TEMPLETON FUNDS INC, 497, 1997-04-07

TEMPLETON FUNDS INC
497, 1997-04-07

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<PAGE> 1

TEMPLETON
FUNDS, INC.
TEMPLETON FOREIGN FUND
ADVISOR CLASS

STATEMENT OF LOGO
ADDITIONAL INFORMATION 700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
JANUARY 1, 1997, AS SUPPLEMENTED APRIL 7, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
How Does the Fund Invest its Assets?.... 2
What Are the Fund's Potential Risks?.... 3
Investment Restrictions................. 5
Officers and Directors.................. 7
Investment Management and
Other Services........................ 12
How Does the Fund Buy Securities
for its Portfolio?.................... 13
How Do I Buy, Sell and Exchange
Shares?............................... 14
How Are Fund Shares Valued?............. 15
Additional Information on
Distributions and Taxes............... 16
The Fund's Underwriter.................. 19
How Does the Fund Measure Performance?.. 20
Miscellaneous Information............... 22
Financial Statements.................... 23
Useful Terms and Definitions............ 23
</TABLE>

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

Templeton Foreign Fund (the "Fund") is a series of Templeton Funds, Inc. (the
"Company"), a diversified open-end management investment company. The Fund's
investment objective is long-term capital growth, which it seeks to achieve
through a flexible policy of investing in stocks and debt obligations of
companies and governments outside the U.S. Any income realized will be
incidental. This SAI relates to the Advisor Class shares of the Fund.

Advisor Class shares are only available for purchase by certain persons,
including, among others, certain broker-dealers and qualified registered
investment advisors; participants in Franklin Templeton's 401(k) and Franklin
Templeton's Profit Sharing Plans; Franklin Templeton Fund Allocator Series; and
directors, trustees, officers and full time employees (and their family members)
of Franklin Templeton Group and the Franklin Templeton Group of Funds.

The Fund's Prospectus relating to the Advisor Class, dated January 1, 1997, as
may be amended from time to time, contains the basic information you should know
before investing in the Fund. For a free copy, call 1-800/DIAL BEN or write the
Fund at the address shown.

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

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

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

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

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

TL104 SAIZ 01/97

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<PAGE> 2

HOW DOES THE FUND INVEST ITS ASSETS?
- ---------------------------------------------------------

The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Fund's Prospectus entitled "How Does the Fund Invest its
Assets?" The Fund may invest for defensive purposes in commercial paper which,
at the date of investment, must be rated A-1 by S&P or Prime-1 by Moody's or, if
not rated, be issued by a company which at the date of investment has an
outstanding debt issue rated AAA or AA by S&P or Aaa or Aa by Moody's.

Repurchase Agreements. Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. TGAL will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. The Fund will enter into
repurchase agreements only with parties who meet creditworthiness standards
approved by the Board, i.e., banks or broker-dealers which have been determined
by TGAL to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.

Debt Securities. The Fund may invest in debt securities which are rated at least
Caa by Moody's or CCC by S&P or deemed to be of comparable quality by TGAL. As
an operating policy, the Fund will not invest more than 5% of its assets in debt
securities rated lower than Baa by Moody's or BBB by S&P. The market value of
debt securities generally varies in response to changes in interest rates and
the financial condition of each issuer. During periods of declining interest
rates, the value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. These changes in market value will be reflected in the Fund's Net
Asset Value.

Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish the Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.

Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities.

Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Fund may incur additional expenses to seek
recovery.

The Fund may accrue and report interest on high yield bonds structured as zero
coupon bonds or pay-in-kind securities as income even though it receives no cash
interest until the security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies, the Fund must
distribute substantially all of its net income to shareholders (see "Additional
Information on Distributions and Taxes"). Thus, the Fund may have to dispose of
its portfolio securities

2
<PAGE> 3

under disadvantageous circumstances to generate cash in order to satisfy the
distribution requirement.

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

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

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

WHAT ARE THE FUND'S POTENTIAL RISKS?
- ---------------------------------------------------------

The Fund has an unlimited right to purchase securities in any foreign country,
developed or developing, if they are listed on a stock exchange, as well as a
limited right to purchase such securities if they are unlisted. You should
consider carefully the substantial risks involved in securities of companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.

