AGE HIGH INCOME FUND INC, 497, 1995-02-21

AGE HIGH INCOME FUND INC
497, 1995-02-21

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SUPPLEMENT DATED FEBRUARY 1, 1995

TO THE PROSPECTUS OF

FRANKLIN'S AGE HIGH INCOME FUND

DATED OCTOBER 1, 1994

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

1. EXPENSE TABLE

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

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

(a) Add the following at the end of the first paragraph:

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................................... 4.25% 4.44% 4.00%
$100,000 but less than $250,000....................... 3.50% 3.63% 3.25%
$250,000 but less than $500,000....................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000..................... 2.15% 2.20% 2.00%
$1,000,000 or more.................................... none none (see below)**
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 0.75% on sales of $1 million but less than
$2 million, plus 0.60% on sales of $2 million but less than $3 million,
plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on
sales of $50 million but less than $100 million, plus 0.15% on sales of
$100 million or more. Dealer concession breakpoints are reset every 12
months for purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.

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

<PAGE>

Fund, and Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment
qualifies for a discount. References throughout the Prospectus, for purposes
of aggregating assets or describing the exchange privilege, refer to the
above descriptions.

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers
who initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases made at net
asset value by certain designated retirement plans (excluding IRA and IRA
rollovers), certain trust company and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of
$10 million or more. See definitions under "Description of Special Net Asset
Value Purchases" and as set forth in the SAI.

PURCHASES AT NET ASSET VALUE

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

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

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

<PAGE>

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

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

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

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

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

<PAGE>

purchase, which may be established by Distributors. Currently, those criteria
require that the amount invested or to be invested during the subsequent
13-month period in this Fund or any of the Franklin Templeton Investments
must total at least $1,000,000. Orders for such accounts will be accepted by
mail accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
such order.

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

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

(a) The following option is added to "Exchanges by Telephone":

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

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

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

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

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

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

FRANKLIN'S
AGE HIGH
INCOME FUND

PROSPECTUS October 1, 1994

(LOGO)

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

AGE High Income Fund, Inc. (the "Fund") is a diversified, open-end management
investment company with the principal investment objective of earning a high
level of current income. The Fund will also seek capital appreciation as a
secondary objective. The assets of the Fund will generally be invested in high
yield, high risk, lower rated, fixed-income debt securities and dividend-paying
common or preferred stocks.

THE FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT GRADE
BONDS, COMMONLY KNOWN AS "JUNK BONDS", WHICH ENTAIL DEFAULT AND OTHER RISKS
GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND IN LIGHT OF
THE SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK CONSIDERATIONS - HIGH
YIELDING, FIXED-INCOME SECURITIES."

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

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

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

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

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

<PAGE>

<TABLE>
<S> <C>
CONTENTS PAGE
Expense Table................................... 2
Financial Highlights............................ 4
About the Fund.................................. 5
Investment Objectives and
Policies of the Fund........................... 5
Risk Considerations............................. 11
Management of the Fund.......................... 14
Distributions to Shareholders................... 16
Taxation of the Fund
and Its Shareholders........................... 18
How to Buy Shares of the Fund................... 19
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments............. 25
Other Programs and Privileges
Available to Fund Shareholders................. 26
Exchange Privilege.............................. 28
How to Sell Shares of the Fund.................. 30
Telephone Transactions.......................... 33
Valuation of Fund Shares........................ 34
How to Get Information Regarding
an Investment in the Fund...................... 35
Performance..................................... 36
General Information............................. 36
Account Registrations........................... 37
Important Notice Regarding
Taxpayer IRS Certifications.................... 38
Portfolio Operations............................ 38
Appendix........................................ 39
</TABLE>

EXPENSE TABLE

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or
indirectly in connection with an investment in the Fund. These figures
are based on restated aggregate operating expenses of the Fund for the fiscal
year ended May 31, 1994.

SHAREHOLDER TRANSACTION EXPENSES

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

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

<PAGE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)

<TABLE>
<S> <C> <C>
Management Fees.................................................................................. 0.46%
Maximum 12b-1 Fees............................................................................... 0.15%**
Other Expenses
Shareholder servicing costs............................................................. 0.04%
Reports to shareholders................................................................. 0.04%
Other expenses.......................................................................... 0.04%
----
Total other expenses............................................................................. 0.12%
----
Total Fund Operating Expenses.................................................................... 0.73%***
====
</TABLE>

**Actual 12b-1 fees incurred by the Fund represented an annualized rate of
0.12%. Consistent with National Association of Securities Dealers, Inc.'s
rules, it is possible that the combination of front-end sales charges and 12b-1
fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.
***Total Fund operating expenses for the fiscal year ended May 31, 1994
have been restated to reflect the maximum 12b-1 fees allowed pursuant to the
Fund's plan of distribution, which was effective May 1, 1994, as though such
plan had been in effect for the entire fiscal year.

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

EXAMPLE

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

1 year 3 years 5 years 10 years
$50 $65 $81 $129

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE
MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund and
only indirectly by shareholders as a result of their investment in the Fund. In
addition, federal regulations require the example to assume an annual return of
5%, but the Fund's actual return may be more or less than 5%.

<PAGE>
Financial Highlights

The information for each of the five fiscal years in the period ended May 31,
1994 has been audited by Coopers & Lybrand, independent auditors, whose audit
report appears in the financial statements in the Fund's SAI. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See the discussion "Report to Shareholders" under "General
Information."

<TABLE>
<CAPTION>
Year ended May 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year.. $ 2.81 $ 2.72 $ 2.37 $ 2.53 $ 3.18
---------- ---------- ---------- ---------- ----------
Net investment
income............. 0.27 0.30 0.31 0.34 0.41
Net realized
& unrealized
gains (losses) on
securities......... (0.113) 0.054 .340 (0.122) (0.636)
---------- ---------- ---------- ---------- ----------
Total from
investment
operations......... 0.157 0.354 .650 0.218 (0.226)
========== ========== ========== ========== ==========
Less distributions:
Dividends from net
investment income.. (0.267) (0.264) (.300) (0.359) (0.424)
Distributions from
realized capital
gains -- -- -- -- --
Distributions from
paid-in capital ... -- -- -- (0.019) --
---------- ---------- ---------- ---------- ----------
Total distributions. (0.267) (0.264) (.300) (0.378) (0.424)
---------- ---------- ---------- ---------- ----------
Net asset value
at end of year..... $ 2.70 $2.81 2.72 $ 2.37 $ 2.53
========== ========== ========== ========== ==========
Total Return**...... 5.19% 13.33% 8.48% 10.18% (8.13)
Ratios/Supplemental Data
Net assets at end
of year (in 000's) $1,817,481 $1,935,919 $1,864,195 $1,587,656 $1,675,212
Ratio of expenses to
average net assets. .59% .56% .58% .59% .56%
Ratio of net investment
income to average
net assets......... 9.61% 10.78% 2.18% 14.87% 14.47%
Portfolio turnover rate 42.32% 38.33% 3.70% 28.55% 17.59%
</TABLE>

<TABLE>
<CAPTION>
Year ended May 31,
-------------------------------------------------------------------------------
1989 1988 1987 1986 1985
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year.. $ 3.37 $ 3.58 $3.83 $ 3.71 $ 3.44
---------- ---------- ---------- ---------- ----------
Net investment
income............. 0.43 0.44 0.44 0.48 0.50
Net realized
& unrealized
gains (losses) on
securities......... (0.188) (0.218) (0.228) 0.133 0.280
---------- ---------- ---------- ---------- ----------
Total from
investment
operations......... 0.242 0.222 0.212 0.613 0.780
========== ========== ========== ========== ==========
Less distributions:
Dividends from net
investment income.. (0.432) (0.432) (0.462) (0.492) (0.510)
Distributions from
realized capital
gains -- -- -- (0.001) --
Distributions from
paid-in capital ... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions. (0.432) (0.432) (0.462) (0.493) (0.510)
---------- ---------- ---------- ---------- ----------
Net asset value
at end of year..... $ 3.18 $ 3.37 $ 3.58 $ 3.83 $ 3.71
========== ========== ========== ========== ==========
Total Return**...... 6.97% 6.32% 5.25% 17.02% 24.21%
Ratios/Supplemental Data
Net assets at end
of year (in 000's). $2,243,494 $1,828,108 $1,639,596 $ 669,782 $ 159,262
Ratio of expenses to
average net assets. .56% .57% .59% .67% .80%
Ratio of net investment
income to average
net assets......... 13.06% 12.72% 11.46% 11.66% 13.33%
Portfolio turnover rate 28.82% 24.11% 22.50% 21.88% 25.94%
</TABLE>

*Selected data for a share of capital stock outstanding throughout the
year.
**Total return measures the change in value of an investment over the
periods indicated. It does not include the maximum initial sales charge and
assumes reinvestment of dividends at the maximum offering price and capital
gains, if any, at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan, as discussed in this
Prospectus, the existing sales charge on reinvested dividends has been
eliminated.

<PAGE>
ABOUT THE FUND

The Fund is a diversified, open-end management investment company commonly
called a "mutual fund." The Fund, formerly AGE Fund, Inc. until its name change
in December 1980, was incorporated in Colorado in January 1968 under the
sponsorship of the Assembly of Governmental Employees and registered with the
SEC under the Investment Company Act of 1940, as amended (the "1940 Act").

Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.25% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVES AND
POLICIES OF THE FUND

The Fund's principal investment objective is to earn a high level of current
income. As a secondary objective, the Fund seeks capital appreciation to the
extent it is possible and consistent with the Fund's principal objective. The
investment objectives are fundamental policies of the Fund and may not be
changed without shareholder approval.

TYPE OF SECURITIES THE FUND MAY PURCHASE

Yield and expected return are the primary criteria used by the Fund in
selecting portfolio securities. The Fund may invest in both fixed-income debt
securities (sometimes referred to as "corporate bonds") and dividend-paying
common or preferred stocks, and will seek to invest in whatever type of
security is offering the highest yield and expected total return without
excessive risk at the time of purchase. When purchasing fixed-income debt
securities, the Fund may invest in investment grade or lower grade securities,
depending upon prevailing market and economic conditions and may, for defensive
purposes, invest its assets in government securities, commercial paper
(short-term debt securities of large corporations), various bank debt
instruments or other money market instruments.

Various investment services publish ratings of some of the types of
securities in which the Fund may invest. Higher yields are ordinarily available
from securities in the lower rated categories of the recognized rating services
(that is, securities rated Ba or lower by Moody's Investors Service ["Moody's"]
or BB or lower by Standard & Poor's Corporation ["S&P"]) or from unrated
securities of comparable quality. A list of these ratings is shown in the
Appendix to this Prospectus. These ratings, which represent the opinions of the
rating services with respect to the issuer's ability to pay interest and repay
principal, although they do not purport to reflect the risk of fluctuations in
market value and are not absolute standards of quality, will be considered in
connection with the investment of the Fund's assets, but will not be a
determining or limiting factor. The Fund may invest in securities regardless of
their rating (including securities in the lowest rating categories) or in
securities which are not rated. It is the Fund's intent not to purchase
securities rated below CCC. With respect to unrated securities, it is the Fund's
intent not to purchase securities which, in the view of the Fund's investment
manager, would be comparable to securities rated below B by Moody's or S&P.
Securities rated B and CCC are regarded by S&P, on balance, as predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation. As of May 31, 1994, approximately
84.1% of the Fund's net assets were invested in lower rated bonds (those having
a rating below the four highest grades assigned by the rat-

<PAGE>

ing services) or in unrated bonds with comparable credit characteristics. (A
breakdown of the bonds' ratings is included under "Risk Considerations - Asset
Composition Table.") As noted above, the Fund will not invest in securities
which are felt by management to involve excessive risk. In the event the rating
on an issue held in the Fund's portfolio is changed by the ratings service or
the security goes into default, such event will be considered by the Fund in
its evaluation of the overall investment merits of that security but will not
generally result in an automatic sale of the security.

Rather than relying principally on the ratings assigned by rating
services, the investment analysis of securities being considered for the Fund's
portfolio may also include, among other things, consideration of relative
values, based on such factors as anticipated cash flow, interest or dividend
coverage, asset coverage, earnings prospects, the experience and managerial
strength of the issuer, responsiveness to changes in interest rates and business
conditions, debt maturity schedules and borrowing requirements and the issuer's
changing financial condition and public recognition thereof. Since a substantial
portion of the Fund's portfolio at any particular time may consist of debt
securities, changes in the level of interest rates, among other things, will
likely affect the value of the Fund's holdings and thus the value of a
shareholder's investment. Certain of the high yield, fixed-income securities in
which the Fund may invest may be purchased at a discount to par value. Such
securities, when held to maturity or retired, may include an element of capital
gain. The Fund does not generally intend to hold securities solely for the
purpose of achieving such capital gain, but will generally hold them as long as
expected returns on such securities remain attractive. A capital loss may be
realized when a security is purchased at a premium, that is, in excess of its
stated or par value, is held to maturity or is called or redeemed at a price
lower than its purchase price. A capital gain or loss also may be realized upon
the sale of securities, whether purchased at par, a discount or a premium.

The Fund's total return, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods ended on May 31,
1994, was 1.23%, 8.76% and 10.52%, respectively. See "Performance."

