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

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

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SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN NEW YORK TAX-FREE INCOME FUND
DATED NOVEMBER 1, 1994

The prospectus language is revised, as noted, to reflect current operational
policies of the Fund:

1. EXPENSE TABLE

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

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND:

a) Add the following language under "How to Buy Shares of the Fund - General":

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 PERCDENTAGE 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 from 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
investment of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."

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

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1.00% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
trust companies and trust departments of banks. See definition under
"Description of Special Net Asset Value Purchases and as set forth in the SAI.

As of March 31, 1995, "Timing Accounts" will no longer be permitted to buy
shares of the Fund. See "Exchange Privilege" for a description.

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

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased without the imposition of either a front-end
sales charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, and full-time employees of the Fund, any of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and by their spouses and
family members; (2) companies exchanging shares with or selling assets pursuant
to a merger, acquisition or exchange offer; (3) registered securities dealers
and their affiliates, for their investment account only, and (4) registered
personnel and employees of securities dealers, and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.

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

Dividends and capital gains received in cash by the shareholder may also be used
to purchase shares of the Fund or another of the Franklin Templeton Funds at net
asset value or without the imposition of a contingent deferred sales charge
within 120 days of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from Shareholder Services
at 1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."

<PAGE>

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

Shares of the Fund may be purchased at net asset value or without the imposition
of a contingent deferred sales charge by trust companies and bank trust
departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

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

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

b) Substitute the following for the subsection "Timing Accounts."

As of March 1, 1995, "Timing Accounts" will no longer be permitted to exchange
into the Fund. This policy does not affect any other type of investor. "Timing
Accounts" generally include market timing or allocation services; accounts
administered as to redeem or purchase shares based upon certain predetermined
market indicators; or any person whose transactions seem to follow a timing
pattern.

<PAGE>
c) 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 investments of $1
million or more, a contingent deferred sales charge of 1% applies to
redemptions of those investments within the contingent period of 12 months of
the calendar month following such 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; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995, and for
Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly
of an account's net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a shareholder's account
falling below the minimum specified account size.

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

<PAGE>

Franklin
New York Tax-Free
Income Fund

PROSPECTUS October 1, 1994

[FRANKLIN LOGO]

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

- --------------------------------------------------------------------------------
Franklin New York Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company. Its investment objective is to provide
as high a level of dividend income exempt from federal, New York state and New
York City income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The Fund will seek to achieve this
investment objective through investing primarily in long-term New York state
municipal and public authority debt obligations. Investments in municipal
securities will be within the four highest municipal ratings of either Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch") or in unrated securities which in the opinion
of the Fund's investment manager are of comparable quality to such four highest
municipal ratings, at the time of purchase (see "Investment Objective and
Policies of the Fund"). Except for temporary defensive purposes, at least 80%
of the Fund's assets will be invested in municipal securities.

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

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

A Statement of Additional Information concerning the Fund, dated 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.

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

<PAGE>
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.

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table................................ 2
Financial Highlights......................... 4
About the Fund............................... 4
Investment Objective and
Policies of the Fund........................ 4
Management of the Fund....................... 10
Distributions to Shareholders................ 12
Effect of Federal and New York Taxes
on an Investment in the Fund................ 14
How to Buy Shares of the Fund................ 15
Other Programs and Privileges
Available to Fund Shareholders.............. 21
Exchange Privilege........................... 23
How to Sell Shares of the Fund............... 25
Telephone Transactions....................... 28
Valuation of Fund Shares..................... 28
How to Get Information Regarding
an Investment in the Fund................... 29
Performance.................................. 30
General Information.......................... 31
Account Registrations........................ 31
Important Notice Regarding
Taxpayer IRS Certifications................. 32
Portfolio Operations......................... 33
Special Factors Affecting
an Investment in the Fund................... 33
</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 aggregate
operating expenses of the Fund for the fiscal year ended May 31, 1994, except
as otherwise noted.

SHAREHOLDER TRANSACTION EXPENSES

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

*The $5 fee is 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 Rule 12b-1 Fees.......................................................................... 0.10%*
Other Expenses:
Shareholder Servicing Costs.......................................................... 0.01%
Reports to Shareholders............................................................. 0.02%
Other............................................................................... 0.02%
-----
Total Other Expenses............................................................................. 0.05%
-------
Total Fund Operating Expenses.................................................................... 0.61%**
=======
</TABLE>

*Shareholders of the Fund approved a plan of distribution (the "Plan") pursuant
to Rule 12b-1 of the Investment Company Act of 1940 which provides for payments
made by the Fund in connection with the distribution of its shares, up to a
maximum annual rate of 0.10% of the Fund's average net assets. See "Management
of the Fund - Plan of Distribution." Consistent with National Association of
Securities Dealers, Inc.'s rules, it is possible that the combination of
front-end sales charges and Rule 12b-1 fees could cause long-term shareholders
to pay more than the economic equivalent of the maximum front-end sales charges
permitted under those same rules. Given the Fund's maximum initial sales charge
and the proposed Plan's fee rate, however, it is estimated that this would take
a substantial number of years.

**Total operating expenses for the fiscal year ended May 31, 1994 have been
restated to reflect the maximum reimbursement allowed pursuant to the
Distribution Plan permitted by Rule 12b-1, as though the Plan had been in
effect for the entire fiscal year. The Fund's actual total operating expenses
equalled 0.52% of the average monthly net assets of the Fund for the fiscal
year ended May 1, 1994.

Investors should be aware that the preceding 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:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$48 $61 $75 $115
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE
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
- --------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share of
the Fund for the ten fiscal years in the period ended May 31, 1994. 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 unqualified
opinion thereon appears in the financial statements in the Fund's Statement of
Additional Information, a copy of which may be obtained as noted on the front
cover of this Prospectus. The remaining figures, which are also audited, are
not covered by the auditors' current report. See also "Reports to Shareholders"
under "General Information."

<TABLE>
<CAPTION>
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUE NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTION VALUE
YEAR BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM REALIZED AT END TOTAL
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS OF YEAR RETURN(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 $12.07 $0.75 $(0.338) $0.412 $(0.762) $ -- $11.72 3.18%
1993 11.45 0.77 0.630 1.400 (0.780) -- 12.07 12.35
1992 10.94 0.78 0.523 1.303 (0.793) -- 11.45 12.05
1991 10.85 0.80 0.086 0.886 (0.796) -- 10.94 8.20
1990 11.05 0.80 (0.208) 0.592 (0.792) -- 10.85 5.25
1989 10.52 0.80 0.542 1.342 (0.812) -- 11.05 12.95
1988 10.73 0.80 (0.021) 0.779 (0.846) (0.143) 10.52 7.33
1987 11.19 0.91 (0.265) 0.645 (0.925) (0.180) 10.73 5.19
1986 10.49 0.92 0.740 1.660 (0.960) -- 11.19 16.12
1985 9.43 0.95 1.070 2.020 (0.960) -- 10.49 22.23
<CAPTION>
RATIO OF RATIO OF
NET ASSETS EXPENSES NET INCOME PORTFOLIO
YEAR AT END TO AVERAGE TO AVERAGE TURNOVER
ENDED OF YEAR NET ASSETS NET ASSETS RATE
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 $4,609,998,773 0.52% 6.19% 25.67%
1993 4,339,249,477 0.52 6.56 12.28
1992 3,570,851,373 0.51 7.01 19.37
1991 3,108,151,314 0.50 7.34 18.62
1990 2,914,840,197 0.50 7.30 15.47
1989 2,794,766,262 0.51 7.42 25.68
1988 2,547,061,533 0.51 7.57 57.94
1987 2,558,855,184 0.52 7.04 33.64
1986 1,599,270,664 0.55 7.68 18.61
1985 527,482,837 0.60 8.86 26.47
</TABLE>

(1) Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains, if any, at
net asset value. Effective May 1, 1994, with the implementation of the Rule
12b-1 Distribution Plan as discussed in "Plan of Distribution" under
"Management of the Fund" below, the existing sales charge on reinvested income
dividends has been eliminated.

ABOUT THE FUND
- -------------------------------------------------------------------------------
The Fund, incorporated under the laws of the state of New York on May 14, 1982,
is a diversified, open-end management investment company, commonly called a
"mutual fund" and has registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act"). The Fund has only one class of capital stock with a
par value of $0.01 per share.

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

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
- -------------------------------------------------------------------------------
The Fund's investment objective is to provide a high level of dividend income
exempt from regular federal income taxes and from New York state and New York
City income taxes by investing the Fund's assets in municipal securities exempt
from such taxes. The Fund will seek to achieve its objective by investing
primarily in New York state, municipal and public authority debt obligations
with a maturity of more than one year. In addition, the Fund may also invest
its assets in obligations of municipal issuers located in Puerto Rico, the U.S.
Virgin Islands and Guam, since dividends paid by the Fund, to the extent
attributable to such sources, are exempt from regular federal income taxes and
from New York state and New York City

<PAGE>
personal income taxes. The investment objective of the Fund is a fundamental
policy and may not be changed without shareholder approval.

MUNICIPAL SECURITIES

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

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

TYPES OF SECURITIES THE FUND MAY PURCHASE

The Fund may invest, without percentage limitations, in securities having at
the time of purchase one of the four highest ratings of municipal securities by
Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB), or
in securities which are not rated by the services, provided that, in the
opinion of the Fund's investment manager, such securities are comparable in
quality to those within the four highest municipal ratings. The ratings
agencies consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the cases with higher grade bonds. In the event
the rating on an issue held in the Fund's portfolio is lowered by the rating
service, such change will be considered by the Fund in its evaluation of the
overall investment merits of that security but such change will not necessarily
result in an automatic sale of the security. A description of the municipal
ratings is contained in the Appendix to the Statement of Additional
Information.

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

The Fund has never invested in any obligations paying income subject to regular
federal income taxes or which is treated as a tax preference item under the
federal alternative minimum tax. However, from time to time due to unusual
circumstances, such as avoiding the necessity of liquidating portfolio
investments to meet withdrawals of funds by investors, the Fund may temporarily
invest up to 20% of its assets, pending investment or reinvestment in municipal
bonds, in fixed-income obligations, the interest on which is subject to regular
federal income tax or which is treated as a tax preference item under the
federal alternative minimum tax. Any investments in taxable obligations will be
substantially in Treasury bills, commercial paper and obligations of U.S. banks

<PAGE>
(including commercial banks and savings and loan associations) with assets of
$1 billion or more.

As a fundamental policy, the Fund may not purchase securities of any issuer
which would result in more than 5% of the value of the Fund's gross assets
being invested in the securities of any one issuer, but this limitation does
not apply to investments issued or guaranteed by the U.S. government or its
instrumentalities. In determining the issuer of a tax-exempt security, each
state and each political subdivision, agency and instrumentality of each state
and each multi-state agency of which such state is a member is regarded as a
separate issuer. Where securities are backed only by assets and revenues of a
particular instrumentality, facility or subdivision, such entity is considered
the issuer. A bond for which the payments of principal and interest are secured
by an escrow account of securities backed by the full faith and credit of the
U.S. government ("defeased"), in general, will not be treated as an obligation
of the original municipality for purposes of determining issuer diversification
under this policy. Percentage limitations referred to in this section and
elsewhere in this Prospectus are determined as of the time an investment is
made. When the Fund proposes to add to its position in the securities of an
issuer, it may value that position at the lesser of cost or current market
value, for the sole purpose of determining the amount of that issuer's
securities which may be purchased consistent with the 5% limitation described
in this paragraph. In addition to the fundamental policy described in this
paragraph, the Fund is classified as a diversified company under the 1940 Act
and as such, it is subject to the diversification requirements applicable to
diversified investment companies under the 1940 Act, which are described in the
Statement of Additional Information.

Under normal circumstances at least 65% of the Fund's total assets will be
invested in securities the income from which is exempt from New York state
individual income taxation. As a fundamental policy, at least 80% of the Fund's
total assets will be invested in securities exempt from regular federal income
tax and the federal alternative minimum tax, except where market conditions due
to adverse factors would cause serious erosion of portfolio value, in which
case the Fund's assets may temporarily be substantially invested in short-term
taxable obligations as a defensive measure to preserve net asset value. During
such period, the Fund will not be pursuing its investment objective.

The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at prevailing market rates. The Fund may also invest
in variable or floating rate demand notes ("VRDNs"). VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest according to its terms upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or
by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to such instrument. Although it is not a put option in the usual sense,
such a demand feature is sometimes known as a "put." With respect to 75% of the
Fund's assets, no more than 5% of such value may be in securities underlying
"puts" from the same institution, except that the Fund may invest up to 10% of
its asset value in unconditional "puts" (exercisable even in the event of a
default in the payment of principal or interest on the underlying security) and
other securities issued by the same institution. The Fund may purchase and
sell municipal securities on a "when-issued" and "delayed-delivery"

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

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

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

While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, the essentiality of the leased property
to the municipality and the term of the lease compared to the useful life of
the leased property. The Board of Directors has determined that COPs held in
the Fund's portfolio constitute liquid investments based on various factors
reviewed by the investment manager and monitored by the Board. Such factors
include (a) the credit quality of such securities and the extent to which they
are rated or, if unrated, comply with existing criteria and procedures followed
to ensure that they are of quality comparable to the ratings required for Fund
investment, including an assessment

<PAGE>
of the likelihood that the leases will not be cancelled; (b) the size of the
municipal securities market for the Fund, both in general and with respect to
COPs; and (c) the extent to which the type of COPs held by the Fund trade on
the same basis and with the same degree of dealer participation as other
municipal bonds of comparable credit rating or quality.

SOME CHARACTERISTICS OF MUNICIPAL SECURITIES

Municipal securities include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and the
obtaining of funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airports, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal (sometimes referred to as
"private activity bonds").

The two principal classifications of municipal securities are "general
obligation bonds" and "revenue bonds." General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facility or, in some cases, from
the proceeds of a special excise or specific revenue source. A type of revenue
bond common to New York state is a "moral obligation" bond. Under applicable
New York state law, the state may be called upon to restore deficits in reserve
capital funds of such agencies or authorities created with respect to the
bonds. Any such restoration requires appropriations by the state legislature
and, accordingly, the bonds do not constitute a legally enforceable obligation
or debt of the state. Industrial development bonds, which are municipal bonds,
are in most cases revenue bonds and do not generally constitute the pledge of
the credit of the issuer of such bonds. There are, of course, variations in the
security of municipal bonds, both within a particular classification and
between classifications, depending on numerous factors.

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

Market risk is the risk of price fluctuations of a municipal security caused by
changes in general economic and interest rate conditions generally affecting
the market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the price of the debt securities in
which the Fund invests are likely to decrease in times of rising interest
rates. Conversely, when rates fall, the value of the Fund's debt investments
may rise. Price changes of debt securities

<PAGE>
held by the Fund have a direct impact on the net asset value per share of that
Fund. Since The Fund generally will invest primarily in the securities issued
by New York and Puerto Rico public entities, there are certain factors and
considerations concerning New York and Puerto Rico which may affect the credit
and market risk of the municipal securities which the Fund purchases. See
"Special Considerations Affecting an Investment in the Fund" in this
Prospectus.

The Fund has no restrictions on the maturities of municipal securities in which
the Fund may invest. The Fund will seek to invest in municipal securities of
such maturities that, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with prudent investing.
The investment manager will also consider current market conditions in
determining which securities to buy or hold.

