FRANKLIN CALIFORNIA TAX FREE TRUST, 497, 1995-02-21

FRANKLIN CALIFORNIA TAX FREE TRUST
497, 1995-02-21

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CATP
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN CALIFORNIA TAX-FREE TRUST
(FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND
AND FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND)
DATED NOVEMBER 1, 1994

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

1. EXPENSE TABLE

Revised to reflect that investments of $1,000,000 or more in the Insured 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 Funds
- - Contingent Deferred Sales Charge, Insured Fund."

2. MANAGEMENT OF THE TRUST

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

3. HOW TO BUY SHARES OF THE FUND:

INSURED FUND

a) Substitute the following for the sales charge table and the ensuing three
paragraphs:

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

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors 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 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 within
12 months of the calendar month following such investments. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."

<PAGE>

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

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

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

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

PURCHASES AT NET ASSET VALUE (INSURED FUND)

Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees and full-time employees of the
Trust, 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 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 contigency period will begin. Shares of the Fund redeemed in connection
with an exchange into another fund (see "Exchange Privilege") are not
considered "redeemed" for this privilege. In order to exercise this privilege,
a written order for the purchase of shares of the Fund must be received by the
Fund or the Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on redemption proceeds
placed immediately after redemption in a Franklin Bank Certificate of Deposit
("CD") until the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and the SAI.

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

<PAGE>

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."

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

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

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a 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 and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of 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.

c) Add the following language under "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.

4. EXCHANGE PRIVILEGE

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

As of March 1, 1995, "Timing Accounts" will no longer be permitted to exchange
into the Insured Fund. This policy does not affect any other types of investor.
"Timing Accounts" generally include market tim-

<PAGE>

ing 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.

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

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

5. HOW TO SELL SHARES OF THE FUNDS

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE INSURED FUND

In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments of the Insured Fund within the
contingency 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.

MONEY FUND

The Fund does not impose either a front-end sales charge or a contingent
deferred sales charge. If, however, the shares redeemed were shares acquired by
exchange from another of the Franklin Templeton Funds which would have assessed
a contingent deferred sales charge upon redemption, such charge will be made by
the Fund, as described above. The 12-month contingency period will be tolled
(or stopped) for the period such shares are exchanged into and held in the
Fund.

FRANKLIN CALIFORNIA TAX-FREE TRUST
Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund

PROSPECTUS NOVEMBER 1, 1994

[LOGO]

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

Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company consisting of two diversified and one non-diversified Funds.
This Prospectus pertains only to the two diversified Funds listed above,
referred to herein as the "Insured Fund" and "Money Fund", respectively. Each
Fund in the Trust intends to concentrate its investments in California
municipal securities and seeks to provide investors with as high a level of
income exempt from federal and California personal income taxes as is consistent
with prudent investment management, while seeking preservation of shareholders'
capital. The Money Fund also seeks liquidity in its investments.

The Insured Fund invests in California municipal securities which are covered
by insurance policies providing for the scheduled payment of principal and
interest in the event of non-payment by the issuer, in securities backed by the
full faith and credit of the U.S. government, in municipal securities secured by
such U.S. government obligations, and in short-term obligations of issuers with
the highest ratings from Moody's Investors Service ("Moody's"), Standard &
Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"). All
insured securities not insured by the issuer will be insured by a qualified
municipal bond insurer. An investment in the Insured Fund is not insured by the
U.S. government or the state of California.

The Money Fund is a no-load money market fund offering investors a
convenient way to invest in a diversified, professionally managed portfolio of
high quality, short-term California municipal securities. Its portfolio
securities are not covered by insurance policies. An investment in the Money
Fund is neither insured nor guaranteed by the U.S. government. The Money Fund
attempts to maintain a stable net asset value of $1.00 per share, although no
assurance can be given that it will be able to do so.

This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and the Insured and Money Funds 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 FUNDS 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 FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

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

<PAGE>
A Statement of Additional Information ("SAI") concerning the Trust, dated
November 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 Trust or the Trust's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.

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

CONTENTS PAGE
<S> <C>
Expense Table....................................... 2
Financial Highlights................................ 4
About the Trust..................................... 4
Investment Objective and Policies of Each Fund...... 5
Insurance........................................... 11
Management of the Trust............................. 14
Distributions to Shareholders....................... 15
Taxation of the Funds and Their Shareholders........ 17
How to Buy Shares of the Funds...................... 19
Other Programs and Privileges Available to
Shareholders of the Funds......................... 27
Exchange Privilege.................................. 28
How to Sell Shares of the Funds..................... 31
Telephone Transactions.............................. 35
Valuation of Shares of Each of the Funds............ 36
How to Get Information Regarding an Investment
in the Funds...................................... 36
Performance......................................... 37
General Information................................. 39
Account Registrations............................... 40
Important Notice Regarding Taxpayer IRS
Certifications.................................... 41
Portfolio Operations................................ 41
Risk Factors in California.......................... 43
</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 each Fund. These figures are based on
aggregate operating expenses of each Fund for the fiscal year ended June 30,
1994.