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase debt obligations on a "when-issued" or "delayed
delivery" basis. Such securities are subject to market fluctuation prior to
delivery to the Fund and generally do not earn interest until their scheduled
delivery date. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian, cash or high-grade
marketable securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment leverage. (The
Fund's SAI contains a more complete discussion regarding when-issued and delayed
delivery transactions.)

SOME OTHER INVESTMENT POLICIES OF THE FUND

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

<PAGE>
may purchase securities of U.S. issuers which are denominated in foreign
currency. See "Risk Considerations - Foreign Securities."

Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
equity securities issued without stock certificates or in debt securities which
are not issued and transferable in fully registered form. Securities which are
acquired by the Fund outside the United States and which are publicly traded in
the United States, on a foreign securities exchange or in a foreign securities
market are not considered by the Fund to be an illiquid asset so long as the
Fund acquires and holds the security with the intention of reselling the
security in the foreign trading market, the Fund reasonably believes it can
readily dispose of the security for cash in the U.S. or foreign market and
current market quotations are readily available. The Fund presently has no
intention of investing more than 10% of its net assets in foreign securities not
publicly traded in the United States.

Forward Currency Exchange Contracts. The Fund may enter into forward
currency exchange contracts ("Forward Contracts") to attempt to minimize the
risk to the Fund from adverse changes in the relationship between currencies or
to enhance income. A Forward Contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers.

Options on Foreign Currencies. The Fund may purchase and write put and
call options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities or other assets to be acquired. As in the case
of other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received,
and the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, the Fund may forfeit the entire amount of the premium
plus related transaction costs.

Options on Securities. The Fund may write covered call options which are
listed for trading on a national securities exchange. This means that the Fund
will only write options on securities which the Fund actually owns. A call
option gives the buyer the right to buy the security on which the option is
written for a specified period of time for a price agreed to at the time the
option is sold, even though that price may be less than the value of the
security at the time the option is exercised. When the Fund sells covered call
options, the Fund receives a cash premium which can be used in whatever way is
felt to be most beneficial to the Fund. The risks associated with covered call
writing are such that in the event of a price rise on the underlying security
which would likely trigger the exercise of the call option, the Fund will not
participate in the increase in price beyond the exercise price. If the Fund
determines that it does not wish to deliver the underlying securities from its
portfolio, it would have to enter into a "closing purchase transaction," the
premium on which may be higher or lower than that received by the Fund for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance. Although the Fund's policies permit it to
write covered call options, it does not currently anticipate that it will use
such authority. If, in the

<PAGE>

future, the Fund should engage in covered call options writing, it is not
limited in the extent to which it may write such options.

Loans of Portfolio Securities. As approved by the Board of Directors and
subject to the following conditions, the Fund may lend its portfolio securities
to qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
collateral with an initial market value at least 102% of the initial market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. Such collateral shall consist of cash,
securities issued by the U.S. Government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund engages in security loan arrangements with the
primary objective of increasing the Fund's income either through investing the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.

Concentration. The Fund will not invest more than 25% of the value of
its total assets in any one particular industry.

Borrowing. The Fund does not borrow money or mortgage or pledge any of
its assets, except that it may borrow for temporary or emergency purposes in an
amount not to exceed 5% of the Fund's total assets.

Interest Rate Swaps. The Fund may also participate in interest rate
swaps. An interest rate swap is the transfer between two counterparties of
interest rate obligations, one of which has an interest rate fixed to maturity
while the other has an interest rate that changes in accordance with changes in
a designated benchmark (e.g., London Interbank Offered Rate (LIBOR), prime,
commercial paper, or other benchmarks). The obligations to make repayment of
principal on the underlying securities are not exchanged. Such transactions
generally require the participation of an intermediary, frequently a bank. The
entity holding the fixed rate obligation will transfer the obligation to the
intermediary, and such entity will then be obligated to pay to the intermediary
a floating rate of interest, generally including a fractional percentage as a
commission for the intermediary. The intermediary also makes arrangements with a
second entity which has a floating-rate obligation which substantially mirrors
the obligation desired by the first party. In return for assuming a fixed
obligation, the second entity will pay the intermediary all sums that the
intermediary pays on behalf of the first entity, plus an arrangement fee and
other agreed upon fees.

The Fund intends to participate in interest rate swaps with regard to
obligations held in the Fund's portfolio. To the extent, however, the Fund does
not own the underlying obligation, the Fund will maintain, in a segregated
account with the Fund's custodian, cash or liquid debt securities having an
aggregate value equal to the amount of the Fund's outstanding swap obligation.

Interest rate swaps are generally entered into to permit the party
seeking a floating rate obligation the opportunity to acquire such obligation at
a lower rate than is directly available in the credit market, while permitting
the party desiring a fixed rate obligation the opportunity to acquire such a
fixed rate

<PAGE>

obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon rate to cover the
cost involved.

Repurchase Agreements. The Fund may engage in repurchase transactions,
in which the Fund purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board of Directors and will be held pursuant to a written agreement.

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

Illiquid Investments. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities) may not constitute, at the time of purchase, more than
10% of the value of the total net assets of the Fund. Subject to this
limitation, the Board of Directors has authorized the Fund to invest in
restricted securities where such investments are consistent with the Fund's
investment objectives and has authorized such securities to be considered liquid
to the extent the investment manager determines on a daily basis that there is a
liquid institutional or other market for such securities. Notwithstanding the
determinations in this regard, the Board of Directors remains responsible for
such determinations and will consider appropriate action to maximize the Fund's
liquidity and its ability to meet redemption demands if a security should become
illiquid subsequent to its purchase. To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the Fund may be increased if qualified institutional buyers become
uninterested in purchasing these securities or the market for these securities
contracts. See "Additional Information Regarding the Fund's Investment
Objectives and Policies" in the SAI.

Defaulted Debt Securities. The Fund may purchase defaulted debt
securities if, in the opinion of the investment manager, it appears likely that
the issuer may resume interest payments or other advantageous developments
appear likely in the near

<PAGE>

term. Such securities may be illiquid. The Fund will not invest more than 10%
of its total assets (at the time of purchase) in defaulted debt securities,
although this is not a fundamental policy and may be changed by the Board of
Directors without shareholder approval.

Loan Participations. The Fund is authorized to acquire loan
participations and other related direct or indirect bank debt obligations ("Loan
Participations"), in which the Fund will purchase from a lender a portion of a
larger loan which it has made to a borrower. Generally, such loan participations
are sold without guarantee or recourse to the lending institution and are
subject to the credit risks of both the borrower and the lending institution.
Such loan participations, however, may enable the Fund to acquire an interest in
a loan from a financially strong borrower which it could not do directly. While
Loan Participations generally trade at par value, the Fund will be permitted to
purchase such securities which sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved, the
Loan Participations may appreciate in value.

Investment in Loan Participations is permitted to the extent that such
securities, all of which may have speculative characteristics and some of which
may be in default, and other defaulted securities represent no more than 15% of
the Fund's net assets (at the time of investment).

In addition, it is the present policy of the Fund (which may be changed
without the approval of shareholders) not to invest more than 5% of its total
assets in companies which have a record of less than three years continuous
operations, including predecessors; nor to invest in puts, calls, straddles or
spreads, or any combination thereof, except in connection with option writing
activities; nor to engage in joint or joint and several trading accounts in
securities, except that an order to purchase or sell may be combined with orders
from other persons to obtain lower brokerage commissions.

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

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

The Fund's investment in options, forward contracts, options on foreign
currencies and foreign securities may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for qualification as a
regulated investment company and are subject to special tax rules that may
affect the amount, timing and character of distributions to shareholders. These
securities require the application of complex and special tax rules and
elections, more information about which is included in the SAI.

The Fund's investment in zero coupon and delayed interest bonds, or
bonds that provide for payment of interest in kind may cause the Fund to
recognize income and make distributions to shareholders prior to the receipt of
cash payments. Payment-in-kind obligations are subject to special tax rules
concerning the amount, character and timing of income required to be accrued by
the Fund.

The Fund may also be required under the Code and U.S. Treasury
regulations to accrue income for income tax purposes on defaulted obligations
and to distribute such income to the Fund's shareholders even though the Fund is
not currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy any or all of these

<PAGE>

distribution requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.

RISK CONSIDERATIONS

HIGH YIELDING, FIXED-INCOME SECURITIES

Because of the Fund's policy of investing in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than is present with an investment in higher rated, lower yielding securities.
Accordingly, an investment in the Fund should not be considered a complete
investment program, and should be carefully evaluated for its appropriateness
in light of the investor's overall investment needs and goals. Persons on fixed
incomes, such as retired persons, should also consider the increased risk of
loss to principal which is present with an investment in higher risk securities
such as those in which the Fund invests.

The market values of lower rated, fixed-income securities and unrated
securities of comparable quality (sometimes referred to as "junk bonds") tend to
reflect individual corporate developments to a greater extent than do higher
rated securities, which react primarily to fluctuations in the general level of
interest rates. Such lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. Bonds rated BB or below by S&P
or Ba or below by Moody's are considered, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating categories. Even
bonds rated BBB by S&P or Baa by Moody's, ratings which are considered
investment grade, possess some speculative characteristics.

Companies that issue high yielding, fixed-income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the securities
of such issuers is generally greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of high yielding securities may
experience financial stress. During these periods, such issuers may not have
sufficient cash flow to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific corporate developments, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer may be significantly greater for the
holders of high yielding securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. As of May
31, 1994, four issues (from four separate issuers) out of 170 issues (excluding
short-term securities and cash equivalents) in the Fund's portfolio were in
default. In the fiscal year ended May 31, 1994, two issues defaulted, and a
total of 20 issues defaulted over the prior three years of which the Fund still
holds the four issues mentioned above. Defaulted issues represented 1.20% of the
net assets of the Fund at May 31, 1994. Current prices for defaulted bonds,
however, are generally significantly lower than their purchase price, and the
Fund may have unrealized losses on such defaulted securities which are reflected
in the price of the Fund's shares. In general, securities which default lose
much of their value in the time period prior to the actual default so that the
Fund's net assets are impacted prior to the default. The Fund may retain an
issue which has defaulted because such issue may present an opportunity for
subsequent price recovery. The high yield securities market is relatively new
and much of its growth

<PAGE>

prior to 1990 paralleled a long economic expansion. The recent recession
disrupted the market for high yield securities and adversely affected the value
of outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers.

High yielding, fixed-income securities frequently have call or buy-back
features which permit an issuer to call or repurchase the securities from the
Fund. Although such securities are typically not callable for a period from
three to five years after their issuance, if a call were exercised by the issuer
during periods of declining interest rates, the Fund would likely have to
replace such called securities with lower yielding securities, thus decreasing
the net investment income to the Fund and dividends to shareholders. The
premature disposition of a high yielding security due to a call or buy-back
feature, the deterioration of the issuer's creditworthiness, or a default may
also make it more difficult for the Fund to manage the timing of its receipt of
income, which may have tax implications. Further information is included under
"Taxation of the Fund and Its Shareholders."

The Fund may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular security
at any given time. The market for lower rated, fixed-income securities generally
tends to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "Valuation of Fund Shares.")

The Fund is authorized to acquire high yielding, fixed-income securities
that are sold without registration under the federal securities laws and
therefore carry restrictions on resale. While many recent high yielding
securities have been sold with registration rights, covenants and penalty
provisions for delayed registration, if the Fund is required to sell such
restricted securities before the securities have been registered, it may be
deemed an underwriter of such securities as defined in the Securities Act of
1933, which entails special responsibilities and liabilities. The Fund may incur
special costs in disposing of such securities; however, the Fund will generally
incur no costs when the issuer is responsible for registering the securities.

The Fund may acquire high yielding, fixed-income securities during an
initial underwriting. Such securities involve special risks because they are new
issues. The Fund has no arrangement with its underwriters or any other person
concerning the acquisition of such securities, and the investment manager will
carefully review the credit and other characteristics pertinent to such new
issues.

Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower rated bonds, which appeared

<PAGE>

during 1989 and 1990, along with highly publicized defaults of some high yield
issuers, and concerns regarding a sluggish economy which continued in 1993,
depressed the prices for many such securities. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
Fund will rely on the investment manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the
investment manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters.

The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
and, if the issuer defaults, the Fund may obtain no return at all on its
investment. Zero coupon, deferred interest and pay-in-kind bonds involve
additional special considerations.

Zero coupon or deferred interest securities are debt obligations which
do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are generally issued and traded at a
discount from their face amounts or par value. The discount varies depending on
the time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree than
do non-zero coupon or deferred interest securities having similar maturities
and credit quality. Current federal income tax law requires that a holder of a
zero coupon security report as income each year the portion of the original
issue discount on such security that accrues that year, even though the holder
receives no cash payments of interest during the year.

Pay-in-kind bonds are securities which pay interest through the issuance
of additional bonds. The Fund will be deemed to receive interest over the life
of such bonds and be taxed as if interest were paid on a current basis, although
no cash interest payments are received by the Fund until the cash payment date
or until the bonds mature. Current federal income tax law requires that
companies such as the Fund, which seek to qualify for pass-through federal
income tax treatment as regulated investment companies, distribute at least 90%
of their investment company taxable income each year, including tax-exempt and
non-cash income. The Fund is not limited in the amount of its assets that may be
invested in such securities. The Fund, however, intends to continue to qualify
as a regulated investment company under the Code. Accordingly, during periods
when the Fund receives no cash interest payments on its zero coupon securities
or deferred interest or pay-in-kind bonds, it will be required, in order to
maintain its desired tax treatment, to distribute cash approximating the income
attributable to such securities. Such distribution may require the sale of
portfolio securities to meet the distribution requirements and such sales may be
subject to the risk factors discussed above. Further information is included
under "Taxation of the Fund and Its Shareholders."