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

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

The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain non-essential or private activity bonds
(including those for housing and student loans) issued after August 7, 1986,
while still tax-exempt, constitutes a preference item for taxpayers in
determining the federal alternative minimum tax under the Internal Revenue Code
of 1986, as amended (the "Code"). This interest could subject a shareholder to,
or increase liability under, the federal alternative minimum tax, depending on
the shareholder's tax situation. In addition, all distributions derived from
interest exempt from regular federal income tax may subject a corporate
shareholder to, or increase liability under, the federal alternative minimum
tax, because such distributions are included in the corporation's "adjusted
current earnings." The Fund does not own and does not presently intend to
purchase any private activity bonds but reserves the right to acquire them in
the future. The Code also imposes certain limitations and restrictions on the
use of tax-exempt bond financing for non-government business activities, such
as industrial development bonds, and, to the extent interest on such bonds is
not tax-exempt, they will not be purchased by the Fund. The Fund is subject to
a number of additional investment restrictions, some of which may be changed
only

<PAGE>
with the approval of shareholders, which limit its activities to some extent.
For a list of these restrictions and more information concerning the policies
discussed herein, please see the Statement of Additional Information.

The Fund's investments in unrated municipal securities may cause the Fund to
recognize income and make distributions to shareholders prior to the receipt of
cash payments. For example, with respect to non-performing obligations, the
Fund may be required to accrue as income the original amount of interest due on
its obligations even though such interest is not received by the Fund. The Fund
does not now hold and does not presently intend to purchase any unrated
securities, but reserves the right to acquire them in the future.

The Fund's investment in zero coupon and delayed interest bonds may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments.

In order to generate cash to satisfy 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.

CALLABLE BONDS

Callable municipal bonds are municipal bonds which contain a provision in the
indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which typically reflects a premium over the bonds'
original issue price. These bonds generally have call-protection (that is, a
period of time during which the bonds may not be called) which usually lasts
for 7 to 10 years, after which time such bonds may be called away. An issuer
may generally be expected to call its bonds, or a portion of them, during
periods of relatively declining interest rates, when borrowings may be replaced
at lower rates than those obtained in prior years. If the proceeds of a bond
called under such circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of
such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which the bonds were redeemed. The Fund may not
hold called bonds until they are redeemed if that will result in a lost
premium. In many cases, the investment manager will attempt to time the sale to
recover what the investment manager considers to be the optimum amount of
premium obtainable considering market conditions and the time remaining before
redemption.

OTHER 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 Statement
of Additional Information.

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

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

<PAGE>
Resources is engaged in various aspects of the financial services industry.
Advisers acts as investment manager to 34 U.S. registered investment companies
(112 separate series) with aggregate assets of over $75 billion, approximately
$40 billion of which are in the municipal securities market.

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

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

It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because municipal securities are generally traded on a "net"
basis, that is, in principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. To the extent that the Fund does
participate in transactions involving brokerage commissions, it is the
Manager's responsibility to select brokers through whom such transactions will
be effected. The Manager tries to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to provide the
best execution, the Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data for the Manager and
its affiliates, as well as the sale of shares of the Fund, as factors in
selecting a broker. Further informat ion is included under "The Fund's Policies
Regarding Brokers Used on Portfolio Transactions" in the Statement of
Additional Information.

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

During the fiscal year ended May 31, 1994, the expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totalled 0.52% of the
average monthly net assets of the Fund.

PLAN OF DISTRIBUTION

Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), as approved by Fund shareholders
in March of 1994. Under the Plan, the Fund may reimburse Distributors or others
for all expenses actually incurred by Distributors or others in the promotion
and distribution of the Fund's shares, including but not limited to, the
printing of prospectuses and reports used for sales purposes, expenses of
preparation 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. The maximum amount which the Fund may pay to Distributors or
others for such distribution expenses is 0.10% per annum of the average daily
net assets of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.10% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund. The Plan will also cover any payments to or by the Fund, Distributors, or
other parties on behalf of the Fund 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 will be

<PAGE>
included in the maximum operating expenses which may be borne by the Fund.

In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.10% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average
daily net assets represented by shares of a 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 0.10% 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 fees are Fund expenses so that the shareholders of the Fund, regardless of
when they purchased their shares, will bear Rule 12b-1 expenses at the same
rate. That rate initially will be at least 0.07% (0.05% plus 0.02%) of such
average daily net assets and, as the Fund's shares are sold on or after the
Effective Date, will increase over time. Thus, as the proportion of Fund shares
purchased on or after the Effective Date increases in relation to outstanding
shares of a Fund, the expenses attributable to payments under the Plan will
also increase (but will not exceed 0.10% of average daily net assets). While
this is the currently anticipated calculation for fees payable under the Plan,
the Plan permits the Board to allow the Fund to pay a full 0.10% on all assets
at any time. The approval of the Board would be required to change the
calculation of the payments to be made under the Plan.

DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
There are two types of distributions which the Fund may make to its
shareholders:

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

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once each 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 Fund's Board of Directors, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends monthly for shareholders of record on the last business day of
the month, payable on or about the 15th day of the following month.

The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings,

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

In order to be entitled to a dividend, the investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of its 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 (that is, without sales charge) on the
dividend reinvestment date. Shareholders have the right to change their
election with respect to the receipt of distributions by notifying the Fund,
but any such change will be effective only as to distributions for which the
record date is seven or more business days after the Fund has been notified.
See the Statement of Additional Information for more information.

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

DISTRIBUTIONS IN CASH

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim period 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 also be able to change their dividend options by telephone.
See the section entitled "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>
EFFECT OF FEDERAL AND NEW YORK TAXES ON AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
The following discussion reflects some of the provisions of the Code and of
state tax law which affect mutual funds and their shareholders. Additional
information on tax matters relating to the Fund and its shareholders is
included in the section entitled "Additional Information Regarding Taxation" in
the Statement of Additional Information.

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

By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders. Such
exempt-interest dividends are derived from interest income exempt from regular
federal income tax and are not subject to regular federal income tax for Fund
shareholders. In addition, to the extent that exempt-interest dividends are
derived from interest on obligations of New York state and its political
subdivisions or from interest on U.S. territorial obligations (including Puerto
Rico, the U.S. Virgin Islands and Guam), they will be exempt from New York
state and City personal income taxes. However, for corporate taxpayers subject
to the New York state franchise tax, the foregoing categories of interest
income will generally be taxable.

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

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

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

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

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on a sale or exchange

<PAGE>
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 and will be disallowed to the extent of exempt-interest dividends
paid with respect to such shares. All or a portion of the sales charge incurred
in purchasing shares of the Fund will not be included in the federal tax basis
of such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or in another fund in the Franklin Group of
Funds(R), or the Templeton Group (defined under "How to Buy Shares of the
Fund") 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 advisors
concerning the tax rules applicable to the redemption or exchange of Fund
shares.

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, including the portion of the
dividends on an average basis which constitutes taxable income or income that
is a tax preference item under the federal alternative minimum tax.

Shareholders who have not held shares of the Fund for a full calendar year may
have designated as tax-exempt or as tax preference income a percentage of
income which is not equal to the actual amount of tax-exempt or tax preference
income earned during the period of their investment in the Fund.

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

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

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

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 being purchased through plans established at Franklin providing for regular
periodic investments. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares.

<PAGE>
PURCHASE PRICE OF FUND SHARES

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

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

<TABLE>
<CAPTION>
==============================================================================================
TOTAL SALES CHARGE
--------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
==============================================================================================
</TABLE>

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

On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. 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

<PAGE>
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 U.S. for meetings or seminars of
a business nature. Dealers may not use sales of the Fund's shares to qualify
for this compensation to the extent such may be prohibited by the laws of any
state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional compensation is
paid for by the Fund or its shareholders.

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

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount

<PAGE>
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 executed a Letter of Intent prior to the change in the
sales charge structure for the Fund will be entitled to complete the Letter at
the lower of (i) the new sales charge structure; or (ii) the sales charge
structure in effect at the time the Letter was filed with such Fund.

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

<PAGE>
will be made. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact, with
full power of substitution to surrender for redemption any or all shares for
the purpose of paying any additional sales charge due. Purchases under the
Letter of Intent will conform with the requirements of Rule 22d-1 under the
1940 Act. The investor or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each time a purchase is
made.

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.50%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

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

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

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased at net asset value (without 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 the 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

<PAGE>
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following such
order. If an investment by a trust company or bank trust department at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.

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

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

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 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

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

GENERAL

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

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

SHARE CERTIFICATES

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

CONFIRMATIONS

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

AUTOMATIC INVESTMENT PLAN

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

<PAGE>
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 distribution is scheduled) with payment
generally received 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 period
will be sent to the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because
the amount withdrawn under the plan may be more than the shareholder's actual
yield or income, part of the payment may be a return of the shareholder's
investment.

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

<PAGE>
INSTITUTIONAL ACCOUNTS

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

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

<PAGE>
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 gains distributions will be transferred into the new fund and invested
at net asset value. Because the exchange is considered a redemption and
purchase of shares, the shareholder may realize a gain or loss for federal
income tax purposes. Backup withholding and information reporting may also
apply. Information regarding the possible tax consequences of such an exchange
is included in the tax section in this Prospectus and in the Statement of
Additional Information.

There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer. Exchanges will be effected upon receipt of written instructions
signed by all account owners and accompanied by any outstanding share
certificates properly endorsed.

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 municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term municipal
securities and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.

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

TIMING ACCOUNTS

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

RESTRICTIONS ON EXCHANGES

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

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

<PAGE>
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 a Fund
the value of the shares. Shares may be redeemed in any of the following ways:

REDEMPTIONS BY MAIL

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

TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:

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

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

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

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

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

Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15

<PAGE>
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 truste e(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.

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

Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence. Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper form.

REDEMPTIONS BY TELEPHONE

SHAREHOLDERS WHO FILE A REDEMPTION AUTHORIZATION AGREEMENT ("AGREEMENT") MAY
REDEEM SHARES OF A FUND BY TELEPHONE. THE AGREEMENT MAY BE OBTAINED BY WRITING
TO THE FUNDS OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUNDS 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

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

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

OTHER

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

<PAGE>
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, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file an Application as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.

VERIFICATION PROCEDURES

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

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
registered investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this Prospectus. Neither the
Funds 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 each Fund is determined separately 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 each Fund).

The net asset value per share of each Fund is determined in the following
manner: The aggregate of all liabilities, accrued expenses and taxes and any
necessary reserves is deducted from the aggregate gross value of all assets,
and the difference is divided by the number of shares of the Fund outstanding
at the time. For the purpose of determining the aggregate net assets of the
Fund, cash and receivables are valued at their realizable amounts. Interest is
recorded as accrued. Municipal securities

<PAGE>
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. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. Other securities for which market quotations are readily
available are valued at the current market price, which may be obtained from a
pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the Board of
Directors. All money market instruments with a maturity of more than 60 days
are valued at current market, as discussed above. All money market instruments
with a maturity of 60 days or less are valued at their amortized cost, which
the Board has determined in good faith constitutes fair value for purposes of
complying with the 1940 Act. This valuation method will continue to be used
until such time as the directors determine that it does not constitute fair
value for such purposes. With the approval of the Board, the Fund may utilize a
pricing service, bank or securities dealer to perform any of the above
described functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds by
calling the automated Franklin Tele-FACTS system (day or night) at
1-800/247-1753. Information about each Fund may be accessed by entering the
Fund's Code followed by the sign when requested to do so by the automated
operator. The Fund's code is 15.

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>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

<PAGE>
PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution
rate and taxable equivalent distribution rate. The Fund may occasionally cite
statistics to reflect its volatility or risk.

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

Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of the Fund's
yield (calculated as indicated) by one minus a stated income tax rate and
adding the product to the taxable portion (if any) of the Fund's yield.

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

<PAGE>
yield, distribution rate, taxable equivalent distribution rate or total return
may be in any future period.

GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Fund's fiscal year ends June 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Fund at the telephone number or address set forth on the cover
page of this prospectus. Additional information on Fund performance is included
in the Fund's Annual Report to Shareholders and the Statement of Additional
Information.

The Fund's authorized capital stock consists of 5,000,000,000 shares of common
stock with a par value of $0.01 per share. All shares are of one class, have
one vote and, when issued, are fully paid and nonassessable. All shares have
equal voting, participating and liquidating rights, but have no subscription,
preemptive or conversion rights.

A meeting of shareholders shall be held annually for the election of directors
and for the transaction of other business of the corporation. Shares of the
Fund have noncumulative voting rights which means that the holders of more than
50% of the shares voting for the election of directors can elect 100% of the
directors if they choose to do so and, in such event, the holders of the
remaining shares voting for the election of directors will not be able to elect
any persons to the Board of Directors.

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

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
Funds have 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

<PAGE>
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 a Fund carried in
"street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer.
Both the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
broker 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 his instruction
and signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near
future, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.

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

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

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

<PAGE>
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
- --------------------------------------------------------------------------------
Mr. Thomas Kenny, Mr. John B. Pinkham and Mr. John Pomeroy are primarily
responsible for the day-to-day management of the Fund's portfolio. Their
business history for at least the last five years and positions with the
Manager are shown below:

Thomas Kenny
Senior Vice President and Portfolio Manager

Mr. Kenny joined Advisers in 1986, and is currently Director of the Municipal
Bond Department. He has been responsible for making portfolio recommendations
and decisions for the Fund since August 1994. He received a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara and Master of Science degree in Finance from Golden Gate University. He
is a member of several municipal securities industry related committees and
associations.

John B. Pinkham
Vice President and Portfolio Manager

Mr. Pinkham has been responsible for portfolio recommendations and decisions
for the Fund since joining Advisers in 1985. He has a Bachelor of Science
degree in Business from Columbia University and has been in the securities
industry since 1956. He is a member of the Financial Analysts Federation.

John Pomeroy
Portfolio Manager

Mr. Pomeroy has been responsible for portfolio recommendations and decisions
for the Fund since the beginning of 1993. He joined Advisers in 1986. He has a
Bachelor of Arts degree in Business Administration from San Francisco State
University, and is a member of industry related committees and associations.

SPECIAL FACTORS AFFECTING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
This section briefly summarizes certain general economic and political risks
which could affect the Fund, in view of the Fund's policy of concentrating its
investments in securities issued by public entities in New York and, to a
lesser extent, Puerto Rico. The discussion below is not intended to be
comprehensive or to express any opinion on the future course of political or
economic events. In addition, it should be read in the context of the Fund's
other investment policies, including among others its policies regarding
securities ratings and diversification. (See "Investment Objective and Policies
of the Fund" above.) The discussion is based on information from official
statements relating to securities offerings of New York or Puerto Rico issuers,
from independent municipal credit reports and other sources believed to be
reliable, but has not been independently verified by the Fund.

RISK FACTORS OF NEW YORK ISSUERS

New York State. New York State ("State"), the second-largest state in the U.S.
in terms of population, has historically been one of the wealthiest and most
economically diverse states as well. The State's economic health is dependent
to a significant extent on the fortunes of New York City ("City"), the largest
city in the nation, and the City's metropolitan area (which spreads into New
Jersey and Connecticut as well).

New York State's economy, which was adversely affected by the recession in the
early 1990s, has begun to improve. Job growth in 1993 outperformed estimates,
but remains below the rest of the country. Future growth is likely to be modest
because

<PAGE>

of corporate downsizing of major employers in the State and cutbacks in defense
spending. Income and population growth in the State remain among the slowest in
the nation, although per capita income remains high. Slow growth in the economy
has also increased the disparity in income, which could lead to increased
service demands.

In fiscal 1994 (ended March 31), the State generated its second consecutive
operating surplus, after several years of significant deficits. However, the
State's recent history of late budgets reflects conflicting political
priorities, and the fiscal 1995 budget assumes continued economic growth which
is not certain to take place. Further, the State's ability to balance future
budgets may be threatened by rapid growth in certain spending categories and by
scheduled tax cuts in future years.

Certain agencies, authorities and subdivisions of the State, such as the New
York State Urban Development Corporation ("UDC") and the Housing Finance Agency
("HFA"), depend on continued financial support from the State in order to meet
their obligations on debt securities. The State's support may come in the form
of appropriations, guarantees, lease-purchase arrangements, other contractual
obligations or moral obligation provisions, many of which require
appropriations by the legislature before any payments can be made. Failure of
the State to appropriate necessary amounts or to take other action to permit
the authorities and agencies to meet their obligations could result in their
default.