<TABLE>
<CAPTION>
INSURED MONEY
FUND FUND
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... 4.25% NONE
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)...................... NONE NONE
Deferred Sales Charge...................................... NONE NONE
Redemption Fees............................................ NONE NONE
Exchange Fee (per transaction)............................. $5.00+ $5.00+

<PAGE>

</TABLE>
<TABLE>
<CAPTION>
INSURED MONEY
FUND FUND
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................ .47% .48%
12b-1 Fees................................................. .09%* NONE
Other Expenses:
Shareholder Servicing Costs.............................. .02% .07%
Reports to Shareholders.................................. .02% .04%
Other.................................................... .01% .02%
Total Other Expenses....................................... .05% .13%
Total Fund Operating Expenses.............................. .61% .61%
</TABLE>

+$5.00 fee is imposed only on Timing Accounts as described under "Exchange
Privilege". All other exchanges are without charge.
*Annualized. Actual Rule 12b-1 fees incurred by the Insured Fund for the two
months ended June 30, 1994 were 0.015%. Consistent with National Association
of Securities Dealers, Inc's rules, it is possible that the combination of
front-end sales charges and Rule 12b-1 fees could cause long-term shareholders
to pay more than the economic equivalent of the maximum front-end sales charges
permitted under those same rules. See "Plan of Distribution" under "Management
of the Trust" in this Prospectus.

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

EXAMPLE

As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge for the Insured Fund, that apply
to a $1,000 investment in the Funds listed above 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 preceding table, the Funds charge no redemption
fees.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Insured Fund......... $48 $61 $75 $115
Money Fund........... $ 6 $20 $34 $ 76
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE 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 each Fund
separately and only indirectly by shareholders as a result of their investment
in each 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
each Fund from the effective date of each Fund's registration statement, as
indicated below, through the fiscal year ended June 30, 1994. The information
for each of the five fiscal years in the period ended June 30, 1994 has been
audited by Coopers & Lybrand, independent auditors, whose audit report thereon
appears in the financial statements in the Trust's Statement of Additional
Information. The remaining figures, which are also audited, are not covered by
the auditors' current report. A copy of the Statement of Additional
Information, as well as a copy of the Annual Report which contains further
information regarding performance, may be obtained without charge as noted on
the front cover of this Prospectus.

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE RATIO/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DIVIDENDS NET ASSET NET ASSETS RATIO OF RATIO OF
YEAR VALUE NET & UNREALIZED TOTAL FROM FROM NET VALUE AT END EXPENSES NET INCOME PORTFOLIO
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT AT END TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
JUNE 30 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME OF YEAR RETURN+ (IN 000'S) NET ASSETS NET ASSETS RATE
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 * $10.00 $0.59 $ 1.040 $1.630 $(0.420) $11.21 16.18% $ 48,613 0.42% 4.79% 59.50%
1987 11.21 0.73 (0.446) 0.284 (0.815) 10.64 1.97 161,661 0.68 6.11 18.55
1988 10.64 0.72 (0.080) 0.640 (0.750) 10.53 6.06 208,291 0.62 6.91 19.33
1989 10.53 0.74 0.710 1.450 (0.710) 11.27 13.97 248,336 0.61 6.79 28.56
1990 11.27 0.74 (0.104) 0.636 (0.736) 11.17 5.59 306,531 0.59 6.63 10.41
1991 11.17 0.74 0.094 0.834 (0.744) 11.26 7.45 471,997 0.57 6.48 4.20
1992 11.26 0.70 0.457 1.157 (0.747) 11.67 10.32 967,745 0.55 6.16 3.50
1993 11.67 0.69 0.636 1.326 (0.696) 12.30 11.47 1,363,623 0.53 5.82 8.28
1994 12.30 0.68 (0.562) 0.118 (0.678) 11.74 0.67 1,450,821 0.54 5.53 6.98

FRANKLIN CALIFORNIA TAX -EXEMPT MONEY FUND:
1986* 1.00 0.039 - 0.039 (0.039) 1.00 4.01 140,738 0.57 3.79 -
1987 1.00 0.039 - 0.039 (0.039) 1.00 3.97 358,964 0.63 4.09 -
1988 1.00 0.046 - 0.046 (0.046) 1.00 4.67 681,095 0.58 4.56 -
1989 1.00 0.055 - 0.055 (0.055) 1.00 5.67 807,326 0.55 5.57 -
1990 1.00 0.055 - 0.055 (0.055) 1.00 5.61 1,039,389 0.55 5.36 -
1991 1.00 0.045 - 0.045 (0.045) 1.00 4.58 953,738 0.57 4.47 -
1992 1.00 0.031 - 0.031 (0.031) 1.00 3.17 759,204 0.60 3.14 -
1993 1.00 0.021 - 0.021 (0.021) 1.00 2.08 652,864 0.62 2.07 -
1994 1.00 0.018 - 0.018 (0.018) 1.00 1.83 754,121 0.61 1.82 -
</TABLE>
*For the period September 3, 1985 (effective date of registration) to June 30
1986: annualized.
+Total return measures the change in value of an investment over the periods
indicated. It does not include the Insured Funds maximum initial sales charge
and assumes reinvestment of dividends at the offering price for the Insured
Fund and of capital gains at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan, as discussed in the
prospectus, the Insured Fund's existing sales charge on reinvested dividends has
been eliminated.

ABOUT THE TRUST

Franklin California Tax-Free Trust is an open-end management investment company,
or mutual fund, organized as a Massachusetts business trust in July 1985. The
Trust currently consists of three separate Funds: Franklin California Insured
Tax-Free Income Fund, Franklin California Tax-Exempt Money Fund and Franklin
California Intermediate-Term Tax-Free Income Fund (the "Intermediate-

<PAGE>
Term Fund"). The Intermediate-Term Fund is non-diversified; the Insured and
Money Funds are diversified. Each of the Funds issues a separate series of the
Trust's shares and maintains a totally separate investment portfolio. The Trust
may offer other funds in the future. This Prospectus applies only to the
Insured and Money funds.

Shares of the Insured Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price, which is
equal to the net asset value (see "Valuation of Shares of Each of the Funds")
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.