There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Although the Fund may not invest more than 15% of its total assets in unlisted
foreign securities, including not more than 10% of its total assets in
securities with a limited trading market, in the opinion of management such
securities with a limited trading market do not present a significant liquidity
problem. Commission rates in foreign countries, which are generally fixed rather
than subject to negotiation as in the U.S., are likely to be higher. In many
foreign countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable

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economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.

In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.

Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to the Fund's
shareholders.

Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (1)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (2) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (3) pervasiveness of corruption and crime in the Russian economic
system; (4) currency exchange rate volatility and the lack of available currency
hedging instruments; (5) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (6) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the Fund's
ability to exchange local currencies for U.S. dollars; (7) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.

There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a

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Russian public enterprise with more than 1,000 shareholders is required by law
to contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not always
been strictly enforced. Because of this lack of independence, management of a
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may prevent the Fund
from investing in the securities of certain Russian companies deemed suitable by
TGAL. Further, this also could cause a delay in the sale of Russian company
securities by the Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment.

The Fund endeavors to buy and sell foreign currencies on as favorable a basis as
practicable. Some price spread in currency exchange (to cover service charges)
will be incurred, particularly when the Fund changes investments from one
country to another or when proceeds of the sale of shares in U.S. dollars are
used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent the Fund from transferring cash out of
the country or withhold portions of interest and dividends at the source. There
is the possibility of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments which could affect investments in securities of issuers in foreign
nations.

The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Through the flexible
policy of the Fund, TGAL endeavors to avoid unfavorable consequences and to take
advantage of favorable developments in particular nations where from time to
time it places the investments of the Fund.

The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.

The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the Fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other
Services - Shareholder Servicing Agent and Custodian"). However, in the absence
of willful misfeasance, bad faith or gross negligence on the part of TGAL, any
losses resulting from the holding of the Fund's portfolio securities in foreign
countries and/or with securities depositories will be at the risk of the
shareholders. No assurance can be given that the Board's appraisal of the risks
will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.

INVESTMENT RESTRICTIONS
- ---------------------------------------------------------

The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less.

The Fund MAY NOT:

1. Invest in real estate or mortgages on real estate (although the Fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in other open-end investment companies; invest in
interests (other than debentures or equity stock interests) in oil, gas

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or other mineral exploration or development programs; or purchase or sell
commodity contracts.

2. Purchase or retain securities of any company in which directors or officers
of the Company or of TGAL, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more than 5% of the
securities of such company.

3. Purchase more than 10% of any class of securities of any one company,
including more than 10% of its outstanding voting securities, or invest in
any company for the purpose of exercising control or management.

4. Act as an underwriter; issue senior securities; purchase on margin or sell
short; or write, buy or sell puts, calls, straddles or spreads.

5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although the Fund may buy from a bank or broker-dealer U.S. and Canadian
government obligations with a simultaneous agreement by the seller to
repurchase them within no more than seven days at the original purchase
price plus accrued interest.

6. Borrow money for any purpose other than redeeming its shares or purchasing
its shares for cancellation, and then only as a temporary measure up to an
amount not exceeding 5% of the value of its total assets; or pledge,
mortgage or hypothecate its assets for any purpose other than to secure such
borrowings, and then only up to such extent not exceeding 10% of the value
of its total assets as the Board may by resolution approve. As an operating
policy approved by the Board, the Fund will not pledge, mortgage or
hypothecate its assets to the extent that at any time the percentage of
pledged assets plus the sales commission will exceed 10% of the Offering
Price of the shares the Fund.

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

8. Invest more than 5% of the Fund's total assets in warrants, whether or not
listed on the NYSE or AMEX, including no more than 2% of its total assets
which may be invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to securities are not
included in this restriction. This restriction does not apply to options on
securities indices.

9. Invest more than 15% of the Fund's total assets in securities of foreign
issuers which are not listed on a recognized U.S. or foreign securities
exchange, including no more than 10% of its total assets (including
warrants) which may be invested in securities with a limited trading market.
The Fund's position in the latter type of securities may be of such size as
to affect adversely their liquidity and marketability and the Fund may not
be able to dispose of its holdings in these securities at the current market
price.