<PAGE>

ASSET COMPOSITION TABLE

As stated earlier, ratings published by rating services, such as S&P, will be
considered in connection with the Fund's investments in bonds, although such
ratings will not be determinative. The table below shows the percentage
invested in each of the specific S&P rating categories and those that are not
rated but deemed by the investment manager to be of the same credit quality.
The information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in
the fiscal year ended May 31, 1994. The Appendix to this Prospectus includes a
description of each rating category.

<TABLE>
<CAPTION>
Average Weighted
S&P Rating Percentage of Assets
- ------------------------------------- --------------------
<S> <C>
AAA.................................. 5.64%
AA................................... 0.36%
BBB+................................. 0.06%
BBB.................................. 0.80%
BBB-................................. 3.19%
BB+.................................. 7.01%
BB................................... 3.18%
BB-.................................. 9.28%
B+................................... 18.93%
B.................................... 20.93%
B-................................... 13.05%
CCC+................................. 4.93%
CCC.................................. 0.99%
CCC-................................. 1.09%
CC................................... 0.37%
C.................................... 0.06%
D.................................... 1.17%
N/R*................................. 6.32%
</TABLE>

*Bonds to which no specific equivalent rating have been assigned by S&P but
which have been determined by the investment manager to be consistent with the
Fund's objectives without exposing the Fund to excessive risk.

FOREIGN SECURITIES

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

MANAGEMENT OF THE FUND

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

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the
Fund's investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the
principal shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr.
and R. Martin Wiskemann, who own approximately 20%, 16% and 10%,
respectively, of Resources' outstanding shares. Through its subsidiaries,
Resources is engaged in various aspects of the financial serv-

<PAGE>

ices industry. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (112 separate series) with aggregate assets of
over $75 billion.

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

During the fiscal year ended May 31, 1994, fees totaling 0.46% of the
average monthly net assets of the Fund were paid to Advisers.

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

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

During the fiscal year ended May 31, 1994, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totaled 0.59% of the
average monthly net assets of the Fund.

PLAN OF DISTRIBUTION

Effective May 1, 1994 (the "Effective Date"), the Fund adopted a
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act, as
approved by shareholders at a special meeting held on April 22, 1994. Under the
Plan, the Fund may reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the Fund's shares.
Such expenses may include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates. The maximum amount which the Fund may pay to Distributors or
others for such distribution expenses is 0.15% per annum of the average daily
net assets of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.15% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund.

In implementing the Plan, the Board of Directors has determined that the
annual fees payable there-

<PAGE>

under will be equal to the sum of: (i) the amount obtained by multiplying 0.15%
by the average daily net assets represented by shares of the Fund that were
acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). Such fees will be paid to the
current securities dealer of record on the shareholder's account. In addition,
until such time as the maximum payment of 0.15% is reached on a yearly basis,
up to an additional 0.02% will be paid to Distributors under the Plan. The
payments to be made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the Plan,
such as advertising.

The fee is a Fund expense so that all shareholders regardless of when
they purchased their shares will bear expenses under the Plan at the same rate.
The rate initially will be at least 0.07% (0.05% plus 0.02%) of such average
daily net assets and, as Fund shares are sold on or after the Effective Date,
will increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed 0.15% of average daily net assets). While this is the
currently anticipated method for calculating fees payable under the Plan, the
Plan permits the Fund's directors to allow the Fund to pay a full 0.15% on all
assets at any time. The approval of the Fund's Board of Directors would be
required to change the method of calculating the payments to be made under the
Plan.

DISTRIBUTIONS TO SHAREHOLDERS

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

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

2. Capital gain distributions. The Fund may derive capital gains or
losses in connection with sales or other dispositions of its portfolio
securities. Distributions by the Fund derived from net short-term and net
long-term capital gains (after taking into account any net capital loss
carryovers) may generally be made 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 net capital gains from the
prior fiscal year. These distributions, when made, will generally be fully
taxable to the Fund's shareholders. 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.

DISTRIBUTION DATE

Although subject to change by the Board of Directors, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends monthly for shareholders of record on the last business day of
the month, payable on or about the 15th day of the following month. The amount
of income dividend payments by the Fund is dependent upon the amount of net
income received by the Fund from its portfolio

<PAGE>

holdings, is not guaranteed and is subject to the discretion of the Board of
Directors. Fund shares are quoted ex-dividend on the first business day
following the record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.

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

DIVIDEND REINVESTMENT

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

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

DISTRIBUTIONS IN CASH

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

Shareholders may be able to change their dividend option by telephone. See
"Telephone Transactions."

How Shareholders Participate in
the Results of the Fund's Activities

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

<PAGE>

TAXATION OF THE FUND AND ITS SHAREHOLDERS

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.

The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, qualified as such and intends to continue to so
qualify. By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.

Foreign securities, which meet the definition in the Code of a Passive
Foreign Investment Company ("PFIC"), may subject the Fund to an income tax and
interest charge with respect to such investment. To the extent possible, the
Fund will avoid such treatment by not investing in PFIC securities or by
adopting other tax strategies for any PFIC securities it does purchase.

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

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

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

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

For corporate shareholders, it is anticipated that only a small portion
of the Fund's dividends during the current fiscal year will qualify for the
corporate dividends-received deduction because of the Fund's principal
investment in non-equity domestic investments. To the extent that the Fund pays
dividends which qualify for this deduction, the availability of the deduction is
subject to certain holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction.

<PAGE>

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

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

Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes on
their shares of the Fund and distributions and redemption proceeds received
from the Fund.

HOW TO BUY SHARES OF THE FUND

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

PURCHASE PRICE OF FUND SHARES

Shares of the Fund are offered at the public offering price, which is
the net asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Total Sales Charge
---------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.............................. 4.25% 4.44% 4.00%
$100,000 but less than $250,000................. 3.50% 3.63% 3.25%
$250,000 but less than $500,000................. 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000............... 2.15% 2.20% 2.00%
$1,000,000 through $2,500,000................... 1.00% 1.01% 1.00%
</TABLE>

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

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

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

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

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

<PAGE>

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

2. Letter of Intent. An investor may immediately qualify for a reduced
sales charge on a purchase of shares of the Fund by completing the Letter of
Intent section of the Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses an intention to
invest during the next 13 months a specified amount which if made at one time
would qualify for a reduced sales charge. At any time within 90 days after the
first investment which the investor wants to qualify for the reduced sales
charge, a signed Shareholder Application, with the Letter of Intent section
completed, may be filed with the Fund. After the Letter of Intent is filed,
each additional investment made will be entitled to the sales charge applicable
to the level of investment indicated on the Letter of Intent as described
above. Sales charge reductions based upon purchases in more than one company in
the Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemptions) during the period. AN INVESTOR WHO
EXECUTES A LETTER OF INTENT PRIOR TO A CHANGE IN THE SALES CHARGE STRUCTURE FOR
THE FUND WILL BE ENTITLED TO COMPLETE THE LETTER AT THE LOWER OF (I) THE NEW
SALES CHARGE STRUCTURE, OR (II) THE SALES CHARGE STRUCTURE IN EFFECT AT THE
TIME THE LETTER WAS FILED WITH THE FUND.

AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY
COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five
percent (5%) of the amount of the total intended purchase will be reserved in
shares of the Fund, registered in the investor's name, to assure that the full
applicable sales charge will be paid if the intended purchase is not completed.
The reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the

<PAGE>

Letter of Intent has been completed or the higher sales charge paid. If the
total purchases, less redemptions, equal the amount specified under the Letter,
the reserved shares will be deposited to an account in the name of the investor
or delivered to the investor or the investor's order. If the total purchases,
less redemptions, exceed the amount specified under the Letter and is an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the dealer through whom purchases
were made pursuant to the Letter of Intent (to reflect such further quantity
discount) on purchases made within 90 days before and on those made after
filing the Letter. The resulting difference in offering price will be applied
to the purchase of additional shares at the offering price applicable to a
single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total
of such purchases had been made at a single time. Upon such remittance, the
reserved shares held for the investor's account will be deposited to an account
in the name of the investor or delivered to the investor or to the investor's
order. If within 20 days after written request such difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize such difference will be made. In the event of a total redemption of the
account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the
balance will be forwarded to the investor. By completing the Letter of Intent
section of the Shareholder Application, an investor grants to Distributors a
security interest in the reserved shares and irrevocably appoints Distributors
as attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is in effect each
time a purchase is made.

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

GROUP PURCHASES

An individual who is a member of a qualified group, such as the Assembly of
Governmental Employees ("AGE"), may also purchase shares of the Fund at the
reduced sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously purchased and still
owned by the group, plus the amount of the current purchase. For example, if
members of the group had previously invested and still held $80,000 of Fund
shares and now were investing $25,000, the sales charge would be 3.50%. Members
of AGE who participate in the payroll deduction plan described below or the
group accumulation plan discussed above are eligible for a reduced sales charge
of 1% on investments of $500 or more. Information concerning the current sales
charge applicable to a group may be obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A qualified group must
have more than 10 members, must be available to arrange for group meetings
between representatives of the Fund or Distributors and the

<PAGE>

members, must agree to include sales and other materials related to the Fund in
its publications and mailings to members at reduced or no cost to Distributors,
and must seek to arrange for payroll deduction or other bulk transmission of
investments to the Fund.

AGE members who select a payroll deduction plan should complete the
payroll deduction plan section of the supplement to the Shareholder Application
and submit it to their employer. Investments may be in any amount, with a
minimum of $12.50. Payroll deduction plans will normally be identified by a
member's social security number, therefore, such plans must be limited to one
payroll deduction account per member. Subsequent investments will be automatic
and will continue until such time as the investor notifies the Fund and the
investor's employer to discontinue further investments. Due to the varying
procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.

PURCHASES AT NET ASSET VALUE

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

Shares of the Fund may be purchased at net asset value by trust
companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity. Such purchases are subject to
minimum requirements with respect to amount of purchase, which may be
established by Distributors. Currently, those criteria require that the amount
invested or to be invested during the subsequent 13-month period in this Fund or
any other company in the Franklin/Templeton Group must total at least
$1,000,000. Orders for such accounts will be accepted by mail accompanied by a
check or by telephone or other means of electronic data transfer directly from
the bank or trust company, with payment by federal funds received by the close
of business on the next business day following such order. If an investment by a
trust company or bank trust department at net asset value is made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make payment, out of their own resources, to such

<PAGE>

dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.

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

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

Shares of the Fund may also be purchased at net asset value by (1)
officers, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) former participants in the
Franklin/Templeton Profit Sharing/401(k) plan, who elect to make a direct
rollover of all, or a portion of, their eligible distribution account balance
from such plan, (3) registered securities dealers and their affiliates, for
their investment account only, and (4) registered personnel and employees of
securities dealers and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.

Shares of the Fund may also be purchased at net asset value by any
state, county, or city, or any instrumentality, department, authority or agency
thereof which has determined that the Fund is a legally permissible investment
and which is prohibited by applicable investment laws from paying a sales charge
or commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EX-

<PAGE>

TENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal
investors considering investment of proceeds of bond offerings into the Fund
should consult with expert counsel to determine the effect, if any, of various
payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.

GENERAL

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

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

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

FTTC, an affiliate of Distributors, can serve as custodian or trustee
for various types of retirement plans. Brochures for each of the plans
sponsored by Franklin contain important information regarding eligibility,
contribution limits and Internal Revenue Service ("IRS") requirements. Please
note that separate applications other than the one contained in this Prospectus
must be used to establish a FTTC retirement account. To obtain a retirement
plan brochure or application, call toll free 1-800/DIAL BEN (1-800/342-5236).

The Franklin IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation, accumulate on a tax-deferred basis until
withdrawn. Under the current tax law, individuals who (or whose spouses) are
covered by a company retirement plan (termed "active participants") may be
restricted in the amount they may claim as an IRA deduction on their returns.
The IRA deduction is gradually reduced to the extent that a taxpayer's adjusted
gross incomes exceed certain specified limits.

Two IRAs, with a combined limit of $2,250 or 100% of earned
compensation, may be established by a married couple in which only one spouse is
a wage earner. The $2,250 may be split between the two IRAs, so long as no more
than $2,000 is contributed to either one for a given tax year.

A Franklin Rollover IRA account is designed to maintain the tax-deferred
status of a qualifying distribution from an employer-sponsored retirement plan,
such as a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding law
enacted in 1993.

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary
Reduction Simplified Employee Pension Plan (SAR-SEP) are for use by small
businesses (generally 25 or fewer employees) to provide a retirement plan for
their employees and, at the same time, provide for a tax-deduction to the

<PAGE>

employer. SEP-IRA contributions are made to an employee's IRA, at the
discretion of the employer, up to the lesser of $30,000 or 15% of compensation*
per employee. The SAR-SEP allows employees to contribute a portion of their
salary to an IRA on a pre-tax basis through salary deferrals. The maximum
annual salary deferral limit for a SAR-SEP is the lesser of 15% of compensation
(adjusted for deferrals) or $9,240 (1994 limit; indexed for inflation).