Shares of the Money Fund may be purchased at net asset value, without a sales
charge, next determined after receipt of a purchase order (initial investment
of at least $500 and subsequent investment of $25 or more). The Money Fund
attempts to maintain a stable net asset value of $1 per share (although no
assurances can be given that this will be maintained). A shareholder may write
redemption drafts (similar to checks) against the account; however, the
purchase of shares of the Money Fund does not create a checking or other bank
account. (See "How to Buy Shares of the Funds.")

INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND

Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes and from the personal income taxes of California as is
consistent with prudent investment management and the preservation of
shareholder's capital. The Money Fund also seeks liquidity in its investments.
There is, of course, no assurance that the Funds objectives will be achieved.
The Funds' investment objectives are fundamental policies of each Fund and may
not be changed without the approval of a majority of the respective Fund's
outstanding shares.

While both Funds will invest primarily in California municipal securities, they
have differing policies with respect to the maturity lengths, quality ratings,
and other aspects of the securities in which they invest. Each Fund, under
normal market conditions, will attempt to invest 100% and, as a matter of
fundamental policy, will invest at least 80% of the value of its net assets in
securities the interest on which is exempt from regular federal income taxes,
including the alternative minimum tax, and from the personal income taxes of
California. Thus, it is possible, although not anticipated, that up to 20% of
a Fund's net assets could be in municipal securities from another state,
securities subject to the alternative minimum tax and/or in taxable
obligations.

For temporary defensive purposes only, each of the Funds may invest (i) 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) 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 California's
personal income taxes. For the Insured Fund, any such temporary taxable
investments will be limited to obligations issued or guaranteed by the full
faith and credit of the U.S. government or in the highest quality commercial
paper rated P-1, A-1 or F-1 by Moody's, S&P or Fitch. For the Money Fund,
such temporary investments in taxable obligations will be limited substantially
to U.S. government securities, commercial paper rated in the highest grade
(P-1, A-1 or F-1) by Moody's, S&P or Fitch,

<PAGE>
or in obligations of U.S. banks with assets of $1 billion or more.

Under normal circumstances, at least 65% of the Insured Fund's total assets will
be invested in insured municipal securities. Although an insurer's quality
standards are independently determined and may vary from time to time,
generally such municipal securities that are rated at the date of purchase are
in the three highest ratings of S&P for bonds (AAA, AA, and A) or of Moody's
(Aaa, Aa, and A). Pending investment in longer-term municipal securities, the
Insured Fund also may invest up to 35% of its total net assets in short-term
tax-exempt instruments, without obtaining insurance, provided such instruments
carry a P-1, A-1 or F-1 short-term rating by Moody's, S&P or Fitch,
respectively, or will have a long-term rating of Aaa, or equivalent, by Moody's,
S&P or Fitch. For a description of such ratings, see the Appendix in the SAI.
An insurer may also insure municipal securities which are unrated or have lower
S&P ratings or which meet its own insurance standards. The Insured Fund may
also invest in municipal securities secured by an escrow or trust account of
U.S. government securities, except for temporary short-term investments
carrying the highest rating by Moody's, S&P or Fitch. (See "Insurance.")

In accordance with procedures adopted pursuant to Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act"), the Money Fund limits its investments to
those U.S. dollar denominated instruments which the Board of Trustees of the
Trust determines present minimal credit risks and which are, as required by the
federal securities laws, rated in one of the two highest rating categories as
determined by nationally recognized statistical rating agencies, or which are
unrated and of comparable quality, with remaining maturities of 397 calendar
days or less ("Eligible Securities").

The Money Fund maintains a dollar weighted average maturity of the securities
in its portfolio of 90 days or less. These procedures are not fundamental
policies of the Fund.

Each Fund may borrow from banks for temporary or emergency purposes and pledge
up to 5% of its total assets therefor. As approved by the Board of Trustees and
subject to the following conditions, the Funds may lend their portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian cash collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. The
lending of securities is a common practice in the securities industry. Each
Fund engages in security loan arrangements with the primary objective of
increasing that Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, each Fund continues to be
entitled to all dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and loss of rights in
the collateral should the borrower of the security fail financially.

REPURCHASE AGREEMENTS (MONEY FUND ONLY)

The Money Fund may engage in repurchase transactions, in which the Fund
purchases a U.S. government security subject to resale to a bank or dealer at
an agreed-upon price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal

<PAGE>
to at least 102% of the dollar amount invested by the Money Fund in each
agreement, with the value of the underlying security marked-to-market daily to
maintain coverage of at least 100%. A default by the seller might cause the
Money Fund to experience a loss or delay in the liquidation of the collateral
securing the repurchase agreement. The Money Fund might also incur disposition
costs in liquidating the collateral. The Money Fund, however, intends to enter
into repurchase agreements only with financial institutions such as
broker-dealers and banks which are deemed creditworthy by the Money Fund's
investment manager. A repurchase agreement is deemed to be a loan by the Money
Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Money Fund's Board and will be held pursuant to a written agreement.

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 is generally
rendered to the issuer by the issuer's bond 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 obtain funding for privately
operated facilities. There are two principal classifications of municipal
securities: notes and bonds. Municipal notes are used generally to provide for
short-term capital needs and generally have maturities of up to one year. These
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, construction loan notes, and tax-exempt commercial paper (also known as
municipal paper). Municipal bonds, which meet longer-term capital needs,
generally have maturities of more than one year and fall into one of two
categories. General obligation bonds are backed by the taxing power of the
issuing municipality and are considered the safest type of municipal bond.
Revenue bonds are payable only from the revenues of a particular project or
facility and are generally dependent solely on a specific revenue source.
Industrial development bonds are a specific type of revenue bond backed by the
credit and security of a private user. There are, of course, variations in the
security of municipal bonds, both within a particular classification and
between classifications, depending on numerous factors. In California,
municipal bonds may also be funded by property taxes in specially created
districts (Mello-Roos Bonds or Special Assessment Bonds), tax allocations based
on increased property tax assessments over a specified period frequently for
redevelopment projects, or specified redevelopment area sales tax allocations.
Municipal securities may also be sold in "stripped" form. Stripped municipal
securities represent separate ownership of interest and principal payments on
municipal obligations.