10. Invest more than 25% of the Fund's total assets in a single industry.

11. Invest in "letter stocks" or securities on which there are any sales
restrictions under a purchase agreement.

12. Participate on a joint or a joint and several basis in any trading account
in securities. (See "How Does the Fund Buy Securities for its Portfolio?" as
to transactions in the same securities for the Fund, other clients and/or
other mutual funds within the Franklin Templeton Group of Funds.)

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

Nothing in the investment policy or investment restrictions (except restrictions
9 and 10) shall be deemed to prohibit the Fund from purchasing securities
pursuant to subscription rights distributed to the Fund by any issuer of
securities held at the time in its portfolio (as long as such purchase is not
contrary to the Fund's status as a diversified investment company under the 1940
Act). If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.

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OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
HARRIS J. ASHTON Director Chairman of the board, president and chief
Metro Center executive officer of General Host Corporation
1 Station Place (nursery and craft centers); director of RBC
Stamford, Connecticut Holdings (U.S.A.) Inc. (a bank holding company)
Age 64 and Bar-S Foods; and director or trustee of 55
of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
*NICHOLAS F. BRADY Director Chairman of Templeton Emerging Markets
The Bullitt House Investment Trust PLC; chairman of Templeton
102 East Dover Street Latin America Investment Trust PLC; chairman of
Easton, Maryland Darby Overseas Investments, Ltd. (an investment
Age 66 firm) (1994-present); chairman and director of
Templeton Central and Eastern European Fund;
director of the Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz
Company; formerly, Secretary of the United
States Department of the Treasury (1988-1993)
and chairman of the board of Dillon, Read & Co.
Inc. (investment banking) prior to 1988; and
director or trustee of 23 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp
200 Campus Drive & Szuch; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or
Age 64 trustee of 57 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH Director President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of Gulf
Suite 300 West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present); formerly, director of
Age 75 Mercantile Bank (1991-1995), vice chairman of
Templeton, Galbraith & Hansberger Ltd.
(1986-1992), and chairman of Templeton Funds
Management, Inc. (1974-1991); and director or
trustee of 22 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 8

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group;
150 2nd Avenue N. chairman and director of Precise Power
St. Petersburg, Florida Corporation; executive-in-residence of Eckerd
Age 73 College (1991-present); director of Checkers
Drive- In Restaurants, Inc.; formerly, chairman
of the board and chief executive officer of
Florida Progress Corporation (1982-1990) and
director of various of its subsidiaries; and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
*CHARLES B. JOHNSON Chairman of the President, chief executive officer, and
777 Mariners Island Blvd. Board and Vice director of Franklin Resources, Inc.; chairman
San Mateo, California President of the board and director of Franklin Advisers,
Age 63 Inc. and Franklin Templeton Distributors, Inc.;
director of General Host Corporation (nursery
and craft centers); Franklin Templeton
Investment Services, Inc.; and officer and/or
director, trustee or managing general partner,
as the case may be, of most other subsidiaries
of Franklin Resources, Inc. and 56 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
*RUPERT H. JOHNSON, JR. Director Executive vice president and director of
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin Templeton
San Mateo, California Distributors, Inc.; president and director of
Age 56 Franklin Advisers, Inc.; and officer and/or
director, trustee or managing general partner,
as the case may be, of most other subsidiaries
of Franklin Resources, Inc. and 60 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
BETTY P. KRAHMER Director Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst, U.S.
Wilmington, Delaware government; and director or trustee of 23 of
Age 67 the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Director Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., MCI
Age 68 Communications Corporation, Fusion Systems
Corporation, Infovest Corporation, MedImmune,
Inc., Source One Mortgage Services Corporation,
and Shoppers Express, Inc. (on-line shopping
service); formerly, chairman of Hambrecht and
Quist Group, director of H&Q Healthcare
Investors and Lockheed Martin Corporation, and
president of the National Association of
Securities Dealers, Inc.; and director or
trustee of 52 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