Constitutional challenges to State laws or appropriations could limit the
amount of taxes which the State or political subdivisions may impose on real
property, or the amounts these entities may borrow. For example, in 1979, the
State's highest court declared unconstitutional a state law allowing localities
and school districts to impose a special increase in real estate property taxes
in order to raise funds for pensions and other uses. However, in 1994, the
State's highest court rejected a taxpayer challenge to constitutionality of
certain debt incurred by State agencies without voter approval. Final adverse
decisions in cases of this nature could require extraordinary appropriations or
expenditure reductions, or both, and could have a material adverse effect upon
the financial condition of the State and various of its agencies and
subdivisions.

New York City. In 1975, New York City ("City") suffered several financial
crises which impaired the borrowing ability of both the City and the State. In
that year, the City lost access to public credit markets, and it was not able
to sell short-term notes to the public until 1979 nor long-term debt to the
public until 1981. New York City required financial assistance from New York
State (through the Municipal Assistance Corporation ("MAC")) and the federal
government to resolve these difficulties. Since 1975, the City's financial
condition has been subject to oversight and review by the New York State
Financial Control Board (the "Control Board") and since 1978 its financial
Statements have been audited by independent accounting firms. To be eligible
for guarantees and assistance, the City was required to submit annually to the
Control Board a financial plan for the next four fiscal years, covering the
City and certain agencies showing balanced budgets determined in accordance
with generally accepted accounting principles. Although the Control Board's
powers of prior approval were suspended effective June 30, 1986, because the
City had satisfied certain statutory conditions, the City continues to submit
four-year plans to the Control Board for its review. In the event the City
cannot obtain a balanced budget, there are concerns as to whether any deficit
in the

<PAGE>
City budget can be financed by MAC bonds, federal guarantees, federal and State
aid and increased revenues. Neither New York State nor the federal government
is obligated to provide financial assistance of any kind to the City in the
event of future financial difficulties. The City is also a defendant in
numerous legal actions which relate to material matters.

Currently, New York City projects significant budget deficits through fiscal
1998. Credit rating agencies have praised cost-cutting steps proposed in the
mayor's fiscal 1995 budget, but have criticized certain ongoing city practices,
including asset sales and debt rescheduling, because such practices may not be
sustainable. In addition, projected cost savings or revenue forecasts may not
be realized.

Conclusion. Both the State and City face potential economic problems which
could seriously affect the ability of both the State and City to meet their
financial obligations. The economic problems of New York City adversely affect
the State in numerous ways. In addition, for decades the State economy has
grown more slowly than that of the nation as a whole, resulting in a decline in
the position of New York as one of the country's wealthiest states. The causes
of this decline are varied and complex and some causes reflect international
and national trends beyond the State's and City's control. Some analysts feel
that this long-term decline is the result of State and local taxation, which is
among the highest in the nation, and which may cause corporations to locate
outside the State. The current high level of taxes may limit the ability of the
State and City to impose higher taxes in the event of future difficulties.

RISK FACTORS AFFECTING PUERTO RICO

Puerto Rico's economy is heavily dependent on manufacturing, services
(including trade, tourism and financial services) and government. Manufacturing
has accounted for the majority of Puerto Rico's growth since the early 1970s,
especially in the areas of pharmaceuticals, machinery and metal products.
Manufacturing's share in the island's gross domestic product ("GDP") increased
from 25% in 1971 to 39% in 1993. However, manufacturing growth has stagnated
over the past several years. The pharmaceutical industry, which makes up nearly
half of the manufacturing GDP, is under pressure from cost-containment trends
in the health care industry, potential U.S. health care reform legislation and
efforts by the federal government to reduce its budget deficit. Despite
economic progress, Puerto Rico continues to suffer from high unemployment and
poverty. In the fiscal year ended June 30, 1994, Puerto Rico's unemployment
rate was approximately 16%, more than twice the corresponding rate in the U.S.,
and its income levels were below even the poorest of the 50 states. However,
Puerto Rico's economic situation is considerably stronger than it was in the
mid-1980s, when the official unemployment rate averaged over 20% for several
consecutive years.

Puerto Rico is uniquely susceptible to outside influences that affect its
economic development. Largely dependent on imported oil as a primary energy
source, the island's economy is vulnerable to changes in the price and supply
of such oil. In the early 1980s, high oil prices adversely affected Puerto
Rico's economy and enhanced the effects of an economic recession; later in the
decade, lower oil prices contributed to economic growth. Similarly, Puerto
Rico's relationship with the U.S., while providing economic benefit to the
island, has left it vulnerable to changes in U.S. policy. Recently, changes
were made to Section 936 of the Internal Revenue Code. Section 936 had been a
major force behind the development of manufacturing in Puerto Rico, because it
allowed qualifying U.S. corporations

<PAGE>
to receive tax credits which offset all or a portion of their tax liability on
earnings from Puerto Rican operations. The impact of changes to Section 936 on
future investment in Puerto Rico remains uncertain. Finally, the effect on
Puerto Rico of the 1993 approval of the North American Free Trade Agreement
("NAFTA") is uncertain, as it is in many other states.

Although the government has experienced recent operating deficits, a small
surplus was reported for fiscal 1994 (ended June 30) and the 1995 budget is
projected to be balanced or produce a small surplus. Current government debt
levels are relatively high on a per-capita basis. Puerto Rico's constitution
requires that its annual budgets be balanced at the time of approval, and that
its debt service be limited to 15% of general fund revenues.

<PAGE>

<TABLE>
<S> <C>
FRANKLIN NEW YORK TAX-FREE FRANKLIN
INCOME FUND, INC. NEW YORK
777 Mariners Island Blvd. TAX-FREE
P.O. Box 7777 INCOME FUND
San Mateo, California 94403-7777

SHAREHOLDER SERVICES AGENT PROSPECTUS
Franklin/Templeton Investor Services, Inc. & APPLICATION
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777 OCTOBER 1, 1994

LEGAL COUNSEL
Bleakley, Plann & Schmidt
One North Lexington Ave.
White Plains, New York 10601-1706

INDEPENDENT AUDITORS
Coopers & Lybrand
333 Market Street
San Francisco, California 94105

INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777

PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777

CUSTODIAN
Bank of America NT & SA
555 California Street, 4th Floor
San Francisco, California 94104

For an enlarged version of this prospectus
please call 1-800/DIAL BEN.

15 P 10/94 [FRANKLIN LOGO]

</TABLE>

AMENDMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN NEW YORK TAX-FREE INCOME FUND
DATED OCTOBER 1, 1994

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

ADDITIONAL INFORMATION REGARDING PURCHASES

Special Net Asset Value Purchases. As discussed in the Prospectus under "How to
Buy Shares of the Fund - Description of Special Net Asset Value Purchases,"
certain categories of investors may purchase shares of the Fund without a
front-end sales charge ("net asset value") or 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. If the total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in the name of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the amount specified
under the Letter of Intent and is an amount which would qualify for a further
quantity discount, a retroactive price adjustment will be made by Distributors
and the securities dealer through whom purchases were made pursuant to the
Letter of Intent (to reflect such further quantity discount) on purchases made
within 90 days before and on those made after filing the Letter. The resulting
difference in offering price will be applied to the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter, the investor will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of

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

2. The following substitutes subsection "Reinvestment Date" under "Additional
Information Regarding Fund Shares":

Reinvestment Date

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

<PAGE>

<PAGE>
FRANKLIN
NEW YORK TAX-FREE
INCOME FUND

STATEMENT OF (LOGO)
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>
The Funds Investment Objective and Policies (See
also the Prospectus "Investment Objective and
Policies of the Fund") . . . . . . . . . . . . . . . . . . . . . . . 2
Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Advisory and Other Services (See also the
Prospectus "Management of the Fund") . . . . . . . . . . . . . . . . 8
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . 9
The Funds Policies Regarding Brokers Used on
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 10
Additional Information Regarding Fund Shares (See also
the Prospectus "How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund," "Valuation of
Fund Shares") . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Funds Underwriter . . . . . . . . . . . . . . . . . . . . . . . . 13
Additional Information Regarding Taxation . . . . . . . . . . . . . 13
General Information . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

Franklin New York Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company. Its investment objective is to provide
as high a level of dividend income exempt from federal, New York state and New
York City income taxes as is consistent with prudent investing, while seeking
preservation of shareholders capital. The Fund will seek to achieve this
investment objective through investing primarily in long-term New York state
municipal and public authority debt obligations. Investments in municipal
securities will be within the four highest ratings of either Moodys Investors
Service ("Moodys"), Standard & Poors Corporation ("S&P"), Fitch Investors
Service, Inc. ("Fitch") or in unrated securities which in the opinion of the
Funds investment manager are of comparable quality to such ratings, at the time
of investment. Normally, except for temporary defensive purposes, at least 80%
of the Funds assets will be invested in tax-exempt municipal securities.

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 Funds 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 ADDITIONAL INFORMATION REGARDING THE
ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS.

<PAGE>
THE FUNDS INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
As noted in the Prospectus, the investment objective of the Fund is to provide
as high a level of dividend income to shareholders which is exempt from
federal, and New York state and city income taxes as is consistent with prudent
investing, while seeking preservation of shareholders capital. (See Prospectus
"Investment Objective and Policies of the Fund.")

Although the Fund seeks to invest all of its assets in a manner designed to
accomplish its objective, there may be times when market conditions limit the
availability of appropriate municipal securities or, in the investment managers
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. For temporary defensive
purposes, the Fund may invest more than 20% and up to 100% of the value of its
net assets in instruments the interest on which is exempt from federal income
taxes only, and the Fund may invest more than 20% of its assets (which could be
up to 100%)in fixed-income obligations, the interest on which is subject to
federal income tax and (ii) the Fund may invest more than 20% of the value of
its net assets (which could be up to 100%) in instruments the interest on which
is exempt from federal income taxes but not that states personal income taxes.

RATINGS

The ratings of Moodys, S&P and Fitch represent their respective opinions of the
qualities of the securities they undertake to rate and such ratings are general
and are not absolute standards of quality. On May 31, 1994, 100% of the Funds
invested assets were invested in tax-exempt securities of which 43.3% had a
rating of triple-A requirement by Moodys, Standard & Poors or Fitch; 12.0% had
a rating of double-A by Moodys, Standard & Poors or Fitch; 17.0% had a rating
of single-A by Moodys, Standard & Poors or Fitch; 26.3% had a rating of
triple-B requirement by Moodys, Standard & Poors or Fitch; 0.5% had a rating of
double-B by Moodys, Standard & Poors or Fitch; 0.8% had a rating of single-B by
Moodys, Standard & Poors or Fitch; and 0.1% had a rating of triple-C
requirement by Moodys, Standard & Poors or Fitch. No portion of the invested
assets of the Fund were invested in unrated securities. An explanation of these
ratings is set forth in the Appendix hereto.

MUNICIPAL SECURITIES

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

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

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

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

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

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

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

2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges and tunnels; port and airport

<PAGE>
facilities; colleges and universities; and hospitals. The principal security
behind these bonds may vary. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized
and/or collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund, from which money may be used to make principal and
interest payments on the issuers obligations. Some authorities are provided
with further security in the form of state assurance (although without
obligation) to make up deficiencies in the debt service reserve fund.

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

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

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

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

Callable Bonds. In the early 1980s large numbers of municipal bonds were issued
with provisions which prevented their being called, typically for periods of 5
to 10 years. During the coming years that protection will end on many issues.
During times of generally declining interest rates, if the call-protection on
callable bonds expires, there is an increased likelihood that a number of such
bonds may, in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used by the Funds
investment manager, the Fund believes it has reduced the risk of adverse impact
on net asset value based on calls of callable bonds. The investment manager may
dispose of such bonds in the years prior to their call date, if the investment
manager believes such bonds are at their maximum premium potential. In pricing
such bonds in the Funds portfolio, each callable bond is marked to the market
daily based on the bonds call date. Thus, the call of some or all of the Funds
callable bonds may have an impact on its net asset value. In light of the Funds
pricing policies and because the Fund follows certain amortization procedures
required by the Internal Revenue Service, the Fund is not expected to suffer
any material adverse impact related to the value at which the Fund has carried
the bonds in connection with calls of bonds

<PAGE>
purchased at a premium. Notwithstanding such policies, however, the
re-investment of the proceeds of any called bond may be in bonds which pay a
higher or lower rate of return than the called bonds; and as with any
investment strategy, there is no guarantee that a call may not have a more
substantial impact than anticipated or that the Funds objectives will be
achieved.

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

While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in insured
COPs. The Board of Directors has determined that COPs held in the Funds
portfolio constitute liquid investments based on various factors reviewed by
the investment manager and monitored by the Board. Such factors include (a)
the credit quality of such securities and the extent to which they are rated;
(b) the size of the municipal securities market for the Fund, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
the Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
There is no limit as to the amount of assets which the Fund may invest in COPs.

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

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

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

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

SECURITIES TRANSACTIONS BY THE FUND

The Fund may purchase or sell securities without regard to the length of time
the security has been held to take advantage of short-term differentials in
bond yields consistent with its objective of seeking interest income while
conserving capital. While short-term trading increases the portfolio turnover,
the execution costs for municipal bonds are substantially less than for
equivalent dollar values of equity securities. The Funds portfolio turnover
rates are shown in the "Financial Highlights" table in the Prospectus.

DIVERSIFIED FUND

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

Defeased bonds may be excluded from issuer diversification calculations only
under the following conditions. Only U.S. government securities may be
deposited into the escrow account. The deposit must be irrevocable and pledged
only to the debt service of the underlying bonds, so that the deposited
securities will not be subject to the claims of other creditors of the issuer,
even in the case of

<PAGE>
economic defeasance. The escrow agent may not be an affiliated person of the
issuer or an affiliated person of an affiliated person of the issuer within the
meaning of section 2(a)(3) of the Investment Company Act of 1940 ("1940 Act"),
and may not have a lien of any type on the deposited securities for payment of
its fees, except with respect to excess securities. An independent certified
public accountant, counsel to holders of the original bond, or other party
acceptable to a nationally recognized statistical rating agency, must verify at
the time of the initial deposit of securities and at the time any substitute
securities are deposited into the escrow account, that the securities will
satisfy all scheduled principal, interest, and any applicable premiums on the
original bonds. The Fund will invest no more than 25% of its total assets in
refunded bonds of the same municipal issuer.

INVESTMENT RESTRICTIONS AND POLICIES

Restrictions - The Fund has adopted the following restrictions as fundamental
policies. The Fund may not:

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

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

3. Lend any of its funds or other assets, except by the purchase of a portion
of an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be
deemed a loan. Although such loans are not presently intended, this prohibition
will not preclude the Fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower; provided such security loans may not be made if, as
a result, the aggregate of such loans exceeds 10% of the value of the Funds
total assets at the time of the most recent loan.

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

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

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

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

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

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

10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.

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

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

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

In order to change any of the foregoing restrictions, or any other fundamental
policies listed in the Prospectus, approval must be obtained from the Funds
shareholders. Such approval requires the affirmative vote of the lesser of (i)
67% or more of the Funds voting securities present at a meeting if the holders
of more than 50% of the Funds voting securities are represented at that meeting
or (ii) more than 50% of the Funds outstanding voting securities.