The SAI describes in greater detail the municipal securities in which each of
the Funds may invest.

The Insured Fund has no restrictions on the maturity of municipal securities
in which it may invest. Accordingly, that Fund will seek to invest in
municipal securities of such maturities which, in the judgment of that Fund
and its investment manager, will provide a high level of current income
consistent with prudent investment. The investment manager will also consider
current market

<PAGE>
conditions and the cost of the insurance obtainable on such securities.

It is possible that either 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 upon 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 need
for the projects) might also affect other bonds in the same segment, thereby
potentially increasing market risk.

The interest on bonds issued to finance state and local government operations
is generally tax-exempt. Interest on certain "private activity bonds"
(including those for housing and student loans) issued after August 7, 1986,
while still tax-exempt, constitutes a preference item for taxpayers in
determining their alternative minimum tax under the Internal Revenue Code of
1986, as amended (the "Code"). This interest could subject a shareholder to,
or increase the shareholder's liability under, the federal alternative minimum
tax (but not under Californias alternative minimum tax), depending on the
shareholder's individual tax situation. In addition, all distributions derived
from interest exempt from regular federal income tax may subject corporate
shareholders to, or increase their liability under, the alternative minimum
tax because such distributions are included in the corporation's "adjusted
current earnings."

Consistent with the Funds' investment objectives, the Funds may acquire private
activity bonds if, in an investment manager's opinion, such bonds represent the
most attractive investment opportunity then available to the Funds. As of June
30, 1994, the Insured Fund and the Money Fund had invested 1.16% and 3.41%,
respectively, of their assets in such bonds, the interest on which may be a
preference item subject to the alternative minimum tax for certain investors.

Each 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 total value of each 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 Money Fund may invest in floating rate and variable rate obligations
carrying stated maturities in excess of one year at the date of purchase by
the Fund if such obligations carry demand features that comply with the
conditions of rules adopted by the SEC. The Money Fund will limit its purchase
of municipal securities that are floating rate and variable rate obligations
to those meeting the quality

<PAGE>
standards set forth above. Frequently such obligations are secured by letters
of credit or other credit support arrangements provided by banks. The quality
of the underlying creditor or of the bank, as the case may be, must, as
determined by the investment manager under the supervision of the Board of
Trustees, also be equivalent to the quality standards set forth above. In
addition, the investment manager monitors the earning power, cash flow and other
liquidity ratios of the issuers of such obligations, as well as the
creditworthiness of the institution responsible for paying the principal amount
of the obligations under the demand feature.

Each Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price.
Although the Funds 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 a
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 a Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for that
Fund's portfolio consistent with its investment objective and policies and not
for the purpose of investment leverage.

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. Although the cost of insurance on the Insured
Fund's portfolio will reduce the Fund's yield, one of the objectives of such
insurance is to obtain a higher yield than would be available if all securities
in such Fund's portfolio were rated "AAA" by S&P without the benefit of any
insurance.

Each 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

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

While the risk of nonappropriation is inherent to COP financing, each
Fund believes that this risk is mitigated by its policy of investing only in
insured COPs in the case of the Insured Fund, and, in the case of the Money
Fund, the two highest rating categories as determined by Moody's, S&P or Fitch,
or in unrated COPs believed to be of comparable quality. Criteria considered by
the rating agencies and the Manager in assessing such risk include the issuing
municipality's credit rating, evaluation of how essential the leased property is
to the municipality and the term of the lease compared to the useful life of
the leased property. The Board of Trustees reviews the COPs held in each Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by the investment manager and monitored by the Board. Such
factors include (a) the credit quality of such securities and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of quality comparable to the
ratings required for each Fund's investment, including an assessment of the
likelihood that the leases will not be canceled; (b) the size of the municipal
securities market, both in general and with respect to COPs; and (c) the extent
to which the type of COPs held by each Fund trade on the same basis and with
the same degree of dealer participation as other municipal bonds of comparable
credit rating or quality. While there is no limit as to the amount of assets
which either Fund may invest in COPs, as of June 30, 1994, the Insured Fund
held 17.91% and the Money Fund held 4.48% of their respective net assets in
COPs and other municipal leases.

INVESTMENT RISK CONSIDERATIONS

While an investment in any of the Funds is not without risk, certain policies
are followed in managing each Fund which may help to reduce such risk. There are
two categories of risks to which a 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
securitys price. Market risk is the risk of price fluctuation of a municipal
security caused by changes in general economic and interest rate conditions
generally affecting the market as a whole. A municipal securitys maturity length
also affects its price. The Trust attempts to minimize credit risk by
diversifying its Fund's portfolio investments and, for the Insured Fund, by
maintaining the insurance coverage discussed below. THE INSURANCE DOES NOT
GUARANTEE THE MARKET VALUE OF THE MUNICIPAL SECURITIES AND, EXCEPT AS INDICATED
IN THIS PROSPECTUS, HAS NO EFFECT ON THE NET ASSET VALUE, REDEMPTION PRICE, OR
DIVIDENDS PAID BY THE FUND.

<PAGE>
When interest rates rise, the value of fixed-income securities will
generally decline. Conversely, when rates fall, the value of fixed-income
securities may rise. Since each Fund will generally invest primarily in
California municipal securities, there are certain specific factors and
considerations concerning California which may affect the credit and market
risk of the municipal securities that the Funds purchase. These factors are
described below and in Appendix A of the SAI.