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<PAGE> 9

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FRED R. MILLSAPS Director Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and nonprofit
Fort Lauderdale, Florida organizations; formerly, chairman and chief
Age 67 executive officer of Landmark Banking
Corporation (1969-1978), financial vice
president of Florida Power and Light
(1965-1969), and vice president of The Federal
Reserve Bank of Atlanta (1958-1965); and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of
Nassau, Bahamas global equity research for Templeton Worldwide,
Age 36 Inc.; formerly, investment administrator with
Roy West Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
HARMON E. BURNS Vice President Executive vice president, secretary and
777 Mariners Island Blvd. director of Franklin Resources, Inc.; executive
San Mateo, California vice president and director of Franklin
Age 51 Templeton Distributors, Inc.; executive vice
president of Franklin Advisers, Inc.; officer
and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON Vice President Senior vice president and director of Franklin
500 East Broward Blvd. Resources, Inc.; senior vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 40 president and chief executive officer of
Templeton Worldwide, Inc.; president and
director of Franklin Institutional Services
Corporation; chairman of the board of Templeton
Investment Counsel, Inc.; officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 39 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of
777 Mariners Island Blvd. Franklin Resources, Inc.; senior vice president
San Mateo, California of Franklin Templeton Distributors, Inc.; vice
Age 47 president of Franklin Advisers, Inc. and
officer of 60 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

9
<PAGE> 10

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
MARTIN L. FLANAGAN Vice President Senior vice president, treasurer and chief
777 Mariners Island Blvd. financial officer of Franklin Resources, Inc.;
San Mateo, California director and executive vice president of
Age 36 Templeton Investment Counsel, Inc.; a member of
the International Society of Financial Analysts
and the American Institute of Certified Public
Accountants; formerly, accountant with Arthur
Andersen & Company (1982-1983); officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Worldwide, Inc.; assistant vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 56 formerly, vice president and controller of the
Keystone Group, Inc.; and officer of 27 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT Vice President Executive vice president, portfolio management/
Lyford Cay research of Templeton Global Advisors Limited;
Nassau, Bahamas formerly, investment officer at First
Age 32 Pennsylvania Investment Research (until 1989);
and officer of 2 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President - General counsel, secretary and a senior vice
500 East Broward Blvd. Compliance president of Templeton Investment Counsel,
Fort Lauderdale, Florida Inc.; formerly, vice president and associate
Age 41 general counsel of Kidder Peabody & Co. Inc.
(1989-1990), assistant general counsel of
Gruntal & Co., Inc. (1988), vice president and
associate general counsel Shearson Lehman
Hutton Inc. (1988), vice president and
assistant general counsel of E.F. Hutton & Co.
Inc. (1986-1988), and special counsel of the
division of investment management of the
Securities and Exchange Commission (1984-1986);
and officer of 23 of the investment companies
in the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified public accountant; senior vice
500 East Broward Blvd. president of Templeton Worldwide, Inc. and
Fort Lauderdale, Florida Templeton Funds Trust Company; formerly, senior
Age 42 tax manager with Ernst & Young (certified
public accountants) (1977-1989); and treasurer
of 24 of the investment companies in the
Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE> 11

*Nicholas F. Brady, Rupert H. Johnson, Jr. and Charles B. Johnson are
"interested persons" of the Fund under the 1940 Act, which limits the percentage
of interested persons that can comprise a fund's board. Charles B. Johnson and
Rupert H. Johnson, Jr. are interested persons due to their ownership interests
in Resources. Mr. Brady's status as an interested person results from his
business affiliations with Resources and Templeton Global Advisors Limited. Mr.
Brady and Resources are both limited partners of Darby Overseas Partners, L.P.
("Darby Overseas"). Mr. Brady established Darby Overseas in February 1994, and
is Chairman and shareholder of the corporate general partner of Darby Overseas.
In addition, Darby Overseas and Templeton Global Advisors Limited are limited
partners of Darby Emerging Markets Fund, L.P. The remaining Board members of the
Fund are not interested persons (the "independent members of the Board").

The table above shows the officers and Board members who are affiliated with
Distributors and TGAL. Nonaffiliated members of the Board and Mr. Brady are
currently paid an annual retainer and/or fees for attendance at Board and
Committee meetings, the amount of which is based on the level of assets in the
Funds. Accordingly, the Company currently pays the independent members of the
Board and Mr. Brady an annual retainer of $12,500 and a fee of $950 per meeting
of the Board and its portion of a flat fee of $2,000 for each Audit Committee
meeting and/or Nominating and Compensation Committee meeting attended. As shown
above, some of the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members and Mr. Brady by the Company and by other funds in the Franklin
Templeton Group of Funds.