The Franklin 403(b) Retirement Plan is a salary deferral plan for
employees of certain non-profit and educational institutions [ss.501(c)(3)
organizations and public schools]. The 403(b) Plan allows participants to
determine the annual amount of salary they wish to defer. The maximum annual
salary deferral amount is generally the lesser of 25% of compensation (adjusted
for deferrals) or $9,500.

The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to
make contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows
the employer to contribute up to the lesser of $30,000 or 25% of compensation*
per employee; however, contributions are required annually at the rate
(percentage) elected by the employer at the outset of the plan. In order to
achieve a combined contribution rate of 25% while maintaining a certain degree
of flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).

*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.

FTTC can add optional provisions to the Profit Sharing and Money Purchase
Pension Plans described above and provide Defined Benefit, Target Benefit, and
401(k) Plans on a custom designed basis. Business Retirement Plans, whether
standard or custom designed, may require an annual report (Form 5500) to be
filed with the IRS.

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

Individuals and employers should consult with a competent tax or
financial advisor before choosing a retirement plan.

OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS

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

SHARE CERTIFICATES

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

<PAGE>

the value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the securities dealer.

CONFIRMATIONS

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

AUTOMATIC INVESTMENT PLAN

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

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

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive
regular periodic payments from the account, provided that the net asset value of
the shares held by the shareholder is at least $5,000. There are no service
charges for establishing or maintaining a Systematic Withdrawal Plan. The
minimum amount which the shareholder may withdraw is $50 per withdrawal
transaction, although this is merely the minimum amount allowed under the plan
and should not be mistaken for a recommended amount. The plan may be established
on a monthly, quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and income dividends paid by
the Fund will be reinvested for the shareholder's account in additional shares
at net asset value. Payments will then be made from the liquidation of shares at
net asset value on the day of the transaction (which is generally the first
business day of the month in which the payment is scheduled) with payment
generally received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record. Liquidation of shares
may reduce or possibly exhaust the shares in the shareholder's account, to the
extent withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal

<PAGE>

payment is a sale for federal income tax purposes. Because the amount withdrawn
under the plan may be more than the shareholder's actual yield or income, part
of the payment may be a return of the shareholder's investment.

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

INSTITUTIONAL ACCOUNTS

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

EXCHANGE PRIVILEGE

The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives and policies. The
shares of most of these investment companies are offered to the public with a
sales charge. If a shareholder's investment objective or outlook for the
securities markets changes, the Fund shares may be exchanged for shares of
other mutual funds in the Franklin Group of Funds or the Templeton Group (as
defined under "How to Buy Shares of the Fund") which are eligible for sale in
the shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectuses of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:

EXCHANGES BY MAIL

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

EXCHANGES BY TELEPHONE

Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by telephone by calling Investor Services at
1-800/632-2301. If the shareholder does not wish this privilege extended to a
particular account, the Fund or Investor Services should be notified.

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

<PAGE>

are genuine. Please refer to "Telephone Transactions - Verification
Procedures."

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

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

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

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

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

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

<PAGE>

RETIREMENT ACCOUNTS

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

TIMING ACCOUNTS

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

RESTRICTIONS ON EXCHANGES

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

The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) makes
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) makes more than two exchanges out of the Fund
per calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1/4 of 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.

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

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

HOW TO SELL SHARES OF THE FUND

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

REDEMPTIONS BY MAIL

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

<PAGE>

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

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

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

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

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

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

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

Where shares to be redeemed are represented by share certificates, the
request for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.

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

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

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

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

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

<PAGE>

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

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

REDEMPTIONS BY TELEPHONE

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

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

REDEEMING SHARES THROUGH SECURITIES DEALERS

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

<PAGE>

receipt of the dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
dealer may charge a fee for handling the order. The SAI contains more
information on the redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

RETIREMENT ACCOUNTS

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

OTHER

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

TELEPHONE TRANSACTIONS

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

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

VERIFICATION PROCEDURES

The Fund and Investor Services will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These will
include: recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder

<PAGE>

caused by an unauthorized transaction. Shareholders are, of course, under no
obligation to apply for or accept telephone transaction privileges. In any
instance where the Fund or Investor Services is not reasonably satisfied that
instructions received by telephone are genuine, the requested transaction will
not be executed, and neither the Fund nor Investor Services will be liable for
any losses which may occur because of a delay in implementing a transaction.

RESTRICTED ACCOUNTS

Telephone redemptions and dividend option changes may not be accepted on
FTTC retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend
payment. Changes to dividend options must also be made in writing. While
exchanges may be made by Franklin/Templeton IRA and 403(b) retirement accounts,
certain restrictions may apply to other types of retirement plans.

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

GENERAL

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

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

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

VALUATION OF FUND SHARES

The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales charge of the Fund).

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and dividends are recorded
on the ex-dividend date. Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Portfolio securities

<PAGE>

underlying actively traded call options are valued at their market price as
determined above. The current market value of any option held by the Fund is
its last sale price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market quotations are
readily available are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the Board of
Directors. All money market instruments with a maturity of more than 60 days
are valued at current market, as discussed above. All money market instruments
with a maturity of 60 days or less are valued at their amortized cost, which
the Board of Directors has determined in good faith constitutes fair value for
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the directors determine that it does not constitute
fair value for such purposes. With the approval of directors, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the
above described functions.

Securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets are valued in a similar manner, and values are
translated into U.S. dollars at the bid price of their respective currency
denomination against U.S. dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
policies established by the Board of Directors.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

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

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
05 followed by the # sign, when requested to do so by the automated operator.

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

<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

<PAGE>

PERFORMANCE

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

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

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

Yield, which is calculated according to a formula prescribed by the SEC
(see the SAI), is not indicative of the dividends or distributions which were or
will be paid to the Fund's shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gain, and is calculated over a different
period of time.

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

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

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

<PAGE>

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

ORGANIZATION

The Fund's authorized capital stock consists of 5,000,000,000 shares of
common stock of $.01 par value. All shares are of one class, have one vote and,
when issued, are fully paid and nonassessable. All shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive or
conversion rights.

VOTING RIGHTS

As required by applicable law, the Fund holds regular annual meetings of
its security holders. Shares of the Fund have noncumulative voting rights which
means that in all elections of directors, the holders of more than 50% of the
shares voting can elect 100% of the directors if they choose to do so, and in
such event, the holders of the remaining shares voting will not be able to
elect any person or persons to the Board of Directors.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the
value of such account has been reduced by the shareholder's prior voluntary
redemption of shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided advance notice is
given to the shareholder. More information is included in the SAI.

OTHER INFORMATION

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

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

ACCOUNT REGISTRATIONS

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

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

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

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

Except as indicated, a shareholder may transfer an account in the Fund
carried in "street" or "nominee" name by the shareholder's securities dealer to
a comparably registered Fund account maintained by another securities dealer.
Both the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless

<PAGE>

a dealer agreement has been executed and is on file with Distributors, the Fund
will not process the transfer and will so inform the shareholder's delivering
securities dealer. To effect the transfer, a shareholder should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealer(s) to evidence consent to
the transfer. Under current procedures, the account transfer may be processed
by the delivering securities dealer and the Fund after the Fund receives
authorization in proper form from the shareholder's delivering securities
dealer. In the future it may be possible to effect such transfers
electronically through the services of the NSCC.

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

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

IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS

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

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

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio: R. Martin Wiskemann since 1972 and Chris Molumphy
since 1991.

R. Martin Wiskemann
Senior Vice President of Advisers

Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of
38

<PAGE>

Zurich, Switzerland. He has been with Advisers since 1972 and in the securities
business for more than 30 years, managing mutual fund equity and fixed income
portfolios, and private investment accounts. He is a member of several
securities industry associations.

Chris Molumphy
Portfolio Manager of Advisers

Mr. Molumphy holds a bachelor of arts degree in economics from Stanford
University and a master's degree in finance from the University of Chicago. He
has been with Advisers since 1988. He is a Chartered Financial Analyst (CFA) and
a member of several securities industry associations.

APPENDIX

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

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

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

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

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

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

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

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

Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

<PAGE>

DESCRIPTION OF S&P CORPORATE BOND RATINGS

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

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

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

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

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

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

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995

TO THE STATEMENT OF ADDITIONAL INFORMATION

FRANKLIN'S AGE HIGH INCOME FUND

DATED OCTOBER 1, 1994

1. The following substitutes for the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

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

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

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

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

<PAGE>

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

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

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

REINVESTMENT DATE

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

<PAGE>
FRANKLIN'S
ACE HIGH [LOGO]
INCOME FUND FRANKLIN

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

<PAGE>
FRANKLIN'S
AGE HIGH (Logo)
INCOME FUND FRANKLIN

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

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Additional Information Regarding
the Fund's Investment Objectives
and Policies (See also the Prospectus
"Investment Objectives and Policies
of the Fund").................................. 2
Officers and Directors.......................... 4
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund").................................. 6
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions................. 7
Additional Information Regarding Fund
Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares").................... 9
Additional Information Regarding
Taxation (See also the Prospectus
"Taxation of the Fund and Its
Shareholders")................................. 11
The Fund's Underwriter.......................... 12
General Information............................. 14
Financial Statements............................ 18
</TABLE>

AGE High Income Fund, Inc. (the "Fund") is a diversified, open-end management
investment company with the principal investment objective of earning a high
level of current income. The Fund also seeks capital appreciation as a
secondary objective. The Fund's assets will generally be invested in both
fixed-income debt securities and dividend-paying common or preferred stocks.

A Prospectus for the Fund, dated October 1, 1994, as may be amended from time
to time, which provides the basic information a prospective investor should
know before investing in the Fund, may be obtained without charge from the Fund
or from the Fund's principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors") at the address listed above.

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

<PAGE>

ADDITIONAL INFORMATION REGARDING THE
FUND'S INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES AND POLICIES

Loans of Portfolio Securities. As stated in the Prospectus, the Fund may make
loans of its portfolio securities, up to 10% of its total assets, in accordance
with guidelines adopted by the Fund's Board of Directors. The lending of
securities is a common practice in the securities industry. The Fund will
engage in security loan arrangements with the primary objective of increasing
the Fund's income either through investing the collateral in short-term,
interest bearing obligations or by receiving loan premiums from the borrower.
The Fund will continue to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially. The Fund will not lend its portfolio securities if
such loans are not permitted by the laws or regulations of any state in which
its shares are qualified for sale. Loans will be subject to termination by the
Fund in the normal settlement time, currently five business days after notice,
or by the borrower on one day's notice. Borrowed securities must be returned
when the loan is terminated. Any gain or loss in the market price of the
borrowed securities which occurs during the term of the loan inures to the Fund
and its shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of its securities.

Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be sold without prior
registration under the Securities Act of 1933, unless such sale is pursuant to
an exemption therefrom. In recent years, the Fund's portfolio has included
several issues of such securities.

Notwithstanding the restriction on the sale of such securities, a secondary
market exists for many of these securities. As with other securities in the
Fund's portfolio, if there are readily available market quotations for a
restricted security, it will be valued, for purposes of determining the Fund's
net asset value, within the range of the bid and ask prices. To the extent that
no such quotations are available, the securities will be valued at fair value
in accordance with procedures adopted by the Board of Directors. The Fund's
purchases of restricted securities can result in the receipt of commitment
fees. For example, the transaction may involve an individually negotiated
purchase of short-term increasing rate notes. Maturities for this type of
security typically range from one to five years. Such notes are usually issued
as temporary or "bridge" financing to be replaced ultimately with permanent
financing for the project or transaction which the issuer seeks to finance.
Typically, at the time of commitment, the Fund receives the security and
sometimes a cash commitment fee. Because the transaction could possibly involve
a delay between the time the Fund commits to purchase the security and the
Fund's payment for and receipt of that security, the Fund will maintain, in a
segregated account with its custodian, cash or high-grade marketable securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. The Fund will not purchase restricted securities in
order to generate commitment fees, although the receipt of such fees will
assist the Fund in achieving its principal objective of earning a high level of
current income.

The Fund may also receive consent fees based on a variety of situations. For
example, the Fund may receive consent fees in situations where an issuer seeks
to "call" a bond it has issued which does not contain a provision permitting
the issuer to call the bond. The Fund may also receive a consent fee in
situations where its consent is required to facilitate a merger or other
business combination transaction. Such fees are received only occasionally, are
privately negotiated and may be in any amount. As is the case with commitment
fees, the Fund will not purchase securities with a view to generating consent
fees, although the receipt of such fees is consistent with the Fund's principal
investment objective.

Illiquid Securities. As noted in the Prospectus, it is the policy of the Fund
that illiquid securities (including illiquid equity securities, securities with
legal or contractual restrictions on resale, repurchase agreements of more than
seven days duration and other securities which are not readily marketable) may
not constitute, at the time of purchase, more than 10% of the value of the
total net assets of the Fund. Generally, an "illiquid security" is any security
that cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument. Subject
to this limitation, the Board of Directors has authorized the Fund to invest in
restricted securities where such investment is consistent with the Fund's
investment objectives and has authorized such securities to be considered
liquid to the extent the Fund's investment manager determines that there is a
liquid institutional or

<PAGE>

other market for such securities, such as restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board of Directors will review on a
monthly basis any determination by the Fund's investment adviser to treat a
restricted security as liquid, including the investment adviser's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Fund's investment adviser and the Board of Directors will take
into account the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers willing to purchase or sell the
security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity may be increased if qualified
institutional buyers become uninterested in purchasing these securities or the
market for these securities contracts.