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

<TABLE>
<CAPTION>
Positions and Office
Name and Address with the Fund Principal Occupations During the Past Five Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris J. Ashton Director President, Chief Executive Officer and
General Host Corporation Chairman of the Board, General Host
Metro Center, 1 Station Place Corporation (nursery and craft centers);
Stamford, CT 06904-2045 Director, RBC Holdings, Inc. (a bank holding
company), Bar-S Foods and Sunbelt Nursery
Group Inc.; director of certain of the
investment companies in the Templeton Group of
Funds; and director, trustee or managing
general partner, as the case may be, of most
of the investment companies in the Franklin
Group of Funds.
- --------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp
Park Avenue at Morris County & Szuch; Director of General Host Corporation;
P. O. Box 1945 director of certain of the investment
Morristown, NJ 07962-1945 companies in the Templeton Group of Funds; and
director, trustee or managing general partner,
as the case may be, of most of the investment
companies in the Franklin Group of Funds.
- --------------------------------------------------------------------------------------------------------------
* Charles B. Johnson President and Director President and Director, Franklin Resources,
777 Mariners Island Blvd. Inc. and Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and
General Host Corporation; director of certain
of the investment companies in the Templeton
Group of Funds; and officer and/or director,
trustee or managing general partner, as the
case may be, of most other subsidiaries of
Franklin Resources, Inc. and of most of the
investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------
* Rupert H. Johnson, Jr. Vice President and Executive Vice President and Director,
777 Mariners Island Blvd. Director Franklin Resources, Inc. and
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.;
President and Director, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the
investment companies in the Templeton Group of
Funds; and officer and/or director, trustee or
managing general partner, as the case may be,
of most other subsidiaries of Franklin
Resources, Inc. and of most of the investment
companies in the Franklin Group of Funds.
- --------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Positions and Office
Name and Address with the Fund Principal Occupations During the Past Five Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gordon S. Macklin Director Chairman, White River Corporation (information
8212 Burning Tree Road services); Director, Fundamerican Enterprises
Bethesda, MD 20817 Holdings, Inc., Martin Marietta Corporation,
MCI Communications Corporation, Medimmune Inc.
(biotechnology) and Infovest Corp.
(information services), director of certain of
the investment companies in the Templeton
Group of Funds; and director, trustee or
managing general partner, as the case may be,
of most of the investment companies in the
Franklin Group of Funds; formerly, Chairman,
Hambrecht and Quist Group; Director, H & Q
Healthcare Investors; and President, National
Association of Securities Dealers, Inc.
- --------------------------------------------------------------------------------------------------------------
Brian E. Lorenz Secretary Attorney, member of the law firm of Bleakley
One North Lexington Avenue Platt & Schmidt; officer of some of the
White Plains, New York 10001-1700 investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------
Harmon E. Burns Vice President Executive Vice President, Secretary and
777 Mariners Island Blvd. Director, Franklin Resources, Inc.; Executive
San Mateo, CA 94404 Vice President and Director,
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.
- --------------------------------------------------------------------------------------------------------------
John Pinkham Vice President Vice President of Franklin Advisers, Inc. in
16 South Main Street portfolio management capacities.
Norwalk, CT 06854
- --------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President and Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. Treasurer Inc. and Franklin Advisers, Inc.; Vice
San Mateo, CA 94404 President Franklin/Templeton Distributors,
Inc.; officer 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.
- --------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Vice President, Franklin
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 $800 per month plus $800
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 expense reimbursements totaling $58,981 were paid to directors of the Fund
who are not affiliated with the investment manager. Legal fees and expense
reimbursements of $32,733 were paid during the fiscal year ended May 31, 1994,
to the law firm of which Mr. Lorenz is a partner, and which acts

<PAGE>
as counsel to the Fund. 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 18,858 shares or less than 1% of the
total outstanding shares of the Fund. Certain officers or directors who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

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 Funds outstanding common stock.

INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange. 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 over 3.5 million shareholders. Please refer to the table above which
indicates officers and directors who are affiliated persons of the Fund who are
also affiliated persons of Distributors and of Advisers.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers through whom
the Funds portfolio transactions are executed. The Managers extensive research
activities include, as appropriate, traveling to meet with issuers and to
review project sites. The Managers activities are subject to the review and
supervision of the Funds Board of Directors to whom the Manager renders
periodic reports of the Funds investment activities. The Manager, at its own
expense, furnishes the Fund with office space and office furnishings,
facilities and equipment required for managing the business affairs of the
Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager.

See the Statement of Operations in the financial statements at the end of this
Statement of Additional Information for additional details of these expenses.

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for
the first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2
of 1% per year) of net assets of the Fund in excess of $100 million up to $250
million; 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of the
Fund in excess of $250 million up to $10 billion; 11/300 of 1% (approximately
44/100 of 1% per year) of net assets of the Fund in excess of $10 billion up to
$12.5 billion; 7/200 of 1% (approximately 42/100 of 1% per year) of net assets
of the Fund in excess of $12.5 billion up to $15 billion; 1/30 of 1%
(approximately 40/100 of 1% per year) of net assets of the Fund in excess of
$15 billion up to $17.5 billion; 19/600 of 1% (approximately 38/100 of 1% per
year) of net assets of the fund in excess of $ 17.5 billion up to $20 billion;
and 3/100 of 1% (approximately 36/100 of 1% per year) of net assets of the Fund
in excess of $20 billion.

Management fees for the fiscal years ended May 31, 1992, 1993 and 1994 were
$15,394,393, $18,100,051 and $21,149,935, 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 Funds
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 limitation requirements.

The management agreement is in effect until September 30, 1995. Thereafter, it
may continue in effect

<PAGE>
for successive annual periods providing such continuance is specifically
approved at least annually by a vote of the Funds Board of Directors or by a
vote of the holders of a majority of the Funds outstanding voting securities,
and in either event by a majority vote of the Funds 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 Funds transfer agent and
dividend-paying agent.

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 Penns 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
Funds independent accountants. During the fiscal year ended May 31, 1994, their
accounting services consisted of rendering an opinion on the financial
statements of the Fund included in the Funds Annual Report and this Statement
of Additional Information.

PLAN OF DISTRIBUTION
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act whereby the Fund may pay up to a maximum for expenses
incurred in the distribution of its shares. The Plan provides for a maximum of
0.10% per annum (1/10 of 1%) of a Funds average daily net assets.

Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for all expenses incurred in
the distribution and promotion of the Funds 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
the Funds 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 that the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers 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 Act, then such payments shall be deemed to have
been made pursuant to a 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. No interested person or director of
the Fund has a direct or indirect financial interest in the Plan. 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
Funds shares are offered for sale may differ from the interpretations of
federal law expressed herein, and banks and financial institutions selling

<PAGE>
shares of the Fund may be required to register as dealers pursuant to state
law.

The Board of Directors ("Board") has determined that a consistent cash flow
resulting from the sale of new shares is necessary and appropriate to meet
redemptions and to take advantage of buying opportunities of portfolio
securities without having to make unwarranted liquidations of other portfolio
securities. The Board, 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, 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 the Board, and by the Funds shareholders at a meeting
held on March 2, 1994. The Plan took effect May 1, 1994. The Plan is effective
for an initial one-year period ending April 30, 1995 and is renewable annually
thereafter by a vote of the Board, including a majority 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 trustees be done by the non-interested directors. The Plan and any
related agreement may be terminated at any time, without any penalty, by the
Board or by Distributors on not more than 60 days written notice, by any act
that terminates the underwriting agreement with distributors, or by vote of a
majority of the Funds 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 Funds outstanding shares, and all such
material amendments to the Plan or any distribution or service agreements also
shall be approved by a vote of the non-interested trustees, 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 at least quarterly
on the amounts and purpose of any payment made under a Plan and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether a Plan should be continued.

During the fiscal year ended May 31, 1994, only one month of which occurred
after the Plan went into effect, a total of $266,650 was paid by the Fund to
eligible parties under the Plan.

THE FUNDS POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Since most purchases made by the Fund are principal transactions at net prices,
the Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or purchasing principal or market maker without incurring charges for
the services of a broker on its behalf unless it is determined that a better
price or execution may be obtained by utilizing the services of a broker.
Purchases of portfolio securities from underwriters include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
include a spread between the bid and ask price. The Fund seeks to obtain prompt
execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services rendered by such dealers in the execution of orders. It
is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocations of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staff of other securities firms which the Manager or its
affiliates may lawfully and appropriately use in their investment advisory
capacities with other clients. Provided that the best execution is obtained,
the sale of Fund shares may also be considered as a factor in the selection of
broker-dealers to execute the Funds portfolio transactions.

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

<PAGE>
other cases it is possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

During the past three fiscal years ended May 31, 1994, the Fund paid no
brokerage commissions.

The Fund has not acquired, since its inception, the securities of any
broker-dealer.

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

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

Shares are eligible to receive dividends beginning on the first business day
following settlement of the purchase transaction through the date on which the
Fund writes a check or sends a wire on redemption transactions.

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
the public offering price (or net asset value if a capital gain distribution)
until new instructions are received.

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

Under agreements with certain banks in Taiwan, Republic of China, the Funds
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 New York Stock Exchange (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 Funds 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 dealers responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled
between the customer and the securities dealer.

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with

<PAGE>
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 respect to
the Franklin Group of Funds(R) and the Templeton Group of Funds, Distributors
or its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 0.25% of the amount invested, paid pro rata
on a quarterly basis on average quarterly balances for a period of one year.

GENERAL

Redemptions will be made in cash at the net asset value per share next
determined after receipt by the Fund of a redemption request in proper form,
including all share certificates, share assignments, signature guarantees and
other documentation as may be required by the transfer agent. The amount
received upon redemption may be more or less than the shareholders original
investment.

The Fund will make payment for all redemptions within seven days after receipt
of such redemption request in proper form. However, the Fund reserves the right
to suspend redemptions or postpone the date of payment (1) for any periods
during which the Exchange is closed (other than for the customary weekend and
holiday closings), (2) when trading in the markets that the Fund usually
utilizes is restricted or an emergency exists, as determined by the Securities
and Exchange Commission ("SEC"), so that disposal of such Funds investments or
the determination of such Funds net asset value is not reasonably practicable,
or (3) for such other periods as the SEC may permit by order for the protection
of investors. Also, the Fund will not mail redemption proceeds until checks
received for the shares purchased have cleared.

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 Funds net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission. In the case of
requests for redemption in excess of such amounts, the directors reserve the
right to make payments in whole or in part in securities or other assets of the
Fund from which the shareholder is redeeming, in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Funds 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 shareholders 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 Years Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

The Funds portfolio securities are valued as stated in the Prospectus.
Generally, trading in 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 Funds 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 Funds 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.

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

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

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

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

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

Distributors allows the entire underwriting commission on the sale of Fund
shares to the securities dealer of record, if any, on an account.

In connection with the offering of the Funds shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1992, 1993 and 1994 were
$18,889,980, $26,371,833 and 24,747,692, respectively. After allowances to
dealers, Distributors retained $1,694,243, $1,840,740 and $1,876,562 during the
fiscal years ended May 31, 1992, 1993 and 1994, respectively. Distributors
received no other compensation from the Fund for acting as underwriter.

ADDITIONAL INFORMATION REGARDING TAXATION
- --------------------------------------------------------------------------------
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Directors reserve the
right not to maintain the qualification of the Fund as a regulated investment
company if they determine such course of action to be beneficial to
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
its tax-exempt interest dividends to shareholders) will be taxable to the
extent of the Funds available earnings and profits.

The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the 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 and pay such
dividends, if any, in December to avoid the imposition of this tax, but does
not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.

Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income

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

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

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

Since the Funds income is primarily interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Funds
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
May 31, 1993 qualified for this deduction and it is not anticipated that any of
the current years dividends will so qualify.

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

GENERAL INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE

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

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

TOTAL RETURN

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

In considering the quotations set forth below, 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 investors investment in the Fund. The actual performance
of an investment will be affected less by this charge the longer an investor
retains the investment in the Fund. The average annual compounded rates of
return for the Fund for the indicated periods ended on the date of the
financial statements included herein were as follows:

<PAGE>
Period Ending May 31, 1994:
One-Year: -1.01%
Five-Year: 7.50%
Ten-Year: 10.20%

These figures were calculated according to the Securities and Exchange
Commission formula:

P(1+T)(n)= ERV

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

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

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

Period Ending May 31, 1994:
One-Year: -1.01%
Five-Year: 43.56%
Ten-Year: 164.20%

YIELD

Current yield reflects the income per share earned by the Funds 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 4.94%. This figure was obtained using the
Securities and Exchange Commission formula:

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

where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the period that were
entitled to receive income distributions
d = the maximum offering price per share on the last day of the period

TAX EQUIVALENT YIELD

The Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund
which invests in tax-exempt obligations. Such yield is computed by dividing
that portion of the yield of the Fund (computed as indicated above) which is
tax-exempt by one minus the highest applicable combined federal, state and New
York City income tax rate (and adding the product to that portion of the yield
of the Fund that is not tax-exempt, if any). The tax equivalent yield for the
Fund for the 30-day period ended on the date of the financial statements
included herein was 9.30%. The advertised tax-equivalent yield will reflect the
most current federal, New York state and New York City tax rates available to
the Fund.

As of the date of this Statement of Additional Information, the state, the
combined state and federal, and the combined effective New York City, state and
federal income tax rates upon which the Funds tax equivalent yield quotations
are based are 7.6%, 44.2% and 46.9%, respectively. From time to time, as any
changes to such rates become effective, tax equivalent yield quotations
advertised by the Fund will be updated to reflect such changes. The Fund
expects updates may be necessary as tax rates are changed by federal, state and
local governments. The advantage of tax-free investments, such as the Fund,
will be enhanced by any tax rate increases. Therefore, the details of specific
tax increases may be used in sales material for the Fund.

Quotations of taxable equivalent yield by the Fund in advertisements may
reflect assumed rates of return which are not intended to represent historical
or current distribution rates or yields. Such quotations will be used in sales
literature, such as Franklins Tax-Free Yield Calculator, to illustrate the
general principle of the impact taxes have on rates of return or to show the
taxable rate of return that would be needed to match a tax-free rate of return.

<PAGE>
CURRENT DISTRIBUTION RATE

Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC are not indicative of the amounts which were or
will be paid to the Funds shareholders. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by dividing the
total amount of dividends per share paid by the Fund during the past 12 months
by a current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to the Funds current
distribution rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current federal, New York
state and New York City tax rates available to the Fund. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from additional sources (i.e., sources
other than dividends and interest), such as short-term capital gains, and is
calculated over a different period of time.

The current distribution rate and the current tax-equivalent distribution rate
for the Fund for the 12-month period ended on the date of the financial
statements included herein were 6.19% and 11.66%, respectively.

VOLATILITY

Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability
of net asset value or total return around an average, over a specified period
of time. The premise is that greater volatility connotes greater risk
undertaken in achieving performance.

OTHER PERFORMANCE QUOTATIONS

With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a "Current Distribution Rate for Net Asset Value Investments." This
rate is computed by adding the income dividends paid by the Fund during the
last 12 months and dividing that sum by a current net asset value. Figures for
yield, total return and other measures of performance for Net Asset Value
Investments may also be quoted. These will be derived as described elsewhere in
this Statement of Additional Information with the substitution of net asset
value for public offering price.

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

The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisers and underwriter of both the Franklin Group of Funds(R) 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.
The following publications, indices, and averages are examples of materials
that may be used:

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

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

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

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

e) Bond Buyers 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.

f) Bond Buyers Municipal Bond Index - an index based on the yields of 40
long-term, tax-exempt municipal bonds. Designed to be the basis for the
Municipal Bond Index futures contract.

<PAGE>
g) Bond Buyers 40 Average Dollar Price - a simple average of the current
average dollar bid prices of the 40 bonds in the Bond Buyers Municipal Bond
Index.

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

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

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

k) 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.

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

From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may also compare the Funds
performance to the return on certificates of deposits 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 Funds 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 Funds 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 Funds portfolio, that the 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 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. 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 3.5 million shareholder accounts and
offers 101 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.