<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE COMPANY(A) GROUP OF FUNDS(B) WHICH EACH SERVES(C)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton..................... $ 17,250 $339,592 55
Nicholas F. Brady.................... 17,250 119,275 23
F. Bruce Clarke(d)................... 17,536 69,500 0
Hasso-G von Diergardt-Naglo(e)....... 17,250 66,375 0
S. Joseph Fortunato.................. 17,250 356,412 57
John Wm. Galbraith................... 15,636 102,475 22
Andrew H. Hines, Jr.................. 17,670 130,525 24
Betty P. Krahmer..................... 17,250 119,275 23
Gordon S. Macklin.................... 17,384 331,542 52
Fred R. Millsaps..................... 17,536 130,525 24
</TABLE>

(a)For the fiscal year ended August 31, 1996.
(b)For the calendar year ended December 31, 1996.
(c)We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series of funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies with approximately 171 U.S. based
funds or series.
(d)Mr. Clarke resigned as a director on October 20, 1996.
(e)Mr. von Diergardt resigned as a director on December 31, 1996.

11
<PAGE> 12

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

As December 1, 1996, the officers and Board members, as a group, owned of record
and beneficially approximately 687,622 shares, or less than 1% of the Fund's
total outstanding shares. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.

INVESTMENT MANAGEMENT AND
OTHER SERVICES
- ---------------------------------------------------------

Investment Manager and Services Provided. TGAL provides investment research and
portfolio management services, including the selection of securities for the
Fund to buy, hold or sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. TGAL renders its services to the Fund from
outside the U.S. and its activities are subject to the review and supervision of
the Board to whom TGAL renders periodic reports of the Fund's investment
activities. TGAL is covered by fidelity insurance on its officers, directors and
employees for the protection of the Fund.

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

Management Fees. Under its management agreement, the Fund pays TGAL a monthly
management fee equal to an annual rate of 0.75% of the average daily net assets
of the Fund up to the first $200,000,000, reduced to a fee of 0.675% of such
average daily net assets in excess of $200,000,000 up to $1,300,000,000, and
further reduced to a fee of 0.60% of such average daily net assets in excess of
$1,300,000,000. Each class pays its proportionate share of the management fee.
For the fiscal years ended August 31, 1996, 1995 and 1994, management fees
totaled $51,600,846, $36,110,792, and $23,889,119, respectively.

Investment Management Agreement. The Fund's investment management agreement may
continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
investment management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. The investment management agreement may be terminated without penalty
at any time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by TGAL on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.

Administrative Services. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Fund. These include preparing and maintaining books, records, and tax
and financial reports, and monitoring compliance with regulatory requirements.
FT Services is a wholly owned subsidiary of Resources.

Under the administration agreement, the Company pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Company's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal years ended August 31, 1996, 1995, and 1994,
administration fees totaling $11,564,072, $8,965,630 and $7,161,271,
respectively, were paid to Templeton Global Investors, Inc.

12
<PAGE> 13

Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Company's shareholder servicing agent and acts as the
Company's transfer agent and dividend-paying agent. Investor Services is
compensated on the basis of a fixed fee per account.

Custodian. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, NY 11245, and at the offices of its branches and agencies
throughout the world, acts as custodian of the Fund's assets. The custodian does
not participate in decisions relating to the purchase and sale of portfolio
securities.

Auditors. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, are the
Company's independent auditors. During the fiscal year ended August 31, 1996,
their auditing services consisted of rendering an opinion on the Fund's
financial statements included in the Fund's Annual Report to Shareholders for
the fiscal year ended August 31, 1996, and review of the Fund's filings with the
SEC and the IRS. Advisor Class shares of the Fund were not offered to the public
before January 1, 1997.

HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
- ---------------------------------------------------------

The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by TGAL in accordance with criteria set forth in the
investment management agreement and any directions that the Board may give.