As a fundamental policy, with respect to 75% of its net assets, each Fund 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. For this purpose, each
political subdivision, agency, or instrumentality and each multistate agency of
which a state, including California, is a member, and each public authority
which issues industrial development bonds on behalf of a private entity, will
be regarded as a separate issuer for determining the diversification of each
Fund's portfolio. A bond for which the payments of principal and interest are
secured by an escrow account of securities backed by the full faith and credit
of the U.S. government ("defeased"), in general, will not be treated as an
obligation of the original municipality for purposes of determining issuer
diversification, provided that certain conditions, as prescribed by the SEC,
are followed.

The Funds may purchase or sell securities without regard to the length of time
the security has been held, and the frequency of portfolio transactions (the
turnover rate) will vary from year to year depending on market conditions.

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

The assets of the Insured Fund is invested in portfolio securities. If
the securities owned by the Insured Fund increase in value, the value of the
shares of the Insured Fund which the shareholder owns will increase. If the
securities owned by the Insured 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 Insured Fund.

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of the Fund's shares will fluctuate with movements in the broader bond markets,
as well changes in interest rates will affect the value of the Fund's portfolio
and thus its share price. In particular, changes in interest rates will affect
the value of the Fund's portfolio and thus its share price. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.

INSURANCE
(INSURED FUND ONLY)

Except as indicated, each municipal security in the portfolio of the Insured
Fund will be covered by either a "New Issue Insurance Policy", a "Portfolio
Insurance Policy" issued by a qualified municipal bond insurer, or a "Secondary
Insurance Policy".

Any of the policies discussed herein are intended to insure the scheduled
payment of all principal and interest on each municipal security covered by the
policy (rather than the entire portfolio of each Fund as a whole) when due. The
insurance of principal refers to the face or par value of each security and is
not affected by the price paid therefor by the Fund or the market value thereof.
Each municipal security is secured by an insurance policy from one

<PAGE>
of several qualified insurance companies which allows the investment manager
to diversify among credit enhancements.

NEW ISSUE INSURANCE POLICY

New Issue Insurance Policies, if any, have been obtained by the respective
issuers of the municipal securities and all policy premiums for such securities
have been paid in advance by such issuers. Such policies are non-cancelable and
will continue in force so long as the municipal securities are outstanding and
the respective insurers remain in business. Since New Issue Insurance Policies
remain in effect as long as the securities are outstanding, the insurance may
have an effect on the resale value of securities in the Insured Fund's
portfolio. Therefore, New Issue Insurance Policies may be considered to
represent an element of market value with regard to municipal securities thus
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated. The Insured Fund will acquire portfolio securities subject
to New Issue Insurance Policies only where the claims paying ability of the
insurer thereof is rated triple-AAA by Moody's, S&P or Fitch.

In determining whether to insure any municipal security, the insurer has
applied its own standards, which are not necessarily the same as the criteria
used in regard to the selection of securities by the investment manager. No
contract to purchase a municipal security is entered into without either
permanent insurance in place or an irrevocable commitment to insure the
municipal security by a qualified insurer.

PORTFOLIO INSURANCE POLICY

The Portfolio Insurance Policy to be obtained by the Fund from a qualified
municipal bond insurer will be effective only so long as the Fund is in
existence, the insurer is still in business and meeting its obligations, and
the municipal securities described in the policy continue to be held by the
Fund. In the event of a sale of any municipal security by the Insured Fund or
payment thereof prior to maturity, the Portfolio Insurance Policy terminates as
to such municipal security.

The Portfolio Insurance Policy to be obtained by the Insured Fund may also be
canceled for failure to pay the premium. Nonpayment of premiums on such policy
obtained by the Fund will, under certain circumstances, result in the
cancellation of the Portfolio Insurance Policy and will also permit the insurer
to take action against the Insured Fund to recover premium payments due it.
Premium rates for each issue of securities covered by the Portfolio Insurance
Policy are fixed for the life of the Fund. The insurance premiums are payable
monthly by the Fund and are adjusted for purchases and sales of covered
securities during the month. The insurer cannot cancel coverage already in force
with respect to municipal securities owned by the Fund and covered by the
Portfolio Insurance Policy, except for nonpayment of premiums. In the event that
a portfolio holding which has been covered by a Portfolio Insurance Policy is
pre-refunded and irrevocably secured by a U.S. government security, the
insurance is no longer required. Any security for which insurance is canceled
other than as provided herein will be sold by the Fund as promptly thereafter as
possible.

The premium on the Insured Fund's Portfolio Insurance Policy is an item
of expense and will be reflected in the Fund's average annual expenses. The
average annual premium rate for the Portfolio Insurance Policy is determined by
dividing the amount of the Fund's annual Portfolio Insurance Policy premium by
the face amount of the insured bonds in its investment portfolio covered by
that policy. Premiums are paid from the Fund's assets

<PAGE>
and reduce the current yield on its portfolio by the amount thereof. When the
Insured Fund purchases a Secondary Insurance Policy (see below), the single
premium is added to the cost basis of the municipal security and is not
considered an item of expense of the Fund.

The Fund may also own, without insurance coverage, municipal securities
for which an escrow or trust account has been established pursuant to the
documents creating the municipal security and containing sufficient U.S.
government securities backed by the government's full faith and credit pledge in
order to ensure the payment of principal and interest on such bonds.