Forward Currency Exchange Contracts. As stated in the Prospectus, the Fund may
enter into forward currency exchange contracts ("Forward Contracts") to attempt
to minimize the risk to the Fund from adverse changes in the relationship
between currencies or to enhance income. A Forward Contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and is privately traded by currency traders and
their customers. When the Fund is the buyer or a seller in such a transaction,
it will either cover its position or maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregated value
equal to the amount of such commitment until payment is made.

When-Issued and Delayed Delivery Transactions. The Fund may purchase debt
securities on a "when-issued" or "delayed delivery" basis. These transactions
are arrangements under which the Fund purchases securities with payment and
delivery scheduled for a future time. Purchases of debt securities on a
when-issued or delayed delivery basis are subject to market fluctuation and are
subject to the risk that the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was
entered into. Although the Fund will generally purchase debt securities on a
when-issued basis with the intention of acquiring such securities, it may sell
them before the settlement date if it is deemed advisable. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The other party's failure may cause the Fund to miss a price or
yield considered advantageous. Securities purchased on a when-issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. The Fund is not subject to any percentage limit on the amount of its
assets which may be invested in when-issued debt securities.

Foreign Securities. As noted in the Prospectus, the Fund may purchase foreign
securities which are traded in the United States or purchase American
Depository Receipts ("ADRs") which are certificates issued by U.S. banks
representing the right to receive securities of a foreign issuer deposited with
that bank or a correspondent bank. The Fund will only purchase ADRs which are
"sponsored," that is, an ADR in which establishment of the issuing facility is
brought about by the participation of the issuer and the depository institution
pursuant to a deposit agreement which sets out the rights and responsibilities
of the issuer, the depository and the ADR holder. Under the terms of most
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, thereby ensuring that ADR holders will be
able to exercise voting rights through the depository with respect to the
deposited securities.

SECURITIES TRANSACTIONS OF THE FUND

Normally, the Fund will purchase securities with the intention of holding them
for the long-term; however, it may on occasion purchase securities with the
expectation of selling within a short period of time. Changes in particular
portfolio holdings may be made whenever it is considered that a security no
longer is suitable for the Fund's portfolio or that another security appears to
offer a relatively greater opportunity, and will be made without regard to the
length of time a security has been held. The portfolio turnover for the fiscal
years ended May 31, 1993 and 1994 was 38.33% and 42.32%, respectively.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of the Fund.

<PAGE>

Under the Investment Company Act of 1940 (the "1940 Act"), a "vote of a
majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares
of the Fund, or (2) 67% or more of the shares of the Fund present at a
shareholders' meeting if more than 50% of the outstanding shares of the Fund
are represented at the meeting in person or by proxy. The Fund may not:

1. Invest more than 25% of the value of the Fund's total assets in one
particular industry.

2. Purchase securities, if the purchase would cause the Fund at that time to
have more than 5% of the value of its total assets invested in the securities
of any one company or to own more than 10% of the voting securities of any one
company (except obligations issued or guaranteed by the U.S. government).

3. Underwrite or engage in the agency distributions of securities of other
issuers, except insofar as the Fund may be technically deemed an underwriter in
connection with the disposition of securities in its portfolio.

4. Make loans to other persons except on a temporary basis in connection with
the delivery or receipt of portfolio securities which have been bought or sold,
or by the purchase of bonds, debentures or similar obligations which have been
publicly distributed or of a character usually acquired by institutional
investors or through loans of the Fund's portfolio securities, or to the extent
the entry into a repurchase agreement may be deemed a loan.

5. Borrow money in excess of 5% of the value of the Fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes.

6. Sell securities short or buy on margin nor pledge or hypothecate any of the
Fund's assets.

7. Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts.

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

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

10. Purchase the securities of any company in which any officer or director of
the Fund or its investment manager owns more than 1/2 of 1% of the outstanding
securities and in which all of the officers and directors of the Fund and its
investment manager as a group, own more than 5% of such securities.

Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in warrants (valued at the lower of cost or market) in excess of
5.0% of the value of the Fund's net assets. No more than 2.0% of the value of
the Fund's net assets may be invested in warrants (valued at the lower of cost
or market) which are not listed on the New York or American Stock Exchanges.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value. In addition, the Fund will not invest in real estate
limited partnerships or in interests (other than publicly traded equity
securities) in oil, gas, or other mineral leases, exploration or development.

OFFICERS AND DIRECTORS

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

<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
<S> <C> <C>
Frank H. Abbott, III Director President and Director, Abbott Corporation (an investment company);
1045 Sansome St. Director, Mother Lode Gold Mines Consolidated; and director, trustee
San Francisco, CA 94111 or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.

*Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin
777 Mariners Island Blvd. and Director Resources, Inc.; Executive Vice President and Director,
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the investment companies in
the Templeton Group of Funds; officer and/or director, as the case
may be, of other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of all the investment companies
in the Franklin Group of Funds.

Robert F. Carlson Director Former member and past Chairman of the Board, Sutter Community
2120 Lambeth Way Hospitals, Sacramento, CA; former member Corporate Board, Blue
Carmichael, CA 95608 Shield of California; formerly Chief Counsel, California Department
of Transportation; and member and past President, Board of
Administration, California Public Employees Retirement Systems.

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

Roy V. Fox Director Retired; formerly Publishing Consultant, Franklin Resources, Inc.
3910 Cypressdale Drive and formerly National Administrative Officer of the Assembly of
Spring, TX 77388 Governmental Employees.

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

<PAGE>

<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
<S> <C> <C>
*R. Martin Wiskemann Vice President Senior Vice President, Portfolio Manager and Director, Franklin
777 Mariners Island Blvd. and Director Advisers, Inc.; Senior Vice President, Franklin Management, Inc.;
San Mateo, CA 94404 Vice President, Treasurer and Director, ILA Financial Services, Inc.
and Arizona Life Insurance Company of America; and officer and/or
director, as the case may be, of many of the investment companies
in the Franklin Group of Funds.

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

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

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

As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R). Directors not affiliated with
the investment manager are currently paid fees of $680 per month plus $680 per
meeting attended and are reimbursed for expenses incurred in connection with
attending such meetings. During the fiscal year ended May 31, 1994, fees and
expenses totaling $76,398 were paid to directors of the Fund who are not
affiliated with the investment manager. No officer or director received any
other compensation directly from the Fund. As of July 5, 1994, the directors and
officers, as a group, owned of record and beneficially approximately 694,200.467
shares or less than 1% of the total outstanding shares of the Fund. Certain
officers or directors who are shareholders of Franklin Resources, Inc. may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.

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

INVESTMENT ADVISORY AND OTHER SERVICES

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services. The Manager and other subsidiary companies of Resources currently
manage over $112 billion in assets for more than 3.6 million shareholders. The
preceding table indicates those officers and directors who are also affiliated
persons of Distributors and Advisers.

<PAGE>

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

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for
the first $100 million of average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on average monthly net assets of the Fund in
excess of $100 million up to $250 million; and 9/240 of 1% (approximately
45/100 of 1% per year) of average monthly net assets of the Fund in excess of
$250 million.

Management fees for the fiscal years ended May 31, 1992, 1993 and 1994 were
$8,245,812, $8,666,780 and $8,993,566, respectively.

The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 1.5% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements.

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

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

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

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended May 31, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this Statement of
Additional Information.

THE FUND'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS

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

<PAGE>

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry
and information available to them concerning the level of commissions being
paid by other institutional investors of comparable size. The Manager will
ordinarily place orders for the purchase and sale of over-the-counter
securities on a principal rather than agency basis with a principal market
maker unless, in the opinion of the Manager, a better price and execution can
otherwise be obtained. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask price. As
a general rule, the Fund does not purchase bonds in underwritings where it is
not given any choice, or only limited choice, in the designation of dealers to
receive the commission. The Fund will seek to obtain prompt execution of orders
at the most favorable net price.

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

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

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

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers
under the management agreement will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection therewith.

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

<PAGE>

have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Fund.

During the fiscal years ended May 31, 1992, 1993 and 1994, the Fund paid total
brokerage commissions of $43,411, $103,351, and $23,257, respectively. As of
May 31, 1994, the Fund did not own securities of its regular broker-dealers.

ADDITIONAL INFORMATION REGARDING FUND SHARES

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

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

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

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

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

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

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

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS

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

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

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that

<PAGE>

there is minimal or no sales effort required with respect to these investors.
If certain investments at net asset value are made through a dealer who has
executed a dealer or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested (1% for certain 401(k) or
similar category of investor as stated in the Prospectus), paid pro rata on a
quarterly basis on average quarterly balances for a period of one year.

REDEMPTIONS IN KIND

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

REDEMPTIONS BY THE FUND

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

CALCULATION OF NET ASSET VALUE

As noted in the Prospectus, the Fund generally calculates net asset value as of
1:00 p.m. Pacific time each day that the Exchange is open for trading. As of
the date of this Statement of Additional Information, the Fund is informed that
the Exchange observes the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific time which will not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Board of Directors.

REINVESTMENT DATE

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

SPECIAL SERVICES

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

Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed

<PAGE>

the per account fee which the Fund normally pays Investor Services. Such
financial institutions may also charge a fee for their services directly to
their clients.

ADDITIONAL INFORMATION REGARDING TAXATION

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

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

Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.

Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment
in Fund shares. The entire dividend, including the portion which is treated as
a deduction, is includable in the tax base on which the alternative minimum tax
is computed and may also result in a reduction in the shareholder's tax basis
in its Fund shares, under certain circumstances, if the shares have been held
for less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.

The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the 12-month period ending October 31 of
each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to shareholders by December 31 of each year
in order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to the shareholder until the
following January, will be treated for tax purposes as if paid by the Fund and
received by the shareholder on December 31 of the calendar year in which they
are declared. The Fund intends as a matter of policy to declare such dividends,
if any, in December and to pay these dividends in December or January to avoid
the imposition of this tax, but does not guarantee that its distributions will
be sufficient to avoid any or all federal excise taxes.

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

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

<PAGE>

lowed under these rules will be added to the tax basis of the shares purchased.

Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.

The Fund is authorized to invest in foreign securities (see the discussion in
the Prospectus under Investment Objectives and Policies of the Fund). Such
investments, if made, will have the following tax consequences.

Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be
treated as ordinary income and losses rather than capital gains and losses and
may affect the amount and timing of the Fund's income or loss from such
transactions and in turn its distributions to shareholders.

In order for the Fund to qualify as a regulated investment company, at least
90% of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Future Treasury regulations, however, are expected to provide that
such gains may not qualify for purposes of the 90% limitation if such gains are
not directly related to the Fund's principal business of investing in stock or
securities, or options or futures with respect to such stock or securities.

Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.

The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.

If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any tax
paid by the Fund as a result of its ownership of shares in a PFIC will not give
rise to a deduction or credit to the Fund or to any shareholder. A PFIC means
any foreign corporation if, for the taxable year involved, either (i) it
derives at least 75 percent of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income."

THE FUND'S UNDERWRITER

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

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

<PAGE>

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

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

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1992, 1993 and 1994 were
$8,368,994, $7,108,307, and $7,958,366, respectively. After allowances to
dealers, Distributors retained $1,169,508, $1,021,018, and $1,044,184, during
the fiscal years ended May 31, 1992, 1993 and 1994, respectively. Distributors
may be entitled to reimbursement under the distribution plan of the Fund as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby the Fund may pay up to a maximum of 0.15% per annum of
its average daily net assets for expenses incurred in the promotion and
distribution of its shares.

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

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

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

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

To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plan for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.

The Board of Directors has determined that a consistent cash flow resulting
from the sale of new

<PAGE>

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

The Plan was approved by shareholders on April 22, 1994 and by the directors of
the Fund, including those directors who are not interested persons, as defined
in the 1940 Act. The Plan is effective for an initial period through April 30,
1995 and is renewable annually by a vote of the Fund's Board of Directors,
including a majority vote of the directors who are non-interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan, cast in person at a meeting called for that purpose. It is also
required that the selection and nomination of such directors be done by the
non-interested directors. The Plan and any related agreement may be terminated
at any time, without any penalty, by vote of a majority of the non-interested
directors on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with the Manager or by vote of a majority of the Fund's
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.

The Plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested directors,
cast in person at a meeting called for the purpose of voting on any such
amendment.

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

GENERAL INFORMATION

PERFORMANCE

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

Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by the Fund are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by the Fund to compute or express performance follows.

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains 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. If a change is made in the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge currently in effect.

The average annual compounded rates of return for the Fund for the one-, five-
and ten-year periods ended on the date of the financial statements included
herein were 1.23%, 8.76% and 10.52%, respectively.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years

<PAGE>

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods. The
total rates of return for the Fund for the one-, five- and ten-year periods
ended on the date of the financial statements included herein were 1.23%,
52.20% and 171.96%, respectively.

In considering the quotations of total return by the Fund, investors should
remember that the 4.25% maximum sales charge reflected in each quotation is a
one time fee (charged on all direct purchases) which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund.

YIELD

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

Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. The yield for the Fund for the 30-day period ended on the date of
the financial statements included herein was 8.95%.