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

In placing orders to effect transactions for the Fund, TGAL may pay to
particular brokers commissions that are higher than another broker might charge,
if TGAL determines in good faith that the amount of commission paid is
reasonable in relation to the value of the brokerage and research services to be
received, viewed in terms of the particular transaction or TGAL's overall
responsibilities with respect to client accounts for which TGAL exercises
investment discretion. Services received by TGAL may include, among other
things, information relating to particular companies, markets or countries,
local, regional, national or transnational economies, statistical data,
quotations and other securities pricing information and other information which
provide lawful and appropriate assistance to TGAL in carrying out its investment
advisory responsibilities. The services received may not always be of direct
benefit to the Fund, but must be of value to TGAL in carrying out its overall
responsibilities to its clients.

When TGAL believes several brokers are equally able to provide the best net
price and execution, it may decide to execute transactions through brokers who
provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.

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

Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund

13
<PAGE> 14

tenders portfolio securities pursuant to a tender-offer solicitation. As a means
of recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next investment management fee payable to
TGAL will be reduced by the amount of any fees received by Distributors in cash,
less any costs and expenses incurred in connection with the tender.

If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by TGAL are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by TGAL
taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.

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

During the fiscal years ended August 31, 1996, 1995 and 1994, the Fund paid
brokerage commissions totaling $10,641,000, $11,925,138 and $7,329,697,
respectively.

As of August 31, 1996, the Fund did not own any securities of its regular
broker-dealers.

HOW DO I BUY, SELL AND EXCHANGE SHARES?
- ---------------------------------------------------------

ADDITIONAL INFORMATION ON BUYING SHARES

The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers. Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages indicated in the table under "How Do I
Buy Shares? - Purchase Price of Fund Shares" in the Fund's Prospectus.

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

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 the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.

ADDITIONAL INFORMATION ON EXCHANGING SHARES

If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Fund's Prospectus.

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

The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of the Fund's shares to complete an exchange
will be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Fund's Prospectus.

ADDITIONAL INFORMATION ON SELLING SHARES

Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any

14
<PAGE> 15

distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled.

Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.

The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.

Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.

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 the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.

GENERAL INFORMATION

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

If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.

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

Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.

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

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

HOW ARE FUND SHARES VALUED?
- ---------------------------------------------------------

We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a secu-

15
<PAGE> 16

rities exchange or on the NASDAQ National Market System for which market
quotations are readily available are valued at the last quoted sale price of the
day or, if there is no such reported sale, within the range of the most recent
quoted bid and ask prices.

Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both in
the over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by TGAL.

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

Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.

Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.

ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------

DISTRIBUTIONS

You may receive two types of distributions from the Fund:

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

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.

TAXES

As stated in the Prospectus, the Fund has elected and qualified to be treated as
regulated investment company under Subchapter M of the Code. The status of the
Fund as a regulated investment company does not involve government supervision
of management or of its investment practices or policies. As a regulated
investment company, the Fund generally will be relieved of liability for U.S.
federal income tax on that portion of its net investment income and net realized
capital gains which it distributes to its shareholders. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
also are subject to a nondeductible 4% excise tax. To prevent application of the
excise tax, the Fund intends to make distribu-

16
<PAGE> 17

tions in accordance with the calendar year distribution requirement.

The Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.

Dividends of net investment income and net short-term capital gains are taxable
to shareholders as ordinary income. Distributions of net investment income may
be eligible for the corporate dividends-received deduction to the extent
attributable to the Fund's qualifying dividend income. However, the alternative
minimum tax applicable to corporations may reduce the benefit of the
dividends-received deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) designated by
the Fund as capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of the length of time the Fund's shares have been held
by a shareholder, and are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to shareholders, whether
received in cash or reinvested in shares of the Fund. Any distributions that are
not from the Fund's investment company taxable income or net capital gain may be
characterized as a return of capital to shareholders or, in some cases, as
capital gain. Shareholders will be notified annually as to the federal tax
status of dividends and distributions they receive and any tax withheld thereon.

Distributions by the Fund reduce the Net Asset Value of the Fund's shares.
Should a distribution reduce the Net Asset Value below a shareholder's cost
basis, the distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.

Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semi-annual compounding of interest.

The Fund may invest in stocks of foreign companies that are classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over the period during
which the Fund held the PFIC stock. The Fund itself will be subject to tax on
the portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to shareholders.
Excess distributions include any gain from the sale of PFIC stock as well as
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.

The Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, the Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to market the
Fund's PFIC shares at the end of each taxable year (and on certain other

17
<PAGE> 18

dates prescribed in the Code), with the result that unrealized gains are treated
as though they were realized. If this election were made, tax at the fund level
under the PFIC rules would generally be eliminated, but the Fund could, in
limited circumstances, incur nondeductible interest charges. The Fund's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC shares.

Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC stock, as well as subject the Fund itself to tax
on certain income from PFIC stock, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC stock.

Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries. If
more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, a
shareholder will be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by the
Fund, and will be entitled either to deduct (as an itemized deduction) his pro
rata share of foreign income and similar taxes in computing his taxable income
or to use it as a foreign tax credit against his U.S. federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit (see below). Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass through" for that year.

Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his foreign source taxable
income. For this purpose, if the pass-through election is made, the source of
the Fund's income flows through to its shareholders. With respect to the Fund,
gains from the sale of securities will be treated as derived from U.S. sources
and certain currency fluctuation gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit), including the foreign source passive income
passed through by the Fund. Shareholders may be unable to claim a credit for the
full amount of their proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative minimum taxable
income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as U.S. source
income.

Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its shareholders as
ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that the Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, the Fund would not be able to
make ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as return of capital to shareholders for
federal income tax purposes, rather than as an ordinary dividend, reducing each
shareholder's basis in his Fund shares, or as a capital gain.

18
<PAGE> 19

Upon the sale or exchange of his shares, a shareholder will realize a taxable
gain or loss depending upon his basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and generally will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of the Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions of long-term capital gains received by the
shareholder with respect to such shares.

In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.

The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he is not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.

Ordinary dividends and taxable capital gain distributions declared in October,
November, or December with a record date in such month and paid during the
following January will be treated as having been paid by the Fund and received
by shareholders on December 31 of the calendar year in which declared, rather
than the calendar year in which the dividends are actually received.

Distributions also may be subject to state, local and foreign taxes. U.S. tax
rules applicable to foreign investors may differ significantly from those
outlined above. Shareholders are advised to consult their own tax advisers for
details with respect to the particular tax consequences to them of an investment
in the Fund.

THE FUND'S UNDERWRITER
- ---------------------------------------------------------

Pursuant to the underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.

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

Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.

19
<PAGE> 20

Such support is based primarily upon the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealers' sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 distribution plans,
from payments to Distributors under such plans. In addition, certain Securities
Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's Rules.

Distributors will not receive other compensation from the Fund for acting as
underwriter with respect to the Advisor Class shares.

HOW DOES THE FUND MEASURE PERFORMANCE?
- ---------------------------------------------------------

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Fund to compute or express performance for the Advisor Class shares follows. For
any period prior to January 1, 1997, the standardized performance quotations for
the Advisor Class will be calculated by substituting the performance of Class I
for the relevant time period, and excluding the effect of the maximum sales
charge and including the effect of the Rule 12b-1 fees applicable to Class I.
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.

TOTAL RETURN

Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year periods
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees.

The average annual total return for the Advisor Class for the one-, five- and
ten-year periods ended August 31, 1996 would have been 10.68%, 11.66% and 14.8%,
respectively.

These figures were calculated according to the SEC formula:

P(1+T)(n) = ERV
where:

<TABLE>
<S> <C> <C>
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 period
</TABLE>

Cumulative Total Return. The Fund may also quote its cumulative total return, in
addition to its average annual total return. These quotations are computed the
same way, except the cumulative total return will be based on the Fund's actual
return for a specified period rather than on its average return over the period.
The cumulative total return for the Advisor Class for the one-, five- and
ten-year periods ended August 31, 1996 would have been 10.68%, 73.58% and
299.77%, respectively.

VOLATILITY

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

20
<PAGE> 21

OTHER PERFORMANCE QUOTATIONS

For any period prior to January 1, 1997, sales literature about the Advisor
Class may quote a current distribution rate, yield, cumulative total return,
average annual total return and other measures of performance as described
elsewhere in this SAI by substituting the performance of Class I for the
relevant time period and excluding the effect of the maximum sales charge, if
applicable, and Rule 12b-1 fees applicable to Class I.