SECONDARY INSURANCE POLICY

The Fund may at any time purchase from the provider of a Portfolio
Insurance Policy a permanent Secondary Insurance Policy on any municipal
security held by the Fund. The coverage and obligation of the Fund to pay
monthly premiums under a Portfolio Insurance Policy would cease with the
purchase by the Fund of a Secondary Insurance Policy on such security.

By purchasing a Secondary Insurance Policy, the Fund would, upon payment
of a single premium, obtain similar insurance against nonpayment of scheduled
principal and interest for the remaining term of the security. Such insurance
coverage will be noncancellable and will continue in force so long as the
securities so insured are outstanding. One of the purposes of acquiring such a
policy would be to enable the Fund to sell the portfolio security to a third
party as a AAA-rated insured security at a market price higher than what
otherwise might be obtainable if the security was sold without the insurance
coverage. (Such rating is not automatic, however, and must specifically be
requested from Moody's, S&P or Fitch for each bond.) Such a policy would likely
be purchased if, in the opinion of the investment manager, the market value or
net proceeds of a sale by the Fund would exceed the current value of the
security (without insurance) plus the cost of the policy. Any difference between
the excess of a security's market value as a AAA-rated security over its market
value without such rating, including the single premium cost thereof, would
inure to the Fund in determining the net capital gain or loss realized by the
Fund upon the sale of the portfolio security. The Fund may purchase insurance
under a Secondary Insurance Policy in lieu of a Portfolio Insurance Policy at
any time, regardless of the effect of market value on the underlying municipal
security, if the investment manager believes such insurance would best serve the
Fund's interests in meeting its objective and policies.

Since the Fund has the right to purchase a Secondary Insurance Policy even if
the security is currently in default as to any payments by the issuer, the Fund
would have the opportunity to sell such security rather than be obligated to
hold the security in its portfolio in order to continue in force the applicable
Portfolio Insurance Policy, as discussed below.

Because coverage under the Portfolio Insurance Policy terminates upon sale of
a security from the Insured Fund's portfolio, such insurance does not have an
effect on the resale value of the securities. Therefore, the Fund may retain
any municipal securities insured under a Portfolio Insurance Policy which are
in default or in significant risk of default, and place a value on the
insurance which will be equal to the difference between the market value of
the defaulted security and the market value of similar securities which are not
in default. (See "Valuation of Shares of Each of the Funds.") Because of this
policy, the Trust's investment manager may be unable to manage the Insured
Fund's

<PAGE>
portfolio to the extent that it holds defaulted securities, which may
limit its ability in certain circumstances to purchase other municipal
securities. While a defaulted municipal security is held in the Fund's
portfolio, the Fund continues to pay the insurance premium thereon but also
collects interest payments from the insurer and retains the right to collect
the full amount of principal from the insurer when the security comes due. This
would not be applicable if the Insured Fund elected to purchase the Secondary
Market Policy discussed above in lieu of the Portfolio Insurance Policy.

MUNICIPAL BOND INSURER

A "qualified municipal bond insurer" refers to companies whose charter
limits their risk assumption to insurance of financial obligations only. This
precludes assumption of other types of risk, such as life, medical, fire and
casualty, auto and home insurance. The bond insurance industry is a regulated
industry. All bond insurers must be licensed in each state in order to write
financial guarantees in that jurisdiction. Regulations vary from state to
state; however, most regulators require minimum standards of solvency,
limitations on leverage and investment of assets. Regulators also place
restrictions on the amount an insurer can guarantee in relation to its capital
base. Neither the Fund nor its investment manager make any representations as
to the ability of any insurance company to meet its obligation to the Fund if
called upon to do so. The SAI contains more information on municipal bond
insurers. Currently, there are no bonds in the Fund's portfolio on which an
insurer is paying the principal or interest, otherwise payable by the issuer of
the Fund's portfolio obligations.

MANAGEMENT OF THE TRUST

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Trust's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly-owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and
R. Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager to 34 U.S. registered investment companies (112 separate
series) with aggregate assets of over $75 billion, approximately $41 billion of
which are in the municipal securities market.

Pursuant to the management agreement, the Manager supervises and implements
the Trust's investment activities and provides certain administrative services
and facilities which are necessary to conduct the Trust's business. Under the
management agreement, each Fund of the Trust is obligated to pay the Manager a
fee for its services based upon the respective Fund's net assets. During the
fiscal year ended June 30, 1994, fees totaling 0.47% of the average monthly
net assets of the Insured Fund and 0.48% of the average daily net assets of
the Money Fund were paid to Advisers.

It is not anticipated that the Funds 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 a 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

<PAGE>
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's as factors in selecting a broker. Further
information is included under "The Trust's Policies Regarding Brokers Used on
Portfolio Transactions" in the SAI.

Shareholder accounting and many of the clerical functions for the Trust
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 June 30, 1994, the expenses borne by the
Trust, including fees paid to Advisers and to Investor Services, totaled 0.61%
of the average monthly net assets of the Insured Fund on an annualized basis,
and 0.61% of the average daily net assets of the Money Fund.

PLAN OF DISTRIBUTION
(INSURED FUND)

The Insured Fund has adopted a distribution plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may reimburse
Distributors or others for expenses incurred by Distributors or others in the
promotion and distribution of the Fund's shares. Such expenses may include, but
are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid
to securities dealers or their firms or others who have executed a servicing
agreement with the Trust on behalf of the Fund, Distributors or its affiliates.
The maximum amount which the Fund may pay to Distributors or others for such
distribution expenses is 0.10% per annum of the average daily net assets of the
Fund, payable on a quarterly basis. All expenses of distribution and marketing
in excess of 0.10% per annum will be borne by Distributors, or others who have
incurred them, without reimbursement from the Fund. The Plan also covers any
payments to or by the Fund, Advisers, Distributors, or other parties on behalf
of the Fund, Advisers or Distributors, to the extent such payments are deemed
to be for the financing of any activity primarily intended to result in the
sale of shares issued by the Fund within the context of Rule 12b-1. The
payments under the Plan are included in the maximum operating expenses which
may be borne by the Fund.