This figure was obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period

CURRENT DISTRIBUTION RATE

Yield, which is calculated according to a formula prescribed by the SEC, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders are reflected in the quoted "current
distribution rate." The current distribution rate is computed by dividing the
total amount of dividends per share paid by the Fund during the past 12 months
by a current maximum offering price. Under certain circumstances, such as when
there has been a change in the amount of dividend payout, or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid over the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains, and is calculated over
a different period of time.

VOLATILITY

Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken
in achieving performance.

OTHER PERFORMANCE QUOTATIONS

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

<PAGE>

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

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

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

COMPARISONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

OTHER FEATURES AND BENEFITS

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

MISCELLANEOUS INFORMATION

The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets.

Founded in 1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 45 years and now services more than 2.4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton Worldwide, Inc., a pioneer in international investing. Together,
the Franklin/Templeton Group has over $112 billion in assets under management
for more than 3.6 million shareholder accounts and offers 103 U.S.-based mutual
funds. The Fund may identify itself by its NASDAQ or CUSIP number.

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

OWNERSHIP AND AUTHORITY DISPUTES

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
of AGE High Income Fund, Inc.:

We have audited the accompanying statement of assets and liabilities of AGE
High Income Fund, Inc. (the Fund), including the statement of investments in
securities and net assets, as of May 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights,
included under the caption "Financial Highlights" for each of the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AGE
High Income Fund, Inc. as of May 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated thereon, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
June 27, 1994

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS 84.4%
AUTOMOTIVE 1.9%
US $15,010,000 Clevite Industries, Inc., S.F., sub. deb., 12.375%, 06/30/01 .. $ 7,580,050
US 8,200,000 Exide Corp., senior sub. notes, 10.75%, 12/15/02 .............. 8,589,500
US 2,000,000 Lear Seating Corp., senior sub. notes, 11.25%, 07/15/00 ....... 2,115,000
US 15,150,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ................ 15,339,375
------------
33,623,925
------------
CABLE TELEVISION 9.3%
US 17,400,000 Cablevision Industries Corp., senior notes, 10.75%, 01/30/02 .. 17,226,000
US 20,000,000 Cablevision System Corp., S.F., senior sub. deb., 10.75%,
04/01/04 ..................................................... 20,250,000
US 5,000,000 Cablevision System Corp., senior sub. deb., 9.875%, 04/01/23 .. 4,487,500
US 16,000,000 (e)Century Communications Corp., senior disc. notes, (original
accretion rate 8.875%), 0.00%, 03/15/03 ...................... 6,480,000
US 8,000,000 Century Communications Corp., senior notes, 9.50%, 08/15/00.... 7,780,000
US 15,000,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 .............. 14,212,500
US 3,000,000 Continental Cablevision, Inc., senior deb., 8.875%, 09/15/05 .. 2,752,500
US 8,500,000 Continental Cablevision, Inc., senior deb., 9.50%, 08/01/13 ... 7,862,500
US 13,000,000 Continental Cablevision, Inc., senior sub. deb., 11.00%,
06/01/07 ..................................................... 13,390,000
US 5,800,000 Continental Cablevision, Inc., senior sub. deb., 9.00%,
09/01/08 ..................................................... 5,307,000
US 10,000,000 Helicon Group L.P. Corp., S.F., senior secured notes, 9.00%
coupon to 11/1/96, 11.00% thereafter, 11/01/03 ............... 8,750,000
US 5,000,000 Rogers Cablesystems, Inc., senior secured deb., 10.125%,
09/01/12 ..................................................... 4,937,500
CA 15,300,000 Rogers Cablesystems, Inc., senior secured deb., 9.65%,
01/15/14 ..................................................... 9,558,011
US 10,000,000 Rogers Communications, Inc., senior deb., 10.875%, 04/15/04 ... 10,200,000
US 7,000,000 Scott Cable Communications, Inc., S.F., sub. deb., 12.25%,
04/15/01 ..................................................... 6,055,000
US 20,000,000 Tele-Communications, Inc., senior deb., 9.80%, 02/01/12 ....... 20,834,100
US 9,500,000 Turner Broadcasting Systems, Inc., senior deb., 8.40%,
02/01/24 ..................................................... 7,980,000
------------
168,062,611
------------
CHEMICALS 5.4%
US 18,000,000 Arcadian Partners, S.F., senior notes, Series B, 10.75%,
05/01/05 ..................................................... 17,910,000
US 18,750,000 (e)Harris Chemical North America, Inc., senior secured disc. notes,
zero coupon to 01/15/96, (original accretion rate 10.25%),
10.25% thereafter, 07/15/01 .................................. 15,046,875
US 20,000,000 Huntsman Corp., lst mortgage, 11.00%, 04/15/04 ................ 20,250,000
US 2,000,000 IMC Fertilizer Group, Inc., senior deb., 9.45%, 12/15/11 ...... 1,870,000
US 10,000,000 IMC Fertilizer Group, Inc., senior notes, 9.25%, 10/01/00...... 9,500,000
US 6,550,000 IMC Fertilizer Group, Inc., senior notes, 10.75%, 06/15/03 .... 6,713,750
US 6,000,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.125%,
06/15/01 ..................................................... 6,037,500
US 8,000,000 Methanex Corp., senior notes, 8.875%, 11/15/01 ................ 7,920,000
US 3,500,000 Uniroyal Chemical Corporation, senior notes, 10.50%, 05/01/02 . 3,552,500
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- -----------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
COUNTRY* AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

BONDS (CONT.)
CHEMICALS (CONT.)
US $ 4,850,000 Uniroyal Chemical Corporation, senior sub. notes, 11.00%,
05/01/03 ........................................................ $ 4,971,250
US 6,000,000 (e)Uniroyal Chemical Corporation, sub. notes, zero coupon to
05/01/98, (original accretion rate 12.00%), 12.00% thereafter,
05/01/05 ........................................................ 3,975,000
----------
97,746,875
----------
CONSUMER GOODS 3.9%
US 9,000,000 Calmar, Inc., S.F., senior notes, 12.00%, 12/15/97 ............... 8,910,000
US 17,000,000 (e)Coleman Holdings, Inc., senior secured disc. notes, (original
accretion rate 10.875%), 0.00%, 05/27/98 ........................ 11,560,000
US 7,500,000 Playtex Family Products Corp., senior sub. notes, 9.00%,
12/15/03 ........................................................ 6,768,750
US 15,000,000 Revlon Consumer Products Corp., senior sub. notes, 10.50%,
02/15/03 ........................................................ 12,412,800
US 18,700,000 (e)Revlon Worldwide Corp., senior secured disc. notes, (original
accretion rate 12.00%), 0.00%, 03/15/98 ......................... 7,760,500
US 20,000,000 RJR Nabisco, Inc., senior notes, 9.25%, 08/15/13 ................. 17,775,000
US 5,750,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 .................. 5,520,000
----------
70,707,050
----------
CONTAINERS & PACKAGING 2.2%
US 3,360,000 (a),(d),(e)Kane Industries, Inc., senior sub. disc. notes, zero coupon to
02/01/95, (original accretion rate 8.00%), 8.00% thereafter,
02/01/98 ...................................................... 18,480
US 25,500,000 Owens Illinois, Inc., S.F., senior deb., 11.00%, 12/01/03 ..... 27,348,750
US 12,000,000 Owens Illinois, Inc., senior sub. notes, 9.75%, 08/15/04 ...... 11,910,000
----------
39,277,230
----------
ENERGY 2.5%
US 6,750,000 (b)Energy Ventures, senior notes, 10.25%, 03/15/04 ............... 6,547,500
US 17,000,000 Gulf Canada Resources, Ltd., senior sub. notes, 9.25%,
01/15/04 ..................................................... 15,640,000
US 3,985,000 (a),(d)Synergy Group, Inc., senior sub. notes, 11.625%, 03/15/97 ..... 3,626,350
US 18,000,000 Transco Energy Co., senior notes, 11.25%, 07/01/99 ............ 19,035,144
----------
44,848,994
----------
FOOD & BEVERAGES 7.4%
US 9,250,000 Beatrice Foods, Inc., S.F., senior sub. notes, 12.00%,
12/01/01 ..................................................... 10,128,750
US 9,500,000 Coca Cola Bottling Group Southwest, Inc., senior sub. notes,
9.00%, 11/15/03 .............................................. 8,597,500
US 2,500,000 Darling-Delaware Co., Inc., S.F., senior sub. notes, 13.75%
coupon to 01/01/95, 11.00% thereafter, 07/15/00............... 2,500,000
US 26,129,000 (b)Del Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 ............ 26,194,323
US 1,540,000 Dr Pepper Bottling Co. of Texas, senior notes, 10.25%,
02/15/00 ..................................................... 1,555,400
US 2,000,000 (e)Dr Pepper Bottling Holdings, S.F., senior disc. notes, zero
coupon to 02/15/98, (original accretion rate 11.625%), 11.625%
thereafter, 02/15/03 ......................................... 1,330,000
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
FOOD & BEVERAGES (CONT.)
US $43,550,000 (e)Dr Pepper/Seven-Up Cos., Inc., S.F., senior sub. disc. notes,
zero coupon to 11/01/97, (original accretion rate 11.50%),
11.50% thereafter, 11/01/02 .................................. $ 33,533,500
US 7,500,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 .... 7,575,000
US 17,000,000 Royal Crown Corp., senior secured notes, 9.75%, 08/01/00....... 16,192,500
US 19,000,000 Specialty Foods Corp., senior notes, Series B, 10.25%,
08/15/01 ..................................................... 18,572,500
US 9,500,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 8,656,875
------------
134,836,348
------------
FOOD RETAILING 6.6%
US 9,500,000 Food 4 Less Supermarkets, Inc., S.F., senior notes, 10.45%,
04/15/00 ..................................................... 9,547,500
US 2,000,000 Food 4 Less Supermarkets, Inc., S.F., senior sub. notes,
13.75%, 06/15/01 ............................................. 2,190,000
US 12,500,000 (c),(e)Grand Union Capital Corp., senior notes, Series B, zero coupon
to 07/15/99, (original accretion rate 15.00%), 15.00%
thereafter, 07/15/04 ......................................... 5,187,500
US 17,700,000 (c),(e)Grand Union Capital Corp., senior sub. notes, Series A,
(original accretion rate 16.50%), 0.00%, 01/15/07 ............ 2,168,250
US 2,955,000 (g)Kash N' Karry Food Stores, Inc., S.F., sub. deb., 14.00%,
02/01/01 ..................................................... 1,049,025
US 10,000,000 Kroger Co., senior sub. notes, 10.00%, 05/01/99 ............... 10,350,000
US 11,600,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01 . 12,528,000
US 10,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02 .... 10,250,000
US 14,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 .... 13,090,000
US 5,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 .............. 4,575,000
US 10,000,000 Penn Traffic Co., senior notes, 10.375%, 10/01/04 ............. 10,200,000
US 11,000,000 Pueblo Xtra International, senior notes, 9.50%, 08/01/03 ...... 10,065,000
US 21,000,000 Ralphs Grocery Co., senior sub. notes, 10.25%, 07/15/02 ....... 21,105,000
US 8,000,000 Vons Cos., Inc., senior sub. notes, 9.625%, 04/01/02 .......... 8,120,000
------------
120,425,275
------------
FOREST & PAPER PRODUCTS 4.3%
US 16,000,000 Container Corp. of America, senior notes, Series A, 9.75%,
04/01/03 ..................................................... 15,680,000
US 9,000,000 Container Corp. of America, guaranteed senior notes, Series A,
11.25%, 05/01/04 ............................................. 9,337,500
US 8,102,924 Fort Howard Corp., S.F., pass through trust, 11.00%, 01/02/02 . 8,204,211
US 25,500,000 Fort Howard Corp., senior sub. notes, 9.00%, 02/01/06 ......... 21,738,750
US 7,500,000 Fort Howard Corp., sub. notes, 10.00%, 03/15/03 ............... 7,031,250
US 16,000,000 Stone Container, senior notes, 9.875%, 02/01/01 ............... 15,280,000
------------
77,271,711
------------
GAMING & LEISURE 2.5%
US 1,249,800 (a)Divi Hotels, Inc., secured cvt. sub. deb., 0.00%, 02/07/02 .... 212,466
US 17,500,000 Embassy Suites, Inc., guaranteed senior sub. notes, 10.875%,
04/15/02 ..................................................... 18,637,500
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
GAMING & LEISURE (CONT.)
US $20,000,000 John Q. Hammons Hotels, 1st mortgage, 8.875%, 02/15/04 ........ $ 18,000,000
US 10,000,000 (b)Red Roof Inns, Inc., senior notes, 9.625%, 12/15/03 ........... 9,300,000
------------
46,149,966
------------
HEALTHCARE 5.1%
US 14,830,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%,
11/01/02 ..................................................... 13,791,900
US 6,001,000 ALCO Health Distribution Corp., senior deb., PIK, 11.25%,
07/15/05 ..................................................... 6,226,038
US 10,800,000 (e)American Medical, Inc., junior sub. disc. deb., zero coupon to
11/25/95, (original accretion rate 15.00%), 15.00% thereafter,
11/26/05 ..................................................... 18,738,000
US 7,500,000 American Medical Holding, Inc., senior sub. notes, 13.50%,
08/15/01 ..................................................... 8,456,250
US 8,000,000 Healthsouth Rehabilitation Co., senior sub. notes, 9.50%,
04/01/01 ..................................................... 7,800,000
US 18,000,000 Healthtrust, Inc. - The Hospital Co., sub. notes, 10.75%,
05/01/02 ..................................................... 18,720,000
US 11,500,000 Healthtrust, Inc. - The Hospital Co., sub. notes, 10.25%,
04/15/04 ..................................................... 11,643,750
US 9,000,000 Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98,
9.625% thereafter, 12/15/03 .................................. 7,065,000
------------
92,440,938
------------
HOME BUILDING .7%
US 12,660,774 (a),(d)Walter Industries, Inc., extendable senior sub. reset notes,
PIK, 16.625%, 01/01/95 ....................................... 12,091,039
------------
INDUSTRIAL 6.3%
US 14,000,000 (e)American Standard, Inc., S.F., senior sub. deb., zero coupon
to 06/01/98, (original accretion rate 10.50%), 10.50%
thereafter, 06/01/05 ......................................... 8,680,000
US 23,000,000 American Standard, Inc., senior deb., 11.375%, 05/15/04 ....... 24,121,250
US 8,350,000 American Standard, Inc., senior sub. notes, 9.875%, 06/01/01 .. 8,162,125
US 5,000,000 Coltec Industries, Inc., senior notes, 9.75%, 11/01/99 ........ 5,050,000
US 18,000,000 Coltec Industries, Inc., senior sub. notes, 10.25%, 04/01/02 .. 18,360,000
US 24,000,000 (e)Eagle Industries, Inc., senior notes, zero coupon to 07/15/98,
(original accretion rate 10.50%), 10.50% thereafter, 07/15/03. 15,240,000
US 12,000,000 Inter-City Products Corp., senior secured notes, 9.75%,
03/01/00 ..................................................... 10,500,000
US 10,376,061 Thermadyne Industries, Inc., senior sub. notes, 10.25%,
05/01/02 ..................................................... 10,064,780
US 14,387,336 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ..... 13,955,716
------------
114,133,871
------------
MEDIA & BROADCASTING 5.5%
US 12,000,000 Ackerley Communications, Inc., senior secured notes, Series B,
10.75%, 10/01/03 ............................................. 12,060,000
US 6,000,000 Act III Broadcasting, senior sub. notes, 9.625%, 12/15/03 ..... 5,850,000
US 16,000,000 Continental Broadcasting, Ltd., senior sub. notes, 10.625%,
07/01/03 ..................................................... 16,160,000
US 19,075,000 Infinity Broadcasting Corp., senior sub. notes, 10.375%,
03/15/02 ..................................................... 19,742,625
US 10,500,000 K-III Communications Corp., S.F., senior notes, 10.625%,
05/01/02 ..................................................... 10,736,250
US 15,000,000 New World Television, Inc., S.F., senior notes, 11.00%,
06/30/05 ..................................................... 15,300,000
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
MEDIA & BROADCASTING (CONT.)
US $ 3,500,000 News America Holdings, Inc., guaranteed senior deb., 9.25%,
02/01/13 ..................................................... $ 3,462,522
US 25,000,000 (e)PanAmSat Capital Corp., L.P., S.F., senior sub. disc. notes,
zero coupon to 08/01/98, (original accretion rate 11.375%),
11.375% thereafter, 08/01/03 ................................. 16,125,000
------------
99,436,397
------------
METALS & MINING 3.9%
US 20,000,000 AK Steel Corporation, senior notes, 10.75%, 04/01/04 .......... 20,375,000
US 11,042,000 (a),(d)Bucyrus-Erie Co., senior notes, 16.00%, 01/01/96 .............. 6,335,348
US 17,000,000 Envirosource, Inc., senior notes, 9.75%, 06/15/03 ............. 15,555,000
US 11,000,000 Horsehead Industries, Inc., S.F., sub. notes, 14.00%, 06/01/99. 10,505,000
US 19,000,000 Joy Technologies, Inc., senior notes, 10.25%, 09/01/03 ........ 18,525,000
------------
71,295,348
------------
RESTAURANTS 2.6%
US 10,850,000 Family Restaurants, Inc., senior notes, 9.75%, 02/01/02 ....... 9,873,500
US 2,000,000 Flagstar Corp., senior notes, 10.75%, 09/15/01 ................ 1,955,000
US 11,000,000 Flagstar Corp., senior notes, 10.875%, 12/01/02 ............... 10,725,000
US 13,614,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 ...... 12,626,985
US 2,900,000 Foodmaker, Inc., senior notes, 9.25%, 03/01/99 ................ 2,704,250
US 11,500,000 Foodmaker, Inc., senior sub. notes, 9.75%, 06/01/02 ........... 10,177,500
------------
48,062,235
------------
RETAIL .5%
US 10,000,000 Eckerd Corp., senior sub. notes, 9.25%, 02/15/04 .............. 9,525,000
------------
TECHNOLOGY & INFORMATION SYSTEMS 1.3%
US 10,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03.. 9,550,000
US 7,500,000 (e)Bell & Howell Co., senior deb., zero coupon to 03/01/00,
(original accretion rate 11.50%), 11.50% thereafter, 03/01/05. 4,031,250
US 3,550,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00............... 3,408,000
US 6,500,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 ........ 6,630,000
------------
23,619,250
------------
TEXTILES & APPAREL 4.2%
US 20,500,000 Collins & Aikman Group, Inc., S.F., senior sub. deb., 11.875%,
06/01/01 ..................................................... 20,781,875
US 10,300,000 Forstmann & Co., Inc., S.F., senior sub. notes, 14.75%,
04/15/99 ..................................................... 11,445,875
US 15,000,000 Hartmarx Corp., senior sub. notes, 10.875%, 01/15/02 .......... 14,775,000
US 4,000,000 JPS Textiles Group, Inc., S.F., sub. disc. notes, 10.85%,
06/01/99 ..................................................... 3,995,000
US 12,000,000 JPS Textiles Group, Inc., S.F., sub. notes, 10.25%, 06/01/99 .. 11,460,000
US 6,000,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 ........ 5,490,000
US 10,000,000 WestPoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ... 9,062,500
------------
77,010,250
------------
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TRANSPORTATION 3.9%
US $ 9,000,000 Delta Air Lines, Inc., S.F., pass through equipment trust,
10.06%, 01/02/16 ............................................. $ 8,589,510