Founded in 1947, Franklin is a leader in the tax-free mutual fund industry,
currently offering 40 tax-free funds, including 35 funds free from both federal
and state personal income taxes, and managing more than $40 billion in
municipal bond assets for over half a million investors. This leadership
position, combined with our portfolio managers skill and experience, allows us
to help people like you as you seek to take advantage of investment
opportunities across the country.

Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1994, taxes could cost as much
as $47 on every $100 earned from a fully taxable investment (based on the
maximum combined 39.6% federal tax rate and the highest state tax rate of 12%
for 1994.) Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected based on their
yield, quality and maturity. An investment in a Franklin tax-free fund can
provide an investor with the potential to earn income free of federal taxes
and, depending on the fund, state and local taxes as well, while supporting
state and local public pro-

<PAGE>
jects. Franklin tax-free funds may also provide tax-free compounding, when
dividends are reinvested. An investment in Franklins tax-free funds can grow
more rapidly than similar taxable investments.

The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
costs 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
childs 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.

According to the June 30, 1994, report published by Lipper Analytical Services,
Inc., the Fund is still the largest New York municipal bond fund in existence.

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

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

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

OWNERSHIP AND AUTHORITY DISPUTES

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

APPENDIX
- --------------------------------------------------------------------------------
DESCRIPTION OF MUNICIPAL BOND RATINGS:

Moodys

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

Aa: Municipal bonds which are rated Aa are judged to be 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, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

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

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

<PAGE>
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 to a
high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Con. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis condition.

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

Standard & Poors

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

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

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

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

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

C: This rating is reserved for income bonds on which no interest is being paid.

D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears. Note: The S&P ratings may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within the major
rating categories.

Fitch

AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.

AA bonds: Considered to be investment grade and of very high credit quality.
The obligors ability to pay interest and repay principal is very strong
although not quite as strong as bonds rated AAA and not significantly
vulnerable to foreseeable future developments.

A bonds: Considered to be investment grade and of high credit quality. The
obligors ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings."

BBB bonds: Considered to be investment grade and of satisfactory credit
quality. The obligors ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefor
impair timely payment. The likelihood that the

<PAGE>
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.

BB bonds: Considered speculative. The obligors ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.

B bonds: Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligors limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.

CCC bonds: Have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.

C bonds: Imminent default in payment of interest or principal.

DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.

Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.

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

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

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

DESCRIPTION OF OTHER INVESTMENTS:

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

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

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

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

Repurchase Agreements - involve purchase of obligations issued or guaranteed as
to interest and principal by the United States government or any agency or
instrumentality thereof or any federally-created corporation. At the same time
the Fund purchases the security, it resells it to the vendor (a member bank of
the Federal Reserve System) and is obligated to redeliver the security to the
vendor on an agreed-upon date in the future. The resale price is in excess of
the purchase price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn, at no market risk, a return on cash which is only
temporarily available. The Funds risk is limited to the ability of the vendor
to pay an agreed-upon sum upon the delivery date.

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

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

We have audited the accompanying statement of assets and liabilities of
Franklin New York Tax-Free Income Fund, Inc., 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
information included under the caption "Financial Highlights" for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

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

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin New York Tax-Free 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 five years in the period then ended in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
June 24, 1994

<PAGE>
FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 97.9%
BONDS 96.7%
$ 1,610,000 Albany Parking Authority, Parking Revenue, Refunding, Series A, 6.85%, 11/01/12 . . . . . . . $ 1,643,456

