before the settlement date. The
Fund has set aside sufficient investment securities as collateral for these
purchase commitments. These securities are identified on the accompanying
Statement of Investments in Securities and Net Assets.

100

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)

2. CAPITAL STOCK

At March 31, 1994 there were 10,000,000,000 shares of $.01 par value capital
stock authorized and paid-in capital aggregated $12,763,013,099. Transactions
in the Fund's shares for the years ended March 31, 1994 and 1993 were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------------------------------
1994 1993
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold................................. 180,128,610 $ 1,335,542,977 223,459,144 $1,610,358,405
Shares issued in reinvestment of distribution 41,609,415 307,666,874 40,366,417 290,128,848
Shares redeemed............................. (146,910,079) (1,087,527,077) (136,776,800) (985,065,625)
Changes from exercise of the exchange
privilege:
Shares sold............................... 70,846,305 523,666,151 58,488,454 419,653,393
Shares redeemed........................... (111,663,949) (826,238,600) (87,763,855) (633,355,066)
------------ --------------- ------------ --------------
Net increase................................ 34,010,302 $ 253,110,325 97,773,360 $ 701,719,955
============ =============== ============ ==============
</TABLE>

3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

For tax purposes, the Fund has a deferred capital loss of $25,227,321 deemed to
be incurred on the first day of the following fiscal year.

For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at
March 31, 1994 by $178,749.

4. PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended March 31, 1994 aggregated $2,781,520,877 and
$2,476,683,977, respectively.

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of an 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 at 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% of net assets in excess of $100 million to $250 million,
45/100 of 1% of net assets in excess of $250 million to $10 billion, 44/100 of
1% of net assets in excess of $10 billion to $12.5 billion, 42/100 of 1% of net
assets in excess of $12.5 billion to $15 billion and 40/100 of 1% of net assets
in excess of $15 billion. Such management fees incurred by the Fund aggregated
$62,407,624 for the year ended March 31, 1994.

The terms of the management agreement provide that annual aggregate 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 March 31, 1994.

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 March 31, 1994 totalling $45,850,292 of
which $41,499,462 was subsequently 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.

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FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)

Under the terms of a shareholder services 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 March 31, 1994
were $1,342,192 of which $1,246,415 was paid to Franklin/Templeton Investor
Services, Inc.

Legal fees and expenses of $51,226 were incurred to a law firm in which Brian
E. Lorenz, Secretary of the Fund, is a partner.

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.

6. CREDIT RISK AND DEFAULTED SECURITIES

Although the Fund has a diversified investment portfolio, all of its
investments are in the securities of issuers in California. Such concentration
may subject the Fund to economic changes occurring within that state.

Although the Fund has a diversified portfolio, the Fund has .5% of its
portfolio invested in lower rated and comparable quality unrated high yield
securities. Investments in higher yield securities are accompanied by a greater
degree of credit risk and such lower quality securities tend to be more
sensitive to economic conditions than higher rated securities.

The risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities, because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. At March
31, 1994 the Fund held ten defaulted securities issued by four separate issuers
with a value aggregating $18,629,600, representing .14% of the Fund's net
assets. For more information as to specific securities, see the accompanying
Statement of Investments in Securities and Net Assets.

For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due
to unpaid interest income on defaulted bonds for the current reporting period.

7. SUBSEQUENT EVENTS

On March 15, 1994 and April 19, 1994, the Board of Directors declared
distributions of $.037 per share from undistributed net investment income to
shareholders of record at the close of business on March 31, 1994 and April 29,
1994, payable on April 15, 1994 and May 13, 1994, respectively.

102

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FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT.)

8. FINANCIAL HIGHLIGHTS

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

During the fiscal year ended March 31, 1994, the Fund paid distributions from
undistributed net investment income in the amounts shown in the Statement of
Changes in Net Assets. The Fund hereby designates the total amount of these
distributions as exempt-interest dividends under Section 852(b)(5) of the
Internal Revenue Code.

In addition, the Fund paid distributions from long-term capital gain in the
amounts shown in the Statement of Changes in Net Assets. The Fund hereby
designates the total amount of these distributions as capital gain dividends
under Section 852(b)(3) of the Internal Revenue Code.

103

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