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

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

COMPARISONS AND OTHER INFORMATION

To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages.

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

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

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

Performance information for the Fund may be compared, in reports and promotional
literature, to: (i) unmanaged indices so that investors may compare the Fund's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.

Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.

From time to time, the Fund and TGAL may also refer to the following
information:

(1) TGAL's and its affiliates' market share of international equities managed
in mutual funds prepared or published by Strategic Insight or a similar
statistical organization.

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

21
<PAGE> 22

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

(4) The geographic and industry distribution of the Fund's portfolio and the
Fund's top ten holdings.

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

(6) To assist investors in understanding the different returns and risk
characteristics of various investments, the Fund may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).

(7) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.

(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.

(9) Allegorical stories illustrating the importance of persistent long-term
investing.

(10) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.

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

(12) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets
under management.

(13) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.

(14) Quotations from the Templeton organization's founder, Sir John Templeton*,
advocating the virtues of diversification and long-term investing,
including the following:

- "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."

- "Diversify by company, by industry and by country."

- "Always maintain a long-term perspective."

- "Invest for maximum total real return."

- "Invest - don't trade or speculate."

- "Remain flexible and open-minded about types of investment."

- "Buy low."

- "When buying stocks, search for bargains among quality stocks."

- "Buy value, not market trends or the economic outlook."

- "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."

- "Do your homework or hire wise experts to help you."

- "Aggressively monitor your investments."

- "Don't panic."

- "Learn from your mistakes."

- "Outperforming the market is a difficult task."

- "An investor who has all the answers doesn't even understand all the
questions."

- "There's no free lunch."

- "And now the last principle: Do not be fearful or negative too often."

MISCELLANEOUS INFORMATION
- ---------------------------------------------------------

The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings pro-

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

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

22
<PAGE> 23

gram. Of course, an investment in the Fund cannot guarantee that these goals
will be met.

The Company is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 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 $150
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 125 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.

The DALBAR Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.

As of December 1, 1996, the principal shareholders of the Foreign Fund,
beneficial or of record were as follows:

<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- --------------------------------------------------
<S> <C> <C>
CLASS I
Merrill Lynch, Pierce, 63,250,305 6%
Fenner & Smith, Inc.
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246
CLASS II
Merrill Lynch, Pierce, 16,814,108 25%
Fenner & Smith, Inc.
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246
</TABLE>

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 Advisor Class shares.

In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, 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 IRS in response to a Notice of Levy.

Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.

FINANCIAL STATEMENTS
- ---------------------------------------------------------

The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended August 31, 1996, including the auditors'
report, are incorporated herein by reference. The audited financial statements
do not include information for the Advisor Class as those shares were not
publicly offered prior to the date of this SAI.

USEFUL TERMS AND DEFINITIONS
- ---------------------------------------------------------

1933 Act - Securities Act of 1933, as amended.

1940 Act - Investment Company Act of 1940, as amended.

AMEX - American Stock Exchange, Inc.

Board - The Board of Directors of the Company.

CD - Certificate of deposit.

Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans. Advi-

23
<PAGE> 24

sor Class shares are purchased without a sales charge and do not have a Rule
12b-1 plan.

Code - Internal Revenue Code of 1986, as amended.

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

Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.

Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.

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

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

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

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

IRS - Internal Revenue Service.

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

Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly Mutual Series Fund Inc. Each series of Mutual Series began
offering three classes of shares on November 1, 1996, Class I, Class II and
Class Z. All shares sold before that time are designated Class Z shares.

NASD - National Association of Securities Dealers, Inc.

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

NYSE - New York Stock Exchange, Inc.

Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 5.75% for Class I and 1% for Class II. Advisor
Class has no front-end sales charge.

Prospectus - The prospectus for the Advisor Class of the Fund dated January 1,
1997, as may be amended from time to time.

Resources - Franklin Resources, Inc.

SAI - Statement of Additional Information.

S&P - Standard & Poor's Corporation.

SEC - U.S. Securities and Exchange Commission.

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

TGAL - Templeton Global Advisors Limited, the Fund's investment manager, is
located in Lyford Cay, Nassau, Bahamas.

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

U.S. - United States.

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