6,100,000 (b)Auburn, IDA, MFR, Auburn Memorial Home, 6.50%, 02/01/34 . . . . . . . . . . . . . . . . . 6,119,642
Babylon IDA, Resource Recovery Revenue, Ogden Martin System, Inc.,
8,090,000 Series A, 8.50%, 01/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,904,744
4,290,000 Series B, 8.50%, 01/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,722,046
2,845,000 Series C, 8.50%, 01/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,131,520
10,750,000 Babylon IDA, Waste Facilities Revenue, Community Waste Management, Series A,
Pre-Refunded, 7.875%, 07/01/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,285,100
1,000,000 Batavia Housing Authority Mortgage Revenue, Refunding, Washington Towers, Series A,
6.50%, 07/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006,050
2,500,000 Battery Park City Authority Revenue, Pre-Refunded, 7.70%, 05/01/15 . . . . . . . . . . . . . 2,829,200
1,440,000 Cattaraugus County COP, Olean Project Facility, Series A, Pre-Refunded, 8.50%,
08/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,660,061
5,375,000 Clinton County COP, Correctional Facilities Project, 8.125%, 08/01/17 . . . . . . . . . . . . 6,123,200
5,050,000 Cortland County IDA, Civic Facilities Revenue, Cortland Memorial Hospital, Inc.
Project, 6.25%, 07/01/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,720,286
1,000,000 Erie County GO, Public Improvement, Series A, Pre-Refunded, 9.50%, 02/01/99 . . . . . . . . . 1,066,930
5,730,000 Franklin County COP, Court House Redevelopment Project, 8.125%, 08/01/06 . . . . . . . . . . 6,400,639
2,000,000 Franklin County IDA, Lease Revenue, County Correctional Facilities Project, 6.75%,
11/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,031,160
Glen Cove, Refunding,
200,000 Series 1993, 5.90%, 01/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,300
190,000 Series 1993, 5.95%, 01/15/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,322
185,000 Series 1993, 6.00%, 01/15/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,177
4,000,000 Government of Guam Limited Obligation, Highway Bonds, USF & G Insured, Series A,
9.25%, 05/01/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,261,480
7,500,000 Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 . . . . . . . . . . . . . . . . . . . 7,325,025
1,425,000 Hamilton Elderly Housing Corp. Mortgage Revenue, Hamilton Apartments Project,
11.25%, 01/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,531,704
1,915,000 Ilion Elderly Housing Corp. Mortgage Revenue, Section 8, Housing Assistance Revenue,
7.25%, 07/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883,900
1,400,000 Lincoln Towers Housing Corp. Mortgage Revenue, Lincoln Towers Project, 11.25%, 01/01/15 . . . 1,503,740
5,045,000 Livingston County IDA, PCR, General Foods Manufacturing Corp., 8.875%, 08/01/05 . . . . . . . 5,406,827
2,640,000 Lysander COP, Arena Project, 8.375%, 06/01/10 . . . . . . . . . . . . . . . . . . . . . . . . 2,606,947
Metropolitan Transportation Authority, Commuter Facilities Revenue,
525,000 Series G, Pre-Refunded, 8.50%, 07/01/11 . . . . . . . . . . . . . . . . . . . . . . . . 577,416
17,450,000 Series H, Pre-Refunded, 8.50%, 07/01/11 . . . . . . . . . . . . . . . . . . . . . . . . 19,192,208
1,000,000 Series I, Pre-Refunded, 7.375%, 07/01/15 . . . . . . . . . . . . . . . . . . . . . . . . 1,022,660
4,000,000 Series J, Pre-Refunded, 7.375%, 07/01/15 . . . . . . . . . . . . . . . . . . . . . . . . 4,090,640
Metropolitan Transportation Authority, Service Contract Revenue,
20,255,000 Commuter Facilities, 6.00%, 07/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . 18,971,643
5,750,000 Commuter Facilities, Series 3, Pre-Refunded, 7.50%, 07/01/16 . . . . . . . . . . . . . . 6,579,208
2,790,000 Commuter Facilities, Series 4, Pre-Refunded, 8.00%, 07/01/08 . . . . . . . . . . . . . . 3,249,429
5,490,000 Commuter Facilities, Series 4, Pre-Refunded, 7.50%, 07/01/19 . . . . . . . . . . . . . . 6,261,345
22,630,000 Commuter Facilities, Series 5, 7.00%, 07/01/12 . . . . . . . . . . . . . . . . . . . . . 23,394,441
6,850,000 Commuter Facilities, Series 6, Pre-Refunded, 7.125%, 07/01/15 . . . . . . . . . . . . . 7,760,023
24,160,000 Refunding, Commuter Facilities, Series N, 7.125%, 07/01/09 . . . . . . . . . . . . . . . 25,352,296
12,000,000 Refunding, Transit Facilities, Series 5, 7.00%, 07/01/12 . . . . . . . . . . . . . . . . 12,405,360
16,470,000 Refunding, Transit Facilities, Series 5, 6.50%, 07/01/16 . . . . . . . . . . . . . . . . 16,468,847
7,725,000 Refunding, Transit Facilities, Series 5, 6.00%, 07/01/18 . . . . . . . . . . . . . . . . 7,302,520
7,625,000 Refunding, Transit Facilities, Series N, 7.125%, 07/01/09 . . . . . . . . . . . . . . . 8,001,294
13,250,000 Transit Facilities, Series 3, 6.00%, 07/01/19 . . . . . . . . . . . . . . . . . . . . . 12,513,035
33,310,000 Transit Facilities, Series 3, Pre-Refunded, 7.50%, 07/01/16 . . . . . . . . . . . . . . 38,113,635
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Metropolitan Transportation Authority, Service Contract Revenue, (cont.)
$ 2,050,000 Transit Facilities, Series 4, Pre-Refunded, 8.00%, 07/01/08 . . . . . . . . . . . . . . $ 2,387,574
9,300,000 Transit Facilities, Series 4, Pre-Refunded, 7.50%, 07/01/19 . . . . . . . . . . . . . . 10,606,650
2,000,000 Transit Facilities, Series 6, 7.00%, 07/01/09 . . . . . . . . . . . . . . . . . . . . . 2,074,500
20,150,000 Transit Facilities, Series 6, Pre-Refunded, 7.125%, 07/01/15 . . . . . . . . . . . . . . 22,826,928
Metropolitan Transportation Authority, Transit Facilities Revenue,
35,695,000 Refunding, Series 5, 6.50%, 07/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . 35,692,501
8,460,000 Refunding, Series 5, 6.00%, 07/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . 7,997,323
1,500,000 Refunding, Series K, 6.25%, 07/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,469,130
7,230,000 Series E, Pre-Refunded, 9.125%, 07/01/04 . . . . . . . . . . . . . . . . . . . . . . . . 7,752,946
22,000,000 Series E, Pre-Refunded, 9.125%, 07/01/11 . . . . . . . . . . . . . . . . . . . . . . . . 23,591,260
750,000 Series F, Pre-Refunded, 8.375%, 07/01/05 . . . . . . . . . . . . . . . . . . . . . . . . 823,050
54,190,000 Series F, Pre-Refunded, 8.375%, 07/01/16 . . . . . . . . . . . . . . . . . . . . . . . . 59,468,106
11,300,000 Series H, Pre-Refunded, 8.50%, 07/01/05 . . . . . . . . . . . . . . . . . . . . . . . . 12,428,192
28,540,000 Series H, Pre-Refunded, 8.50%, 07/01/11 . . . . . . . . . . . . . . . . . . . . . . . . 31,389,434
2,000,000 Series I, Pre-Refunded, 7.375%, 07/01/15 . . . . . . . . . . . . . . . . . . . . . . . . 2,045,320
13,935,000 Series J, Pre-Refunded, 7.375%, 07/01/15 . . . . . . . . . . . . . . . . . . . . . . . . 14,250,767
8,495,000 Series L, Pre-Refunded, 6.625%, 07/01/14 . . . . . . . . . . . . . . . . . . . . . . . . 9,368,116
New York City GO,
11,400,000 Refunding, Series 1991-A, 6.25%, 08/01/17 . . . . . . . . . . . . . . . . . . . . . . . 11,073,276
9,650,000 Refunding, Series 1992-A, 6.50%, 08/01/12 . . . . . . . . . . . . . . . . . . . . . . . 9,655,983
2,000,000 Refunding, Series 1992-A, 6.25%, 08/01/19 . . . . . . . . . . . . . . . . . . . . . . . 1,933,460
14,500,000 Refunding, Series 1992-A, 6.25%, 08/01/20 . . . . . . . . . . . . . . . . . . . . . . . 14,010,045
4,775,000 Refunding, Series 1992-A, 6.25%, 08/01/21 . . . . . . . . . . . . . . . . . . . . . . . 4,611,361
2,500,000 Refunding, Series 1993-G, 5.75%, 08/01/10 . . . . . . . . . . . . . . . . . . . . . . . 2,337,650
6,900,000 Refunding, Series 1993-G, 5.90%, 08/01/11 . . . . . . . . . . . . . . . . . . . . . . . 6,508,977
2,420,000 Series 1985-B, Pre-Refunded, 9.625%, 10/01/08 . . . . . . . . . . . . . . . . . . . . . 2,635,937
80,000 Series 1986-D, 8.50%, 08/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,762
345,000 Series 1986-D, 8.50%, 08/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373,649
135,000 Series 1986-D, 8.50%, 08/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,210
730,000 Series 1986-D, 8.50%, 08/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792,174
175,000 Series 1986-D, 8.50%, 08/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,905
1,035,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/02 . . . . . . . . . . . . . . . . . . . . . . 1,131,591
1,570,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/11 . . . . . . . . . . . . . . . . . . . . . . 1,729,810
6,305,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/13 . . . . . . . . . . . . . . . . . . . . . . 6,946,786
2,365,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/14 . . . . . . . . . . . . . . . . . . . . . . 2,605,733
13,970,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/15 . . . . . . . . . . . . . . . . . . . . . . 15,392,006
3,220,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/16 . . . . . . . . . . . . . . . . . . . . . . 3,547,764
740,000 Series 1987-A, Pre-Refunded, 8.50%, 11/01/08 . . . . . . . . . . . . . . . . . . . . . . 837,332
7,475,000 Series 1987-A, Pre-Refunded, 8.50%, 11/01/09 . . . . . . . . . . . . . . . . . . . . . . 8,458,187
4,410,000 Series 1987-A, Pre-Refunded, 8.50%, 11/01/11 . . . . . . . . . . . . . . . . . . . . . . 4,990,047
2,900,000 Series 1987-A, Pre-Refunded, 8.50%, 11/01/12 . . . . . . . . . . . . . . . . . . . . . . 3,276,536
2,115,000 Series 1987-A, Pre-Refunded, 8.75%, 11/01/14 . . . . . . . . . . . . . . . . . . . . . . 2,406,045
1,180,000 Series 1987-D, 8.50%, 08/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,310,650
6,385,000 Series 1987-D, 8.50%, 08/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,188,199
5,720,000 Series 1987-D, Pre-Refunded, 8.50%, 08/01/08 . . . . . . . . . . . . . . . . . . . . . . 6,451,359
8,210,000 Series 1987-D, Pre-Refunded, 8.50%, 08/01/10 . . . . . . . . . . . . . . . . . . . . . . 9,240,132
6,725,000 Series 1990-B, 7.00%, 06/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,182,636
4,250,000 Series 1990-B, 7.00%, 06/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,539,213
2,000,000 Series 1991-A, 7.75%, 08/15/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,218,820
10,000,000 Series 1991-A, 7.75%, 08/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,094,100
1,400,000 Series 1991-A, 7.75%, 08/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,557,514
2,000,000 Series 1991-B, 7.75%, 02/01/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,231,060
5,000,000 Series 1991-B, 7.75%, 02/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,577,650
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York City GO, (cont.)
$ 500,000 Series 1991-B, 7.75%, 02/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 557,110
1,875,000 Series 1991-B, 7.75%, 02/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,089,163
4,820,000 Series 1991-B, 8.25%, 08/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,544,494
10,950,000 Series 1991-B, 7.75%, 02/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,200,709
22,610,000 Series 1991-B, 7.75%, 02/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,266,449
3,615,000 Series 1991-B, Pre-Refunded, 8.00%, 08/01/17 . . . . . . . . . . . . . . . . . . . . . . 4,254,927
65,000 Series 1991-D, 8.00%, 08/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,627
7,500,000 Series 1991-F, 8.40%, 11/15/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,762,550
3,350,000 Series 1991-F, 8.40%, 11/15/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,913,939
1,500,000 Series 1992-B, 6.75%, 10/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,528,800
4,500,000 Series 1992-C, Sub-Series C, 7.00%, 08/01/16 . . . . . . . . . . . . . . . . . . . . . . 4,852,125
2,500,000 Series 1992-D, 7.50%, 02/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,772,050
2,000,000 Series 1992-E, 6.00%, 05/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,888,540
4,600,000 Series 1992-H, 7.20%, 02/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,001,672
6,500,000 Series 1992-H, 7.00%, 02/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,988,605
4,225,000 Series 1992-H, 7.00%, 02/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,542,593
1,500,000 Series 1993-B, 5.75%, 08/15/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,412,940
2,350,000 Series 1993-B, 5.75%, 08/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,155,585
2,960,000 Series 1993-B, 5.75%, 08/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,703,960
2,000,000 Series 1993-E, 5.625%, 08/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,806,840
4,650,000 Series 1993-E, 6.00%, 05/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,349,099
5,825,000 Series 1993-E, 6.00%, 05/15/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,442,589
New York City HDC, MFMR,
6,000,000 Series A, 6.55%, 10/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,036,180
10,000,000 Series A, 6.55%, 04/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,060,300
2,000,000 Series A, 5.85%, 05/01/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852,500
45,000,000 Series A, 6.60%, 04/01/30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,097,650
1,500,000 Series I, FGIC Insured, 8.50%, 05/01/07 . . . . . . . . . . . . . . . . . . . . . . . . 1,598,490
85,680,000 New York City Health & Hospital Authority, Local Government Revenue, Refunding,
Series A, 6.30%, 02/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,752,200
New York City IDA, Civic Facilities Revenue,
6,570,000 American Society, Prevention Cruelty Project, 7.625%, 10/15/09 . . . . . . . . . . . . . 7,088,242
9,270,000 American Society, Prevention Cruelty Project, 7.70%, 10/15/19 . . . . . . . . . . . . . 10,032,458
2,835,000 Federation Protestant Welfare, 6.95%, 11/01/11 . . . . . . . . . . . . . . . . . . . . . 2,933,488
4,000,000 New York Blood Center, Inc. Project, 7.20%, 05/01/12 . . . . . . . . . . . . . . . . . . 4,177,960
7,000,000 New York Blood Center, Inc. Project, 7.25%, 05/01/22 . . . . . . . . . . . . . . . . . . 7,357,350
2,500,000 St. Christopher Ottilie Project, 7.50%, 07/01/21 . . . . . . . . . . . . . . . . . . . . 2,607,675
8,000,000 The Lighthouse, Inc. Project, 6.50%, 07/01/22 . . . . . . . . . . . . . . . . . . . . . 8,070,000
New York City Municipal Water Finance Authority, Water & Sewer System Revenue,
6,660,000 Series 1987-A, Pre-Refunded, 8.75%, 06/15/10 . . . . . . . . . . . . . . . . . . . . . . 7,541,451
3,700,000 Series 1987-A, Pre-Refunded, 7.00%, 06/15/14 . . . . . . . . . . . . . . . . . . . . . . 3,955,633
37,135,000 Series 1987-A, Pre-Refunded, 9.00%, 06/15/17 . . . . . . . . . . . . . . . . . . . . . . 42,309,020
3,700,000 Series 1989-A, 6.00%, 06/15/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,543,120
1,475,000 Series 1989-A, Pre-Refunded, 7.375%, 06/15/09 . . . . . . . . . . . . . . . . . . . . . 1,646,130
3,010,000 Series 1991-A, 6.75%, 06/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,090,397
5,000,000 Series 1991-A, 6.75%, 06/15/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,133,550
15,700,000 Series 1991-A, Pre-Refunded, 7.10%, 06/15/12 . . . . . . . . . . . . . . . . . . . . . . 17,643,817
1,570,000 Series 1991-A, Pre-Refunded, 7.00%, 06/15/15 . . . . . . . . . . . . . . . . . . . . . . 1,755,213
4,650,000 Series 1991-C, Pre-Refunded, 7.75%, 06/15/20 . . . . . . . . . . . . . . . . . . . . . . 5,418,552
3,000,000 Series 1992-B, 6.00%, 06/15/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,880,780
19,310,000 Series 1992-B, 6.50%, 06/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,536,120
21,960,000 Series 1992-B, 6.375%, 06/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,015,778
3,635,000 Series 1992-B, Pre-Refunded, 6.375%, 06/15/22 . . . . . . . . . . . . . . . . . . . . . 3,923,837
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York City Municipal Water Finance Authority, Water & Sewer System Revenue, (cont.)
$ 3,100,000 Series 1992-C, AMBAC Insured, 6.50%, 06/15/21 . . . . . . . . . . . . . . . . . . . . . $ 3,236,958
20,000,000 Series 1994-A, Pre-Refunded, 7.10%, 06/15/12 . . . . . . . . . . . . . . . . . . . . . . 21,470,973
2,875,000 Series 1994-A, Pre-Refunded, 7.00%, 06/15/15 . . . . . . . . . . . . . . . . . . . . . . 3,053,548
New York Housing Corp. Revenue,
5,000,000 Series A, MBIA Insured, Pre-Refunding, 8.625%, 11/01/06 . . . . . . . . . . . . . . . . 5,698,450
70,065,000 Series A, Pre-Refunding, 9.00%, 11/01/17 . . . . . . . . . . . . . . . . . . . . . . . . 80,549,527
New York State COP,
3,800,000 City University, John Jay College, 7.25%, 08/15/07 . . . . . . . . . . . . . . . . . . . 4,012,914
2,500,000 Commissioner Office Mental Health, 8.25%, 09/01/07 . . . . . . . . . . . . . . . . . . . 2,706,325
1,750,000 Commissioner Office Mental Health, 8.30%, 09/01/12 . . . . . . . . . . . . . . . . . . . 1,909,390
6,575,000 Hanson Redevelopment Project, 8.25%, 11/01/01 . . . . . . . . . . . . . . . . . . . . . 7,213,498
18,045,000 Hanson Redevelopment Project, 8.375%, 05/01/08 . . . . . . . . . . . . . . . . . . . . . 20,020,747
New York State Dormitory Authority Revenue,
5,790,000 City University System Consolidated, Series A, 6.50%, 07/01/16 . . . . . . . . . . . . . 5,800,654
33,795,000 City University System Consolidated, Series A, Pre-Refunded 625%, 07/01/20 . . . . . . . 38,791,253
13,160,000 City University System Consolidated, Series B, 6.00%, 05/15/17 . . . . . . . . . . . . . 12,606,754
3,430,000 City University System Consolidated, Series D, 7.00%, 07/01/09 . . . . . . . . . . . . . 3,702,959
10,970,000 City University System Consolidated, Series E, 7.75%, 07/01/17 . . . . . . . . . . . . . 11,548,229
18,920,000 City University System, Series A, Pre-Refunded, 7.625%, 07/01/13 . . . . . . . . . . . . 20,477,305
14,900,000 City University System, Series C, 7.50%, 07/01/10 . . . . . . . . . . . . . . . . . . . 16,721,674
10,880,000 City University System, Series C, 6.00%, 07/01/16 . . . . . . . . . . . . . . . . . . . 10,430,656
6,505,000 City University System, Series F, Pre-Refunded, 7.875%, 07/01/07 . . . . . . . . . . . . 7,550,809
73,320,000 City University System, Series F, Pre-Refunded, 7.875%, 04/01/17 . . . . . . . . . . . . 85,107,656
1,000,000 City University System, Series R, 10.875%, 07/01/14 . . . . . . . . . . . . . . . . . . 1,030,060
3,250,000 Court Facilities Lease, Series A, 5.70%, 05/15/22 . . . . . . . . . . . . . . . . . . . 2,912,975
1,000,000 Crouse Irving Memorial Hospital, HIBI Insured, 10.50%, 07/01/17 . . . . . . . . . . . . 1,023,870
2,530,000 Department of Education, 7.75%, 07/01/21 . . . . . . . . . . . . . . . . . . . . . . . . 2,852,626
14,725,000 Department of Health, 6.20%, 07/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . 14,371,600
19,790,000 Department of Health, Pre-Refunded, 7.70%, 07/01/20 . . . . . . . . . . . . . . . . . . 22,848,742
3,190,000 Department of Health, Veterans Home, 7.25%, 07/01/11 . . . . . . . . . . . . . . . . . . 3,433,844
8,480,000 Department of Health, Veterans Home, 6.25%, 07/01/20 . . . . . . . . . . . . . . . . . . 8,298,189
9,775,000 Department of Health, Veterans Home, 7.25%, 07/01/21 . . . . . . . . . . . . . . . . . . 10,522,201
1,275,000 Episcopal Health, 5.90%, 08/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,225,670
2,115,000 Fashion Institute of Technology, 7.50%, 07/01/20 . . . . . . . . . . . . . . . . . . . . 2,317,342
2,475,000 Heritage House Nursing Center, 7.00%, 08/01/31 . . . . . . . . . . . . . . . . . . . . . 2,630,950
14,355,000 Long Island Jewish Medical Center, Series A, 7.75%, 08/15/27 . . . . . . . . . . . . . . 15,744,277
5,835,000 Our Lady of Mercy, FHA Insured, Mortgage Revenue, 6.30%, 08/01/32 . . . . . . . . . . . 5,856,064
5,000,000 Refunding, City University, 7.625%, 07/01/14 . . . . . . . . . . . . . . . . . . . . . . 5,411,550
2,000,000 Refunding, City University, Series C, 8.20%, 07/01/14 . . . . . . . . . . . . . . . . . 2,279,000
2,950,000 Refunding, City University, Series U, 6.375%, 07/01/08 . . . . . . . . . . . . . . . . . 2,970,503
5,405,000 Refunding, City University, Series U, 6.70%, 07/01/09 . . . . . . . . . . . . . . . . . 5,551,854
16,000,000 Refunding, Manhattan College, 6.50%, 07/01/19 . . . . . . . . . . . . . . . . . . . . . 16,151,840
14,780,000 Refunding, State University Educational Facilities, Series B, 6.00%, 05/15/17 . . . . . 14,090,217
19,950,000 Refunding, State University Educational Facilities, Series B, Pre-Refunded, 7.25%,
05/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,473,675
2,565,000 State University Athletic Facilities, 7.25%, 07/01/12 . . . . . . . . . . . . . . . . . 2,761,069
4,750,000 State University Athletic Facilities, 7.25%, 07/01/21 . . . . . . . . . . . . . . . . . 5,113,090
5,500,000 State University Educational Facilities, Series A, 6.00%, 05/15/22 . . . . . . . . . . . 5,221,920
10,000,000 State University Educational Facilities, Series A, 6.25%, 05/15/17 . . . . . . . . . . . 9,832,100
55,190,000 State University Educational Facilities, Series A, Pre-Refunded, 7.70%, 05/15/12 . . . . 63,432,075
44,905,000 State University Educational Facilities, Series A, Pre-Refunded, 7.125%, 05/15/17 . . . 49,737,227
44,650,000 State University Educational Facilities, Series A, Pre-Refunded, 7.25%, 05/15/18 . . . . 50,976,459
12,750,000 State University Educational Facilities, Series A, Pre-Refunded, 6.75%, 05/15/21 . . . . 14,147,018
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York State Dormitory Authority Revenue, (cont.)
$ 12,725,000 State University Educational Facilities, Series B, Pre-Refunded, 7.375%, 05/15/14 . . . $14,101,442
2,000,000 State University Educational Facilities, Series C, 6.125%, 05/15/20 . . . . . . . . . . 1,933,180
6,500,000 The Society of New York Hospital, 9.75%, 07/01/15 . . . . . . . . . . . . . . . . . . . 6,652,165
3,250,000 Upstate Community Colleges, Series A, Pre-Refunded, 7.60%, 07/01/20 . . . . . . . . . . 3,735,485
1,000,000 Upstate Community Colleges, Series B, Pre-Refunded, 7.20%, 07/01/21 . . . . . . . . . . 1,134,060
New York State Energy Research & Development Authority, Gas Facilities Revenue,
24,135,000 Brooklyn Union Gas Co. Project, 9.00%, 05/15/15 . . . . . . . . . . . . . . . . . . . . 25,581,893
4,010,000 Brooklyn Union Gas Co. Project, 8.75%, 07/01/15 . . . . . . . . . . . . . . . . . . . . 4,257,457
New York State Energy Research & Development Authority, PCR,
3,300,000 Long Island Projects, 7.80%, 12/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . 3,389,958