US 15,000,000 Delta Air Lines, Inc., S.F., pass through equipment trust,
10.50%, 04/30/16 ............................................. 14,869,935
US 19,500,000 Southern Pacific Rail Corp., senior notes, 9.375%, 08/15/05 ... 19,207,500
US 10,000,000 Southern Pacific Transportation Co., S.F., senior secured
notes, Series B, 10.50%, 07/01/99 ............................ 10,587,500
US 20,422,000 United Airlines, S.F., pass through trust, Series B-2, 9.06%,
09/26/14 ..................................................... 17,818,195
--------------
71,072,640
--------------
UTILITIES 2.3%
US 22,500,000 (e) California Energy, senior notes, zero coupon to 01/15/97,
(original accretion rate 10.25%), 10.25% thereafter, 01/15/04. 17,063,528
US 10,000,000 (e) CMS Energy Corp., senior notes, Series B, zero coupon to
10/01/95, (original accretion rate 9.875%), 9.875% thereafter,
10/01/99 ..................................................... 9,030,960
US 4,500,000 Midland Funding II, S.F., senior lease obligation, Series A,
11.75%, 07/23/05 ............................................. 4,526,240
US 11,500,000 Midland Funding II, S.F., senior lease obligation, Series B,
13.25%, 07/23/06 ............................................. 12,041,696
--------------
42,662,424
--------------
WIRELESS COMMUNICATION 2.1%
US 20,000,000 (e) Comcast Cellular Communications, Inc., senior notes, Series B,
(original accretion rate 11.37%), 0.00%, 03/05/00............. 12,000,000
US 27,250,000 (e) Dial Call Communications, units, senior disc. notes, zero
coupon to 04/15/99, (original accretion rate 12.25%), 12.25%
thereafter, 04/15/04 ......................................... 15,941,250
US 10,500,000 Rogers Cantel Mobile Communications, Inc., S.F., senior sub.
notes, 10.75%, 11/01/01 ...................................... 10,920,000
--------------
38,861,250
--------------
TOTAL BONDS (COST $1,584,740,401) ....................... 1,533,160,627
--------------
FOREIGN CURRENCY NOTES 1.1%
SOUTH AFRICA
ZA 108,800,000 ESCOM, E168, utility deb., 11.00%, 06/01/08 (Cost $24,942,668). 19,854,852
--------------
FOREIGN GOVERNMENT AGENCIES 2.1%
MEXICO 1.5%
US 15,000,000 United Mexican States, floating rate notes, Series D, 4.25%,
12/31/19 ..................................................... 13,125,000
US 13,000,000 United Mexican States, floating rate notes, Series D, 4.328%,
12/31/19 ..................................................... 11,375,000
US 4,000,000 United Mexican States, Series B, 6.25%, 12/31/19 .............. 2,720,000
--------------
27,220,000
--------------
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT AGENCIES (CONT.)
VENEZUELA .6%
US $20,000,000 Republic of Venezuela, 4.312%, 12/18/07 ....................... $ 11,175,000
--------------
TOTAL FOREIGN GOVERNMENT AGENCIES (COST $36,588,856) .... 38,395,000
--------------

<CAPTION>
SHARES/
WARRANTS
------------
<S> <C> <C> <C>
(a) COMMON STOCKS 1.4%
US 168,149 Darling Delaware Co. .......................................... 1,933,714
US 611,655 (f) Divi Hotels, Inc. ............................................. 74,622
US 103,000 Dr Pepper/Seven-Up Cos., Inc. ................................. 2,523,500
US 302,965 Envirodyne Industries, Inc. ................................... 1,401,213
US 155,795 Gaylord Containers Corp., Class A ............................. 817,924
US 1,436,971 (f) NVR, Inc. ..................................................... 10,058,797
US 39,757 Penn Traffic Co. .............................................. 1,446,161
US 1,833,563 (f) Price Communications Corp. .................................... 7,105,057
US 97,500 (b) Specialty Food Corp. .......................................... 146,250
US 38,615 Thermadyne Holdings Corp. ..................................... 521,303
--------------
TOTAL COMMON STOCKS (COST $78,613,165) .................. 26,028,541
--------------
PREFERRED STOCKS 1.0%
US 378,839 Glendale Federal Bank, 1.00% cvt. pfd., Series D .............. 3,693,680
US 2,550,000 RJR Nabisco Holdings Corp., $.835 cvt. pfd. ................... 15,300,000
--------------
TOTAL PREFERRED STOCKS (COST $24,189,325) ............... 18,993,680
--------------
PARTNERSHIP UNITS .4%
US 415,000 Freeport-McMoRan Resource Partners, Ltd., depository units
(Cost $8,190,392) ............................................ 7,573,750
--------------
(a) WARRANTS & RIGHTS .3%
US 8,030 Foodmaker, Inc. ............................................... 134,180
US 827,526 Gaylord Container Corp. ....................................... 3,206,663
US 6,253 Gilbert Robinson Holdings Corp. ............................... 625
US 9,982 Glendale Federal Bank ......................................... 100
US 1,215 (c) Grand Union Capital Corp. ..................................... 1,136,827
US 5,896 Kendall International, Inc. ................................... 190,145
US 120,000 NVR, Inc. ..................................................... 345,000
US 20,000 Payless Cashways, Inc. ........................................ 311,200
--------------
TOTAL WARRANTS & RIGHTS (COST $5,250,267) ............... 5,324,740
--------------
TOTAL COMMON STOCKS, PREFERRED STOCKS, PARTNERSHIP UNITS,
AND WARRANTS & RIGHTS (COST $116,243,149) ............. 57,920,711
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,762,515,074) ....... 1,649,331,190
--------------
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS
COMMERCIAL PAPER 4.0%
$46,000,000 Associates Corp. of North America, 4.265% - 4.606%, 06/10/94 -
07/25/94...................................................... $ 46,000,000
26,000,000 General Electric Capital Corp., 4.315% - 4.403%, 06/08/94 -
07/25/94...................................................... 26,000,000
--------------
TOTAL COMMERCIAL PAPER (COST $72,000,000) ............... 72,000,000
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $1,834,515,074)................................... 1,721,331,190
--------------
(h), (i) RECEIVABLES FROM REPURCHASE AGREEMENT 3.9%
74,149,310 Joint Repurchase Agreement, 4.26%, 06/01/94 (Maturity Value
$71,239,771) (Cost $71,231,342)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 05/31/95 -
02/15/99.................................................... 71,231,342
--------------

TOTAL INVESTMENTS (COST $1,905,746,416) 98.6% ...... 1,792,562,532
OTHER ASSETS AND LIABILITIES, NET 1.4% ............. 24,918,111
--------------
NET ASSETS 100.0% .................................. $1,817,480,643
==============

At May 31, 1994, the net unrealized depreciation based on the
cost of investments for income tax purposes of $1,905,746,416
was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost ........ $ 38,202,209
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value ........ (151,386,093)
--------------
Net unrealized depreciation ................................... $ (113,183,884)
==============
</TABLE>

PORTFOLIO ABBREVIATIONS: COUNTRY LEGEND:

PIK - Payment in Kind CA - Canada
S.F. - Sinking Fund US - United States of America
L.P. - Limited Partnership ZA - South Africa

* Securities traded in currency of country indicated.
(a) Non-income producing.
(b) See Note 6 regarding Rule 144A securities.
(c) See Note 7 regarding restricted securities.
(d) See Note 8 regarding defaulted securities.
(e) Zero coupon/Step-up bonds. The current effective yield may vary. The
original accretion rate by security, as reported, will remain constant.
(f) See Note 11 regarding holdings of 5% or more of voting securities.
(g) Due to the uncertainty of future interest payments, the fund discontinued
the accrual of income on 2/1/94, the date the last interest payment was
received.
(h) Face amount for repurchase agreements is for the underlying collateral.
(i) See Note 1 regarding joint repurchase agreement.