DISTRIBUTIONS TO SHAREHOLDERS
INSURED FUND

There are two types of distributions which the Insured Fund may make to
its shareholders. Further information on the tax treatment of distributions to
shareholders of each Fund is included under "Taxation of the Funds and Their
Shareholders" and in the SAI under "Additional Information Regarding Taxation".

1. Income dividends. The Fund receives income generally 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.

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

DISTRIBUTION DATE

Although subject to change by the Board of Trustees, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends daily, payable on or about the last business day of the month.
The amount of income dividend payments by the Insured Fund is dependent upon
the amount of net income received by the Insured Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Trust's
Board of Trustees. THE INSURED FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.

DIVIDEND REINVESTMENT

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

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

DISTRIBUTIONS IN CASH

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

MONEY FUND

The Money Fund declares dividends for each day that the Money Fund's net asset
value is calculated,

<PAGE>
payable to shareholders of record as of the close of business the
preceding day. The amount of dividends may fluctuate from day to day and
dividends may be omitted on some days, depending on changes in the factors that
comprise the Money Fund's net investment income. The Money Fund does not pay
"interest" to its shareholders, nor is any amount of dividends or return
guaranteed in any way.

Dividends are automatically reinvested daily in the form of additional
shares of the Money Fund at the net asset value per share at the close of
business each day.

The daily dividend includes accrued interest and any original issue and
market discount, plus or minus any gain or loss on the sale of portfolio
securities and changes in unrealized appreciation or depreciation in portfolio
securities (to the extent required to maintain a stable net asset value per
share) less the estimated expenses of the Fund.

The Fund's portfolio is composed of short-term securities and thus, under
normal circumstances, the Fund does not expect to realize any long-term
capital gain. The federal income tax treatment of dividends and distributions
is the same whether received in cash or reinvested in Fund shares.

The SAI includes additional discussion of distributions.

DIVIDENDS IN CASH

Shareholders may request to have their dividends paid out monthly in
cash by filing written instructions with Investor Services. For such
shareholders, the shares reinvested and credited to their account during the
month will be redeemed as of the close of business on the last banking business
day of the month and the proceeds will be paid to them in cash. By completing
the "Special Payment Instructions for Dividends" section of the Shareholder
Application included in this Prospectus, a shareholder may direct the selected
distributions 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. Dividends which may be paid in the interim will be sent to
the address of record. Additional information regarding automated fund
transfers may be obtained from Franklin's Shareholder Services Department.
Dividend and capital gain distributions are eligible for investment in another
fund in the Franklin Group of Funds or the Templeton Group at net asset value.

TAXATION OF THE FUNDS
AND THEIR SHAREHOLDERS

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

Each Fund is treated as a separate entity for federal income tax purposes. Each
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 exempt-interest income, taxable ordinary
income, and net realized short-term and long-term capital gains, if any, for a
fiscal year in accordance with the timing requirements imposed by the Code and
by meeting certain other requirements relating to the sources of its income and
diversification of its assets, each Fund will not be liable for federal income
or excise taxes.

<PAGE>
By meeting certain requirements of the Code, each Fund has qualified
and continues to qualify to pay exempt-interest dividends to its shareholders.
To the extent that dividends are derived from interest income from debt
obligations of California or its political subdivisions or from interest on
U.S. territorial obligations (including Puerto Rico, the U.S. Virgin Islands
and Guam) which are exempt from regular federal and California personal income
tax, they will not be subject to either federal or California personal income
tax when received by a Fund's shareholders. The pass through of exempt-interest
dividends is allowed only if a Fund meets its federal and California
requirements that at least 50% of its total assets are invested in such exempt
obligations at the end of each quarter of its fiscal year. To the extent that
dividends are derived from direct obligations of the federal government, they
will be exempt from California personal income taxes (but not from federal
income tax). However, for corporate taxpayers subject to the California
franchise tax, all distributions will be fully 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, they
are treated as ordinary income whether the shareholder has elected to receive
them in cash or in additional shares.

From time to time, a 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 (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 a Fund of such ordinary income to its shareholders will be
subject to regular income tax in the hands of Fund shareholders. In any fiscal
year, each Fund may elect not to distribute to its shareholders its taxable
ordinary income and, instead, to 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 each Fund's shares are taxable events on
which a shareholder may realize a gain or loss (although no gain or loss is
anticipated with respect to shares of the Money Fund because the Fund seeks to
maintain a net asset value per share of $1.00). Any loss incurred on sale or
exchange of each Fund's shares, held for six months or less, will be treated as
a long-term capital loss to the extent of net long-term capital gain dividends
received with respect to such shares. All or a portion of the sales charge
incurred in purchasing shares of the Insured Fund will not be included in the
federal tax basis of such shares sold or exchanged within 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 Insured Fund or in another fund in
the Franklin/Templeton Group of Funds

<PAGE>
(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.

Since each Fund's income is primarily interest income and gain on the
sale of portfolio securities rather than dividend income, no portion of either
Fund's distributions has been or is expected to be eligible for the corporate
dividends-received deduction.

Each 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 interest
income that is a tax preference item under the alternative minimum tax.

Exempt-interest dividends of the Funds, 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 federal income tax.
Shareholders are required to disclose their receipt of tax-exempt interest on
their federal income tax returns.

Interest on indebtedness incurred (directly or indirectly) by
shareholders to purchase or carry Fund shares will not be deductible for
federal or California 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 a Fund and the application of foreign tax laws to these
distributions.