5,000,000 Long Island Projects, Series A, 7.50%, 12/01/06 . . . . . . . . . . . . . . . . . . . . 5,154,450
6,000,000 New York State Electric & Gas Corp., Series C, Pre-Refunded, 12.30%, 07/01/14 . . . . . 6,211,980
38,145,000 Niagara Mohawk Power Corp. Project, Series 1, 8.875%, 11/01/25 . . . . . . . . . . . . . 40,758,314
9,535,000 Niagara Mohawk Power Corp. Project, Series 1, Pre-Refunded, 11.375%, 10/01/14 . . . . . 9,958,163
16,550,000 Niagara Mohawk Power Corp. Project, Series A, Pre-Refunded, 11.25%, 07/01/14 . . . . . . 16,965,902
11,420,000 Orange and Rockland Utilities, Inc. Project, 9.00%, 08/01/15 . . . . . . . . . . . . . . 12,190,736
New York State Environmental Facilities Corp., Special Obligation,
4,000,000 Riverbank State Park, 7.25%, 04/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . 4,326,920
4,300,000 Riverbank State Park, 7.25%, 04/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . 4,651,439
10,625,000 Riverbank State Park, 7.375%, 04/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . 11,574,875
2,550,000 State Park Infrastructure, Series A, 5.75%, 03/15/13 . . . . . . . . . . . . . . . . . . 2,372,724
4,500,000 New York State Environmental Facilities Corp., Water Facilities Revenue, Jamaica
Water Supply Co. Project, 10.875%, 12/01/14 . . . . . . . . . . . . . . . . . . . . . . 4,727,295
New York State HFA,
2,460,000 Henry Phipps Plaza, West Urban Project, Section 236, 8.00%, 05/01/18 . . . . . . . . . . 2,520,836
1,300,000 Urban Rentals, Series A, 8.25%, 11/01/19 . . . . . . . . . . . . . . . . . . . . . . . . 1,342,484
New York State HFA, Service Contract Obligation Revenue,
5,000,000 Refunding, Series C, 6.300%, 09/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . 4,914,250
6,575,000 Refunding, Series C, 5.875%, 09/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . 6,142,891
22,590,000 Refunding, Series C, 6.00%, 09/15/21 . . . . . . . . . . . . . . . . . . . . . . . . . . 21,125,942
3,995,000 Series 1990-A, Pre-Refunded, 7.80%, 09/15/10 . . . . . . . . . . . . . . . . . . . . . . 4,637,316
24,000,000 Series 1990-A, Pre-Refunded, 7.80%, 09/15/20 . . . . . . . . . . . . . . . . . . . . . . 27,929,280
10,250,000 Series 1991-A, Pre-Refunded, 7.80%, 09/15/11 . . . . . . . . . . . . . . . . . . . . . . 11,930,488
37,310,000 Series 1991-A, Pre-Refunded, 7.80%, 09/15/20 . . . . . . . . . . . . . . . . . . . . . . 43,543,755
14,400,000 Series 1991-C, Pre-Refunded, 7.30%, 03/15/21 . . . . . . . . . . . . . . . . . . . . . . 16,502,832
9,625,000 Series 1992-A, Pre-Refunded, 7.375%, 09/15/21 . . . . . . . . . . . . . . . . . . . . . 11,077,509
25,870,000 Series 1992-C, 6.30%, 03/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,173,062
10,870,000 Series 1993-A, 5.875%, 09/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,155,624
78,760,000 Series 1993-C, 6.125%, 03/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,985,821
New York State HFAR,
2,885,000 Children's Rescue Fund Housing, Series A, 7.625%, 05/01/18 . . . . . . . . . . . . . . . 2,979,311
2,055,000 FHA Insured, Adult Care, Series A, 7.85%, 02/15/30 . . . . . . . . . . . . . . . . . . . 2,246,300
2,500,000 MF Housing, Second Mortgage, Series D, 6.60%, 08/15/27 . . . . . . . . . . . . . . . . . 2,501,700
2,500,000 MF Housing, Second Mortgage, Series D, 6.25%, 08/15/23 . . . . . . . . . . . . . . . . . 2,390,150
1,655,000 MF Mortgage, FHA Insured, Series 1983-A, 9.875%, 11/15/25 . . . . . . . . . . . . . . . 1,686,280
3,855,000 MF Mortgage, FHA Insured, Series 1983-C, 10.25%, 11/15/24 . . . . . . . . . . . . . . . 3,927,898
12,575,000 MF Mortgage, FHA Insured, Series 1985-B, 8.50%, 05/15/28 . . . . . . . . . . . . . . . . 13,108,432
6,130,000 MF Mortgage, FHA Insured, Series 1991-A, 7.10%, 08/15/35 . . . . . . . . . . . . . . . . 6,312,306
5,000,000 MF Mortgage, FHA Insured, Series 1992-C, 6.50%, 08/15/24 . . . . . . . . . . . . . . . . 4,973,150
96,650,000 Refunding, New York City Health Facilities, Series A, 8.00%, 11/01/08 . . . . . . . . . 109,995,432
New York State Local Government Assistance Corp.,
7,850,000 Series 1991-B, 6.50%, 04/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,932,896
31,000,000 Series 1991-B, Pre-Refunded, 7.50%, 04/01/20 . . . . . . . . . . . . . . . . . . . . . . 35,675,110
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York State Local Government Assistance Corp., (cont.)
$39,935,000 Series 1991-C, 6.50%, 04/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,389,460
5,000,000 Series 1991-D, Pre-Refunded, 7.00%, 04/01/18 . . . . . . . . . . . . . . . . . . . . . . 5,638,500
2,710,000 Series 1992-A, 6.25%, 04/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,695,718
925,000 Series 1992-A, Pre-Refunded, 7.00%, 04/01/21 . . . . . . . . . . . . . . . . . . . . . . 1,025,030
34,025,000 Series 1992-A, Pre-Refunded, 7.125%, 04/01/21 . . . . . . . . . . . . . . . . . . . . . 38,640,151
20,575,000 Series 1992-C, 6.25%, 04/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,471,714
New York State Medical Care Facilities Finance Agency,
43,465,000 Albany Medical Center, Alice Hyde Project, FHA Insured, Mortgage Revenue, Series A, 8.00%,
02/15/28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,150,962
10,525,000 Brooklyn, Caldonia & Long Island College Hospitals, FHA Insured, Mortgage Revenue,
Series A, Pre-Refunded, 8.50%, 01/15/22 . . . . . . . . . . . . . . . . . . . . . . . . 11,420,151
3,500,000 Buffalo General Hospital, FHA Insured, Mortgage Revenue, Series C, 7.70%, 02/15/22 . . . 3,842,720
22,150,000 Catholic Medical Center of Brooklyn & Queens, Inc., FHA Insured, Mortgage Revenue,
Series A, Pre-Refunded, 8.30%, 02/15/22 . . . . . . . . . . . . . . . . . . . . . . . . 25,127,846
22,675,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A, 6.20%, 02/15/ . . . . 22,555,276
6,900,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A, 6.25%, 02/15/27 . . . . 6,832,725
28,750,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A, 7.45%, 08/15/31 . . . . 31,316,225
7,940,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A, 6.375%, 08/15/33 . . . 7,954,292
3,000,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A, Pre-Refunded,
6.125%, 02/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,900
16,150,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series B, 6.20%, 08/15/22 . . . 15,978,326
7,650,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series B, 10.50%, 01/15/24 . . . 7,802,082
4,275,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series B, 9.125%, 02/15/25 . . . 4,498,497
12,530,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series B, 8.875%, 08/15/27 . . . 13,980,097
36,120,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series B, 8.00%, 02/15/28 . . . 39,531,331
5,000,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series C, 9.00%, 02/15/26 . . . 5,237,850
59,275,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series C, 6.375%, 08/15/29 . . . 58,979,218
11,800,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series C, 6.65%, 08/15/32 . . . 12,034,466
1,310,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series C, 5.70%, 08/15/33 . . . 1,183,873
10,375,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series D, 6.60%, 02/15/31 . . . 10,597,025
55,500,000 Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series D, 6.45%, 02/15/32 . . . 55,919,025
7,220,000 Hospital & Nursing Home, FSA Insured, Mortgage Revenue, Series A, 6.50%, 02/15/34 . . . 7,260,215
68,050,000 Long Island College Hospital, FHA Insured, Mortgage Revenue, Series B, 8.10%, 02/15/22 . 74,846,154
2,670,000 Medina Memorial Hospital Project, Series A, 7.30%, 05/01/11 . . . . . . . . . . . . . . 2,860,905
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York State Medical Care Facilities Finance Agency, (cont.)
$15,675,000 Mental Health Services Facilities Improvement Revenue, Series A, Pre-Refunded, 7.70%,
02/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,235,298
57,100,000 Mental Health Services Facilities, Series A, 8.875%, 08/15/07 . . . . . . . . . . . . . 65,189,928
64,110,000 Mental Health Services Facilities, Series A, 8.875%, 08/15/07 . . . . . . . . . . . . . 71,810,252
2,210,000 Mercy Community Hospital Project, Sisters of Mercy, Series A, 9.80%, 11/01/16 . . . . . 2,282,864
74,455,000 Mt. Sinai Hospital, FHA Insured, Mortgage Revenue, Series C, Pre-Refunded, 8.875%,
01/15/26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,216,259
5,380,000 North General Hospital, Series 1989-A, 7.35%, 08/15/09 . . . . . . . . . . . . . . . . . 5,692,309
32,450,000 St. Vincent's Hospital, FHA Insured, Mortgage Revenue, Series A, 8.00%, 02/15/27 . . . . 35,949,084
1,665,000 Saranac Lake General Hospital Project Revenue, Series A, 7.875%, 11/01/10 . . . . . . . 1,846,402
4,690,000 Second Mortgage Health Care Project Revenue, Series A, 5.85%, 02/15/33 . . . . . . . . . 4,296,790
1,500,000 Second Mortgage Health Care Project Revenue, Series B, 6.35%, 11/01/14 . . . . . . . . . 1,511,925
60,645,000 Secured Hospital Revenue, Bronx, Lebanon & The Jamaica Hospital, Series A, 7.10%,
02/15/27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,659,627
72,180,000 Secured Hospital Revenue, North General Hospital, Series A, 7.40%, 02/15/19 . . . . . . 76,575,762
2,250,000 Secured Hospital Revenue, Series A, 7.35%, 08/15/11 . . . . . . . . . . . . . . . . . . 2,442,015
20,890,000 Secured Hospital Revenue, Series A, 6.125%, 08/15/13 . . . . . . . . . . . . . . . . . . 20,168,459
32,990,000 Secured Hospital Revenue, Series A, 7.40%, 08/15/21 . . . . . . . . . . . . . . . . . . 35,900,048
15,780,000 Secured Hospital Revenue, Series A, 6.25%, 02/15/24 . . . . . . . . . . . . . . . . . . 15,241,902
72,200,000 Refunding, Columbia Presbyterian Hospital, FHA Insured, Mortgage Revenue, Series A
Pre-Refunded, 8.00%, 02/15/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,462,568
1,185,000 Refunding, Good Samaritan Hospital Project Revenue, Series A, 8.00%, 11/01/13 . . . . . 1,290,323
5,050,000 Refunding, Hospital & Nursing Home, FHA Insured, Mortgage Revenue, Series A,
6.20%, 05/15/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,995,965
8,000,000 Refunding, Huntington Hospital Project Revenue, Series A, 8.125%, 11/01/14 . . . . . . . 8,674,240
4,005,000 Refunding, John T. Mather Memorial Hospital Project, 7.00%, 11/01/15 . . . . . . . . . . 4,170,647
6,400,000 Refunding, Nyack Hospital Project Revenue, Series A, 8.30%, 11/01/13 . . . . . . . . . . 7,036,480
9,900,000 Refunding, Vassar Brothers Hospital Project Revenue, Series A, 8.25%, 11/01/13 . . . . . 10,762,488
New York State Mortgage Agency, HMR,
795,000 5th Series, 9.75%, 10/01/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825,910
70,000 7th Series, 8.50%, 10/01/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,007
815,000 7th Series, 8.625%, 04/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,151
10,085,000 8th Series C, 8.40%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,542,355
6,550,000 8th Series D, 8.375%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,899,246
5,115,000 8th Series E, 8.10%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,325,380
5,870,000 10th Series A, 8.10%, 04/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,220,909
13,500,000 29th Series B, 6.45%, 04/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,571,415
12,375,000 (b)37th Series A, 6.375%, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,410,764
9,000,000 (b)37th Series A, 6.45%, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,067,050
1,000,000 Series 39, 6.00%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950,610
7,090,000 Series BB-2, 7.95%, 10/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,409,121
3,670,000 Series EE-1, 8.05%, 04/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,808,359
2,835,000 Series FF, 7.95%, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,967,224
14,865,000 Series OO, 8.05%, 10/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,528,425
14,650,000 Series RR, 7.75%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,232,484
7,130,000 New York State Mortgage Agency Revenue, Series 41-A, 6.50%, 10/01/17 . . . . . . . . . . . . 7,130,000
New York State Tollway Authority, Service Contract Revenue,
1,300,000 Local Highway & Bridge, 7.25%, 01/01/10 . . . . . . . . . . . . . . . . . . . . . . . . 1,379,833
21,865,000 Local Highway & Bridge, 6.375%, 04/01/12 . . . . . . . . . . . . . . . . . . . . . . . . 21,884,241
New York State Urban Development Corp. Revenue,
12,500,000 Correctional Facilities, Series B, Pre-Refunded, 8.00%, 01/01/06 . . . . . . . . . . . . 13,440,625
28,335,000 Correctional Facilities, Series B, Pre-Refunded, 8.00%, 01/01/15 . . . . . . . . . . . . 30,467,209
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
New York State Urban Development Corp. Revenue, (cont.)
$ 2,000,000 Refunding, Correctional Facilities, Pre-Refunded, 8.00%, 01/01/06 . . . . . . . . . . . $ 2,150,500
51,935,000 Refunding, Correctional Facilities, Pre-Refunded, 8.00%, 01/01/15 . . . . . . . . . . . 55,843,109
1,500,000 Syracuse University Center, 7.875%, 01/01/17 . . . . . . . . . . . . . . . . . . . . . . 1,632,975
Niagara Falls GO, Public Improvement,
805,000 Refunding, Pre-Refunded, 8.15%, 04/01/04 . . . . . . . . . . . . . . . . . . . . . . . . 899,024
790,000 Refunding, Pre-Refunded, 8.15%, 04/01/05 . . . . . . . . . . . . . . . . . . . . . . . . 882,272
775,000 Refunding, Pre-Refunded, 8.15%, 04/01/06 . . . . . . . . . . . . . . . . . . . . . . . . 865,520
755,000 Refunding, Pre-Refunded, 8.15%, 04/01/07 . . . . . . . . . . . . . . . . . . . . . . . . 843,184
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/04 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/05 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/06 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/07 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/08 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/09 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/10 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
1,000,000 Series A, Pre-Refunded, 8.15%, 12/01/11 . . . . . . . . . . . . . . . . . . . . . . . . 1,134,130
3,500,000 North County, Development Authority, Solid Waste Management Systems Revenue,
Series A, 6.75%, 07/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,560,585
2,250,000 Oneida Health Care Corp., Mortgage Revenue, Oneida Health Care, Series A,
7.20%, 08/01/31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,363,400
Oneida-Herkimer, Solid Waste Management Authority,
1,390,000 Solid Waste Systems Revenue, 6.20%, 04/01/00 . . . . . . . . . . . . . . . . . . . . . . 1,406,722
1,035,000 Solid Waste Systems Revenue, 6.30%, 04/01/01 . . . . . . . . . . . . . . . . . . . . . . 1,046,282
1,930,000 Solid Waste Systems Revenue, 6.40%, 04/01/02 . . . . . . . . . . . . . . . . . . . . . . 1,953,392
2,075,000 Solid Waste Systems Revenue, 6.50%, 04/01/03 . . . . . . . . . . . . . . . . . . . . . . 2,102,494
1,115,000 Solid Waste Systems Revenue, 6.65%, 04/01/05 . . . . . . . . . . . . . . . . . . . . . . 1,132,037
4,380,000 Solid Waste Systems Revenue, 6.75%, 04/01/14 . . . . . . . . . . . . . . . . . . . . . . 4,351,048
1,400,000 Onondaga County IDA, Civic Facilities Revenue, Community General Hospital, Greater
Syracuse, Series B, 6.625%, 01/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,325,856
8,000,000 Port Authority of New York and New Jersey, Consolidated 53rd Series, Revenue,
8.70%, 07/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,548,240
17,000,000 Port Authority of New York and New Jersey, Delta Air Lines Special Project, Series 1,
6.95%, 06/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,060,180
14,645,000 Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A,
7.875%, 07/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,974,180
31,375,000 Puerto Rico Commonwealth GO, 6.50%, 07/01/23 . . . . . . . . . . . . . . . . . . . . . . . . 31,871,353
29,455,000 Puerto Rico Commonwealth Highway Authority Revenue, Series P, Pre-Refunded,
8.125%, 07/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,600,791
10,000,000 Puerto Rico Commonwealth Highway & Transportation Authority Revenue, Series S,
Pre-Refunded, 6.625%, 07/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,062,700
2,750,000 Puerto Rico Commonwealth Highway & Transportation Authority Revenue, Series T,
Pre-Refunded, 6.625%, 07/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,864,714
Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue,
8,000,000 Series A, 7.90%, 07/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,788,240
5,735,000 Series S, Pre-Refunded, 6.50%, 07/01/22 . . . . . . . . . . . . . . . . . . . . . . . . 6,297,604
8,100,000 Puerto Rico Commonwealth Urban Renewal & Housing Corp., Refunding, 7.875%, 10/01/04 . . . . . 9,053,046
Puerto Rico Electric Power Authority, Revenue,
28,435,000 Refunding, Series 1987-K, Pre-Refunded, 9.375%, 07/01/17 . . . . . . . . . . . . . . . . 32,788,114
6,500,000 Refunding, Series 1987-L, Pre-Refunded, 8.375%, 07/01/07 . . . . . . . . . . . . . . . . 7,311,070
12,695,000 Refunding, Series 1988-M, Pre-Refunded, 8.00%, 07/01/08 . . . . . . . . . . . . . . . . 14,398,415
2,500,000 Refunding, Series 1989-O, 6.00%, 07/01/10 . . . . . . . . . . . . . . . . . . . . . . . 2,471,950
15,175,000 Series 1994-T, 6.375%, 07/01/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,256,490
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Puerto Rico Industrial, Medical & Environmental Facilities, PCFA,
$ 1,000,000 Baxter Travenol Labs., Series A, 8.00%, 09/01/12 . . . . . . . . . . . . . . . . . . . . $ 1,125,510
1,660,000 San Pablo Hospital Project, Series A, FHA Insured, Mortgage Revenue, Pre-Refunded, 10.125%,
08/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,761,808
21,015,000 Special Facilities, American Airlines Corp., Series A, 8.75%, 12/01/25 . . . . . . . . . 22,506,014
14,760,000 Puerto Rico Municipal Finance Agency, Series A, 8.25%, 07/01/08 . . . . . . . . . . . . 16,416,957
Puerto Rico PBA, Guaranteed, Public Education & Health Facilities,
1,255,000 Refunding, Pre-Refunded, 7.875%, 07/01/16 . . . . . . . . . . . . . . . . . . . . . . . 1,394,983
3,370,000 Series F, Pre-Refunded, 8.05%, 07/01/04 . . . . . . . . . . . . . . . . . . . . . . . . 3,711,213
16,070,000 Series F, Pre-Refunded, 8.00%, 07/01/12 . . . . . . . . . . . . . . . . . . . . . . . . 17,681,339
Suffolk County GO, Southwest Sewer District, Refunding,
3,000,000 Pre-Refunded, 10.80%, 02/01/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,196,860
6,200,000 Pre-Refunded, 10.90%, 02/01/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,610,812
6,200,000 Pre-Refunded, 10.90%, 02/01/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,610,812
4,800,000 Suffolk County IDA, Civic Facilities Revenue, Downing College, 8.25%, 12/01/20 . . . . . . . 5,277,072
1,360,000 Sunnybrook Elderly Housing Corp. Mortgage Revenue, Sunnybrook Apartments Project,
11.25%, 12/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,458,369
2,000,000 Syracuse IDA, Civic Facility Revenue, St. Joseph's Hospital Health Center Project,
7.50%, 06/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,110,780
5,000,000 UFA Developing Corp., Mortgage Revenue, Loreto Utica Project, 5.95%, 07/01/35 . . . . . . . . 4,661,000
United Nations Development Corp. Revenue, Refunding,
1,430,000 Phase 2 & 3, Senior Lien, Series A, Pre-Refunded, 7.875%, 07/01/06 . . . . . . . . . . . 1,556,183
60,385,000 Phase 2 & 3, Senior Lien, Series A, Pre-Refunded, 7.875%, 07/01/26 . . . . . . . . . . . 65,713,372
3,480,000 Phase 2 & 3, Sub-Lien, Series B, Pre-Refunded, 8.125%, 07/01/06 . . . . . . . . . . . . 3,801,935
7,445,000 Phase 2 & 3, Sub-Lien, Series B, Pre-Refunded, 8.25%, 07/01/26 . . . . . . . . . . . . . 8,151,903
16,975,000 Sub-Lien, Series A, 6.00%, 07/01/26 . . . . . . . . . . . . . . . . . . . . . . . . . . 16,298,716
15,370,000 Sub-Lien, Series B, 6.25%, 07/01/26 . . . . . . . . . . . . . . . . . . . . . . . . . . 15,284,697
3,535,000 University of Puerto Rico, University System Revenue, Series I, Pre-Refunded, 10.625%,
06/01/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,641,050
3,100,000 Virgin Islands Water & Power Authority Electric System, Series A, 7.40%, 07/01/11 . . . . . . 3,279,954
41,000,000 Warren & Washington Counties IDAR, Refunding, Adirondack Resource Recovery Project,
Series A, 7.90%, 12/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,927,050
Yonkers GO,
500,000 Series A, 9.20%, 02/01/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588,710
1,090,000 Series A, 9.20%, 02/01/03 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,307,858
1,095,000 Series A, 9.20%, 02/01/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,323,625
1,095,000 Series A, 9.20%, 02/01/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,335,648
-------------
TOTAL BONDS (COST $4,150,532,758) . . . . . . . . . . . . . . . . . . . . . . . . . 4,456,480,292
-------------
(A)ZERO COUPON/STEP-UP BONDS 1.2%
1,120,000 Erie County Water Authority, Water Revenue, Refunding, Fourth Resolution,
AMBAC Insured, (original accretion rate 7.30%), 12/01/17 . . . . . . . . . . . . . . . . . . 207,939
Metropolitan Transportation Authority, Transit Facilities Revenue,
3,500,000 Refunding, Commuter Facilities, Series 7, (original accretion rate 5.546%), 07/01/14 . 932,680
8,205,000 Refunding, Series 7, (original accretion rate 5.75%), 07/01/09 . . . . . . . . . . . . 3,107,069
16,500,000 Refunding, Series 7, (original accretion rate 5.80%), 07/01/10 . . . . . . . . . . . . 5,812,785
21,200,000 Refunding, Series 7, (original accretion rate 5.80%), 07/01/11 . . . . . . . . . . . . 6,941,516
7,000,000 Refunding, Series 7, (original accretion rate 5.85%), 07/01/12 . . . . . . . . . . . . 2,146,830
5,160,000 Series E, (original accretion rate 6.40%), 05/15/19 . . . . . . . . . . . . . . . . . . 992,578
7,935,000 Transit Facilities, Series 7, (original accretion rate 5.85%), 07/01/13 . . . . . . . . 2,258,539
New York City GO,
8,875,000 Citysavers, Series B, (original accretion rate 8.25%), 08/01/09 . . . . . . . . . . . . 3,342,769
1,030,000 Citysavers, Series B, (original accretion rate 8.66%), 06/01/12 . . . . . . . . . . . . 311,060
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/12 . . . . . . . . . . . . 300,873
</TABLE>