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994

Assets:
Investment in securities, at value
(identified cost $1,834,515,074) $1,721,331,190
Receivables from repurchase
agreement, at value and cost 71,231,342
Cash 526,322
Receivables:
Dividends and interest 39,448,446
Capital shares sold 1,868,582
--------------
Total assets 1,834,405,882
--------------
Liabilities:
Payables:
Investment securities purchased 15,150,000
Capital shares repurchased 633,180
Management fees 702,193
Distribution fees 208,113
Shareholder servicing costs 55,480
Accrued expenses and other liabilities 176,273
--------------
Total liabilities 16,925,239
--------------
Net assets, at value $1,817,480,643
==============
Net assets consist of:
Undistributed net investment income
(Note 1) $ 19,300,345
Unrealized depreciation on investments
and translation of assets and liabilities
denominated in foreign currencies (113,223,856)
Accumulated net realized loss (499,248,524)
Capital shares 6,731,359
Additional paid-in capital 2,403,921,319
--------------
Net assets, at value $1,817,480,643
==============
Representative computation of net asset
value and offering price per share:
Net asset value and
redemption price per share
($1,817,480,643 / 673,135,886
shares outstanding) $ 2.70
==============
Maximum offering price
(100/96 of $2.70)+ $ 2.81
==============

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1994

Investment income:
Interest $194,820,043
Dividends 2,404,390
Realized foreign currency
gain (Note 1) 771,420
------------

Total Income $197,995,853
Expenses:
Management fees (Note 5) 8,993,566
Shareholder servicing
costs (Note 5) 690,897
Distribution fees (Note 5) 208,113
Reports to shareholders 836,450
Custodian fees 348,342
Registration fees 87,752
Professional fees 84,890
Directors' fees and expenses 76,398
Other 75,129
------------
Total expenses 11,401,537
------------
Net investment income 186,594,316
------------
Realized and unrealized loss
on investments:
Net realized loss (3,681,910)
Net unrealized depreciation
on investments and
translation of assets and
liabilities denominated in
foreign currencies (70,177,283)
------------
Net realized and unrealized loss
on investments (73,859,193)
------------
Net increase in net assets
resulting from operations $112,735,123
============

+ Effective July 1, 1994, the sales charge has been increased to a maximum of
4.25% (100/95.75). On sales of $100,000 or more, the offering price is reduced
as stated in the section of the Prospectus entitled "How to Buy Shares of the
Fund."

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MAY 31, 1994 AND 1993

<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................ $ 186,594,316 $ 201,682,653
Net realized loss from security transactions ................................. (3,681,910) (12,409,017)
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in foreign currencies.. (70,177,283) 56,295,929
--------------- ---------------
Net increase in net assets resulting from operations ..................... 112,735,123 245,569,565
Distributions to shareholders:
From undistributed net investment income ..................................... (182,753,717) (179,176,964)
Increase (decrease) in net assets from capital share transactions
(Notes 1 and 3) ............................................................. (48,419,402) 5,330,729
--------------- ---------------
Net increase (decrease) in net assets .................................... (118,437,996) 71,723,330
Net assets:
Beginning of year ............................................................. 1,935,918,639 1,864,195,309
--------------- ---------------
End of year (including undistributed net investment income of
$19,300,345 - 1994 and $32,126,360 - 1993) .................................... $ 1,817,480,643 $ 1,935,918,639
=============== ===============
</TABLE>

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

AGE High Income Fund, Inc. (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended.

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

A. SECURITIES VALUATIONS: Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from a pricing service, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Other securities for which market quotations are not available,
if any, are valued in accordance with procedures established by the Board of
Directors. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.

Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and these values are
translated into U.S. Dollars at current market quotations of their respective
currency denomination against U.S. Dollars last quoted by a major bank or, if
no such quotation is available, at the rate of exchange determined in
accordance with procedures established by the Board of Directors.

The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Directors -- see Notes 6 and
7.

B. INCOME TAXES: The Fund intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code
and to make the requisite distributions to its shareholders which will be
sufficient to relieve it from income and excise taxes. Therefore, no income tax
provision is required.

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

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount is amortized as
required by the Internal Revenue Code.

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

Net investment income differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities - see Note 8.

E. FOREIGN CURRENCY TRANSLATION: The accounting records of the Fund are
maintained in U.S. Dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. Dollars at the rate of exchange of such
currencies against U.S. Dollars on the date of the valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are
recognized when reported by the custodian bank.

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

F. REPURCHASE AGREEMENTS: The Fund may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to
be used to invest in one or more repurchase agreements. The value and face
amount of the Joint Repurchase Agreement has been allocated to the Fund based
on its pro rata interest at May 31, 1994.

The Fund may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. In a repurchase agreement, the Fund purchases a U.S.
Government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for
as a loan by the Fund to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. Government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Fund, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Fund's custodian and held
until resold to the dealer or bank. At May 31, 1994, the outstanding joint
repurchase agreement held by the Fund had been entered into on that date.

G. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS: Effective May 31,
1994, the Fund adopted AICPA Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. As a result,
components of net assets have been reclassified to present financial statement
amounts and distributions in accordance with Statement of Position 93-2.
Accordingly, amounts as of May 31, 1994 have been restated to reflect an
increase in additional paid-in capital of $12,792,023, a decrease in
undistributed net investment income of $16,666,614 and a decrease in
accumulated net realized loss of $3,874,591.

2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At May 31, 1994, for tax purposes, the Fund had capital loss carryovers as
follows:

<TABLE>
<S> <C> <C>
Expiring in: 1995 $ 35,165,075
1996 94,919,282
1997 163,832
1998 85,786,601
1999 192,912,531
2000 63,753,106
2001 14,304,993
2002 12,243,104
------------
$499,248,524
============
</TABLE>

For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Fund are the same as for financial statement purposes at May 31, 1994.

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)

3. CAPITAL STOCK

At May 31, 1994, there were 5,000,000,000 shares of $.01 par value capital
stock authorized and paid-in capital aggregated $2,410,652,678. Transactions in
the Fund's shares for the years ended May 31, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------------------------
1994 1993
--------------------------- ------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold.................................... 82,294,240 $ 233,932,626 77,771,775 $ 212,836,581
Shares issued in connection with merger
(Note 10)..................................... -- -- 844,265 1,745,959
Shares issued in reinvestment of distributions. 25,263,574 71,552,168 24,830,665 67,770,053
Shares redeemed................................ (114,808,451) (326,553,156) (86,131,621) (235,639,792)
Changes from exercise of exchange privilege:

Shares sold................................... 224,078,533 629,917,742 125,977,242 344,309,559
Shares redeemed............................... (231,793,045) (657,268,782) (140,944,314) (385,691,631)
------------ ------------ ------------ ------------
Net increase (decrease).................. (14,965,149) $ (48,419,402) 2,148,012 $ 5,330,729
============ ============ ============ ============
</TABLE>

4. PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended May 31, 1994 aggregated $791,325,971 and
$980,163,626, respectively.

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees, computed monthly on the net assets of the Fund on the
last day of the month at an annualized rate of 5/8 of 1% of the first $100
million of net assets, 1/2 of 1% of net assets in excess of $100 million up to
$250 million, and 45/100 of 1% of net assets in excess of $250 million. Fees
incurred by the Fund aggregated $8,993,566 for the year ended May 31, 1994. The
terms of the management agreement provide that aggregate annual expenses of the
Fund be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Fund's shares are registered. There were no reimbursements to the
Fund under this provision during the year ended May 31, 1994.

In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. receives commissions on sales of the
Fund's capital stock. Commissions received by Franklin/Templeton Distributors,
Inc. and the amounts which were subsequently paid to other dealers for the year
ended May 31, 1994 totaled $7,958,366 and $6,914,182, respectively. Commissions
are deducted from the gross proceeds received from the sale of the capital
stock of the Fund, and as such are not expenses of the Fund.

Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Fund pays costs on a per shareholder account basis. Such
costs incurred for the year ended May 31, 1994 aggregated $690,897, of which
$643,957 was paid to Franklin/Templeton Investor Services, Inc.

Effective May 1,1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of
0.15% per annum of the Fund's average daily net assets for costs incurred in
the promotion, offering and marketing of the Fund's shares. Fees incurred by
the Fund under the agreement aggregated $208,113 for the year ended May
31,1994.

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)

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

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

6. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At May 31, 1994, the Fund held 144A
securities with a value aggregating $42,188,073 representing 2.3% of the Fund's
net assets. See accompanying statement of investments in securities and net
assets for specific information on such securities.

7. RESTRICTED SECURITIES

A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Fund may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Fund values these
restricted securities as disclosed in Note 1. At May 31, 1994, the Fund held
restricted securities with a value aggregating $8,492,577, representing 0.47%
of the Fund's net assets. Such securities are:

<TABLE>
<CAPTION>
Face Acquisition
Amount Security Date Cost Value
- ------------ ------------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
$12,500,000 Grand Union Capital Corp., senior notes, Series B,
zero coupon to 07/15/99, (original accretion rate 15.00%),
15.00% thereafter, 07/15/04................................ 07/22/92 $4,232,703 $5,187,500
17,700,000 Grand Union Capital Corp., senior sub. notes, Series A,
(original accretion rate 16.50%), 0.00%, 01/15/07.......... 07/22/92 1,572,746 2,168,250
Warrants
----------
1,215 Grand Union Capital Corp..................................... 07/22/92 1,136,827 1,136,827
----------
$8,492,577
==========
</TABLE>

8. CREDIT RISK AND DEFAULTED SECURITIES

Although the Fund has a diversified portfolio, the Fund has 84.1% of its net
assets invested in lower rated and comparable quality unrated high yield
securities. Investments in higher yield securities are accompanied by a greater
degree of credit risk and such lower quality securities tend to be more
sensitive to economic conditions than are higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities, because such securities are generally unsecured
and are often subordinated to other creditors of the issuer. At May 31, 1994,
the Fund held 4 defaulted securities issued by 4 separate companies with a
value aggregating $22,071,217, representing 1.2% of the Fund's net assets. For
more information as to specific securities, see the accompanying statement of
investments in securities and net assets.

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)

9. OTHER CONSIDERATIONS

Franklin Advisers, Inc., as the Fund's Manager, may serve as a member of
various bondholders' committees, representing bondholders' interests in certain
corporate restructuring negotiations. Currently, the Manager serves on the
bondholders' committees for Synergy Group and Bucyrus-Erie. As a result of this
involvement in these committees, Franklin Advisers, Inc. may be in possession
of certain material non-public information. The Fund's Manager has not sold nor
does it intend to sell any of its holdings in these securities while in
possession of material non-public information in contravention of the Federal
Securities Laws.

10. ACQUISITION OF FRANKLIN PENNSYLVANIA INVESTORS FUND - HIGH INCOME PORTFOLIO

On June 26, 1992, the Fund acquired all of the net assets of Franklin
Pennsylvania High Income Portfolio pursuant to a plan of reorganization
approved by the shareholders of the Pennsylvania High Income Portfolio on that
date.

The acquisition was accomplished by a tax-free exchange of AGE High Income Fund
shares for all the net assets of the Pennsylvania High Income Portfolio, which
is accounted for as a pooling-of-interests without restatement for financial
reporting purposes.

The selected financial information and shares outstanding immediately before
and after the acquisition for the funds were as follows:

<TABLE>
<CAPTION>
Unrealized
Net Asset Undistributed Accumulated Appreciation
Value Shares Exchange Net Investment Net Realized (Depreciation)
Net Assets Per Share Outstanding Ratio Income Loss on Investments
------------- --------- ----------- -------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania High
Income Portfolio... $ 1,745,959 $8.01 218,029 2.95494559 $ -- $ (167,226) $ 48,460
AGE High Income
Fund............... 1,855,999,272 2.71 685,519,638 9,068,937 (487,423,783) (105,335,714)
Combined............ 1,857,745,231 2.71 686,163,903 9,068,937 (487,591,009) (105,287,254)

</TABLE>

11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES

Investments in portfolio companies, 5% or more of whose outstanding voting
securities are held by the Fund, are defined in the Investment Company Act of
1940 as affiliated companies. The Fund had investments in such affiliated
companies at May 31, 1994, which amounted to $17,238,476.

12. SUBSEQUENT EVENTS

On May 17, 1994 and June 21, 1994 the Board of Directors declared distributions
of $0.022 per share from undistributed net investment income to shareholders of
record at the end of business on May 31, 1994 and June 30, 1994, payable on
June 15, 1994 and July 15, 1994, respectively.

13. FINANCIAL HIGHLIGHTS

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

<PAGE>

AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)