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

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
(A) ZERO COUPON/STEP-UP BONDS (CONT.)
New York City GO, (cont)
$ 1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/13 . . . . . . . . . . . $ 293,705
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/13 . . . . . . . . . . . 284,156
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/14 . . . . . . . . . . . 274,917
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/14 . . . . . . . . . . . 265,987
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/15 . . . . . . . . . . . 257,335
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/15 . . . . . . . . . . . 248,972
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/16 . . . . . . . . . . . 240,876
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/16 . . . . . . . . . . . 233,048
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/17 . . . . . . . . . . . 222,974
1,030,000 Citysavers, Series B, (origianl accretion rate 8.50%), 12/01/17 . . . . . . . . . . . 215,682
1,030,000 Citysavers, Series B, (original accretion rate 2.706%), 06/01/18 . . . . . . . . . . 208,616
1,005,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/18 . . . . . . . . . . . 196,890
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/19 . . . . . . . . . . . 197,554
1,030,000 Citysavers, Series B, (original accretion rate 8.50%), 12/01/19 . . . . . . . . . . . 191,127
10,000,000 Citysavers, Series B, (original accretion rate 8.50%), 06/01/20 . . . . . . . . . . . 1,795,300
2,500,000 M-Raes, Series 29, zero coupon to 03/15/00, (original accretion rate 8.50%), 8.00%
thereafter, 03/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,732,650
3,875,000 M-Raes, Series 30, zero coupon to 03/15/00, (original accretion rate 8.50%), 8.00%
thereafter, 03/15/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,685,608
20,400,000 M-Raes, Series 36, zero coupon to 10/01/02, (original accretion rate 3.048%), 7.00%
thereafter, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,775,492
2,690,000 Series A-2, (original accretion rate 5.95%), 08/01/10 . . . . . . . . . . . . . . . . 942,548
21,625,000 Triborough Bridge and Tunnel Authority, Convention Center Project, Series E, (original
accretion rate 7.50%), 01/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,841,069
--------------

TOTAL ZERO COUPON/STEP-UP BONDS, (COST $56,493,475) . . . . . . . . . . . . . . . . 55,459,144
--------------
TOTAL LONG TERM INVESTMENTS (COST $4,207,026,233) . . . . . . . . . . . . . . . . . 4,511,939,436
--------------
SHORT TERM INVESTMENTS .2%
10,200,000 (c)New York City Municipal Water Finance Authority, Water & Sewer System Revenue,
FGIC Insured, Series C, Daily VRDN and Put, 2.90%, 06/15/23 (Cost $10,200,000) . . . . . 10,200,000
--------------
TOTAL INVESTMENTS (COST $4,217,226,233) 98.1% . . . . . . . . . . . . . . . . 4,522,139,436
OTHER ASSETS AND LIABILITIES, NET 1.9% . . . . . . . . . . . . . . . . . . . . . 87,859,337
--------------
NET ASSETS 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,609,998,773
==============

At May 31, 1994, the net unrealized appreciation based on the cost of investments for
income tax purposes of $ 4,217,679,867 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327,740,188

Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,280,619)
--------------
Net unrealized appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 304,459,569
==============
</TABLE>

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

- --------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority/Agency
FSA - Financial Security Assistance
GO - General Obligation
HDC - Housing Development Corp.
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
HIBI - Health Industry Bond Insurance
HMR - Home Mortgage Revenue
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
USF & G - United States Fidelity & Guaranty Co.

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

(b)See Note 1 regarding securities purchased on a when-issued basis.

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

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

<PAGE>
FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
================================================================================
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
<S> <C>
Assets:
Investment in securities, at value
(identified cost $4,217,226,233) $4,522,139,436
Cash 5,154,530
Receivables:
Interest 91,146,061
Investment securities sold 42,412,037
Capital shares sold 6,714,004
--------------
Total assets 4,667,566,068
--------------

Liabilities:
Payables:
Investment securities purchased:
Regular delivery 22,323,807
When-issued basis (Note 1) 30,023,351
Capital shares repurchased 2,777,477
Distribution fees 266,650
Management fees 1,748,187
Shareholder servicing costs 58,420
Accrued expenses and other liabilities 369,403
--------------
Total liabilities 57,567,295
--------------
Net assets, at value $4,609,998,773
==============
Net assets consist of:
Undistributed net investment income $ 15,564,361
Unrealized appreciation on investments 304,913,203
Accumulated net realized loss (52,732,643)
Capital shares 3,933,908
Additional paid-in capital 4,338,319,944
--------------
Net assets, at value $4,609,998,773
==============

Computation of net asset value and
offering price per share:
Net asset value and redemption
price per share
($4,609,998,773 / 393,390,849
shares of capital stock outstanding) $11.72
==============

Maximum offering price
(100/96 of $11.72)* $12.21
==============
</TABLE>

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1994
<S> <C> <C>
Investment income:
Interest (Note 1) $ 310,171,356
Expenses:
Management fees (Note 5) $21,149,935
Shareholder servicing costs
(Note 5) 684,860
Distribution fees (Note 5) 266,650
Reports to shareholders 889,819
Custodian fees 499,990
Professional fees (Note 5) 122,163
Directors' fees and expenses 58,981
Registration fees 122,318
Other 129,751
-----------
Total expenses 23,924,467
-------------
Net investment income 286,246,889
-------------
Realized and unrealized loss
on investments:
Net realized loss (24,088,876)
Net unrealized depreciation
on investments (114,464,524)
-------------
Net realized and unrealized
loss on investments (138,553,400)
-------------
Net increase in net assets
resulting from operations $ 147,693,489
=============
</TABLE>

* Effective July 1, 1994, the maximum offering price will increase to 4.25%. On
sales of $100,000 or more, the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."

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

<PAGE>
FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
================================================================================
FINANCIAL STATEMENTS (CONT.)

STATEMENT 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 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,246,889 $ 258,284,780
Net realized gain (loss) from security transactions . . . . . . . . . . . (24,088,876) 18,794,739
Net unrealized appreciation (depreciation) on investments . . . . . . . . (114,464,524) 188,460,224
--------------- ---------------
Net increase in net assets resulting from operations . . . . . . . . . 147,693,489 465,539,743
Distributions to shareholders:
From undistributed net investment income (Note 8) . . . . . . . . . . . . (289,819,098) (258,646,986)
Increase in net assets from capital share transactions (Note 3) . . . . . 412,874,905 561,505,347
--------------- ---------------
Net increase in net assets . . . . . . . . . . . . . . . . . . . . . . 270,749,296 768,398,104
Net assets:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,339,249,477 3,570,851,373
--------------- ---------------
End of year (including undistributed net investment income of
$15,564,361 - 1994 and $19,136,570 - 1993) . . . . . . . . . . . . . . . $ 4,609,998,773 $ 4,339,249,477
=============== ===============
</TABLE>

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

<PAGE>
FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
================================================================================
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

d. INVESTMENT INCOME, EXPENSE AND DISTRIBUTIONS: Distributions to shareholders
are recorded on the ex-dividend date. Interest income and estimated expenses
are accrued daily. Bond discounts and premiums are amortized as required by the
Internal Revenue Code.

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

Net realized capital gains and losses differ for financial statement and tax
purposes due to losses deferred for wash sale transactions.

e. 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 better reconcile financial
statement amounts with distributions determined in accordance with Statement of
Position 93-2, as follows:

<TABLE>
<S> <C>
Accumulated Net Realized Loss . . . . . . $ 36,706
Additional Paid-in Capital . . . . . . . (36,706)
</TABLE>

f. SECURITIES TRADED ON A WHEN-ISSUED BASIS: The Fund may trade securities on a
when-issued or delayed delivery basis, with payment and delivery scheduled for
a future date. These transactions are subject to market fluctuations and are
subject to the risk that the value at delivery may be more or less than the
trade date purchase price. Although the Fund will generally purchase these
securities with the intention of acquiring such securities, they may sell such
securities before the settlement date. These securities are identified on the
accompanying statement of investments in securities and net assets. The Fund
has set aside sufficient investment securities as collateral for these purchase
commitments.

2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

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

<TABLE>
<S> <C>
Expiring in: 1996 . . . . . . . . . . . $ 22,797,232
1997 . . . . . . . . . . . 5,574,301
2002 . . . . . . . . . . . 23,907,476
---------------
$ 52,279,009
===============
</TABLE>

For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at May
31, 1994 by $453,634.

<PAGE>
FRANKLIN NEW YORK TAX-FREE 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 $4,342,253,852. Transactions
in the Fund's shares for the year ended May 31, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
1994 1993
--------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold . . . . . . . . . . . . . . . . . . . 51,458,903 $624,610,727 55,518,673 $655,504,802
Shares issued in reinvestment of distributions . . 9,616,839 115,957,302 8,797,576 103,226,285
Shares redeemed . . . . . . . . . . . . . . . . . (24,059,238) (289,963,825) (17,263,044) (203,160,616)
Changes from exercise of exchange privilege:
Shares sold . . . . . . . . . . . . . . . . . . . 7,296,444 87,461,565 7,485,727 88,318,520
Shares redeemed . . . . . . . . . . . . . . . . . (10,421,181) (125,190,864) (6,989,229) (82,383,644)
----------- ------------ ----------- ------------
Net increase . . . . . . . . . . . . . . . . . . . 33,891,767 $412,874,905 47,549,703 $561,505,347
=========== ============ =========== ============
</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 $1,562,414,356 and
$1,167,029,546, respectively.

5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of an agreement, provides investment
advice, administrative services, office space and facilities to the Fund, and
receives fees computed monthly on the net assets of the Fund at the last day of
each 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 up to $10 billion.
Fees are reduced further on net assets over $10 billion. Fees incurred by the
Fund under the agreement aggregated $21,149,935 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 for the year ended May
31, 1994.

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 .10% 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 $266,650 for the year ended May 31, 1994.

In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. received commissions on sales of the
Fund's capital stock for the year ended May 31, 1994 totaling $24,747,692 of
which $22,871,130 was subsequently paid to other dealers. Commissions are
deducted from the gross proceeds received from the sale of the capital stock of
the Fund and as such are not expenses of the Fund.

Under the terms of the shareholder servicing agreement with Franklin/Templeton
Investor Services, Inc., the Fund pays costs on a per shareholder account
basis. Shareholder servicing costs incurred for the year ended May 31, 1994
aggregated $684,860 of which $597,070 was paid to Franklin/Templeton Investor
Services, Inc.

During the year ended May 31, 1994, legal fees of $32,733 were incurred to a
law firm in which Brian E. Lorenz, Secretary of the Fund, is a partner.

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

6. SUBSEQUENT EVENT

On May 13, 1994 and June 15, 1994, the Board of Directors declared
distributions of $.063 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.

7. CREDIT RISK

Although the Fund has a diversified investment portfolio, substantially all of
its investments are in the securities of issuers in New York. Such manner of
investments may subject the Fund to economic and fiscal changes occurring
within that state.

<PAGE>
FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)

8. FINANCIAL HIGHLIGHTS

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

<PAGE>