The foregoing description relates solely to federal income tax law and
to California personal income tax treatment to the extent indicated.
Shareholders should consult their tax advisors with respect to the
applicability of other state and local income tax laws to distributions and
redemption proceeds received from a Fund. Corporate, individual and trust
shareholders should contact their tax advisors to determine the impact of Fund
dividends and capital gain distributions under the alternative minimum tax that
may be applicable to a shareholders particular tax situation.

HOW TO BUY SHARES OF THE FUNDS
INSURED FUND

Shares of the Insured Fund are continuously offered through securities
dealers which execute an agreement with Distributors, the principal underwriter
of the Insured Funds shares. The minimum initial investment is $100 and
subsequent investments must be $25 or more. These minimums may be waived when
the shares are purchased through plans established at Franklin. The Trust and
Distributors reserve the right to refuse any order for the purchase of shares.

Shares of the Insured Fund are offered at the public offering price
which is the net asset value per share plus a sales charge, next computed (1)
after the shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. On orders

<PAGE>
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 Shares of Each of the Funds".

Set forth below is a table of current 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 II and Franklin Government Securities Trust) (the "Franklin
Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on the
excess over $2,500,000. Purchases pursuant to the Rights of Accumulation will be
at the applicable sales charge of 1% or more until the additional purchase, plus
the value of the account or the amount previously invested, less redemptions,
exceeds $2,500,000, in which event the sales charge on the excess will be
calculated as stated

<PAGE>
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
Insured Fund and other funds in the Franklin Group of Funds or the Templeton
Group. Compensation may include financial assistance to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising, sales campaigns and/or shareholder services and
programs regarding one or more of the Franklin Group of Funds or the Templeton
Group and other dealer-sponsored programs or events. In some instances, this
compensation may be made available only to certain dealers whose representatives
have sold or are expected to sell significant amounts of such shares.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Dealers may not use sales
of the Insured 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 Insured Fund or its
shareholders.

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

QUANTITY DISCOUNTS IN SALES CHARGES

Shares of the Insured Fund 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
investors spouse and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an account under
exclusive investment authority) may be considered in determining whether a
reduced sales charge is available, even though there may be a number of
beneficiaries of the account.

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

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

2. Letter of Intent. An investor may immediately qualify for a reduced
sales charge on a purchase of shares of the Fund by completing the Letter of
Intent section of the Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses an intention to
invest during the next 13 months a specified amount which if made at one time
would qualify for a reduced sales charge. At any time within 90 days after the
first investment which the investor wants to qualify for the reduced sales
charge, a signed Shareholder Application, with the Letter of Intent section
completed, may be filed with the Fund. After the Letter of Intent is filed,
each additional

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

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

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

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares
of the Insured 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 the Insured Fund's 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 the Insured Fund's 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, be available to arrange for group meetings
between representatives of the Fund or Distributors and the members, agree to
include sales and other materials related to the Insured Fund in its
publications and mailings to members at reduced or no cost to Distributors, and
seek to arrange for payroll deduction or other bulk transmission of investments
to the Insured 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
Insured 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 Insured Fund, there may be a delay between the time
of the payroll deduction and the time the money reaches the Insured 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 Insured Fund.

PURCHASES AT NET ASSET VALUE

Shares of the Insured 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 amount of purchase, which
may be established by Distributors. Currently, those criteria require that the
amount invested or to be invested during the subsequent 13-month period in this
Fund or any other company in the Franklin/Templeton Group must total at least
$1,000,000. Orders for such accounts will be accepted by mail accompanied by a
check or by telephone or other means of electronic data transfer directly from
the bank or trust company, with payment by federal funds received by the close
of business on the next business day following such order. If an investment by a
trust company or bank trust department at net asset value is made through a
dealer who has exe-

<PAGE>
cuted 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 Insured Fund may be purchased at net asset value by persons who
have redeemed, within the previous 120 days, their shares of the Insured 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 Insured Fund must be received by the
Fund or the Trust'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 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
redemption is a taxable transaction but reinvestment without a sales charge
may affect the amount of gain or loss recognized and the tax basis of the
shares reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and the SAI.

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

Shares of the Insured Fund may be purchased at net asset value by anyone who has
taken a distribution from an existing retirement plan already invested in the
Franklin Group of Funds or the Templeton Group (including former participants of
the Franklin/Templeton Profit Sharing 401(k) plan). In order to exercise this
privilege a written order for the purchase of shares of the Fund must be
received by the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies of a
fund in which the shareholder wishes to invest may be obtained by calling toll
free at 1-800/DIAL BEN (1-800/342-5236).

Shares of the Insured Fund may also be purchased at net asset value by (1)
officers, directors, trustees and full-time employees of the Insured Fund or any
fund in the Franklin Group of Funds or the Templeton Group, the Manager and
Distributors and affiliates of such companies, if they have been such for at
least 90 days and by their spouses and family members, (2) registered
securities dealers and their affiliates, for their investment account only, and
(3) registered personnel and employees of securities dealers and by their
spouses and family members in accordance with the internal policies and
procedures of the employing securities

<PAGE>
dealer. Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Fund. Employees of securities dealers must obtain a special application from
their employers or from Franklin's Sales Department in order to qualify.

Shares of the Insured 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 Insured Fund is a legally permissible
investment and which is prohibited by applicable investment laws from
paying a sales charge or commission in connection with the purchase of shares of
any registered management investment company ("an eligible governmental
authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE INSURED FUND CONSTITUTE
LEGAL INVESTMENTS FOR THEM. Municipal investors considering investment of
proceeds of bond offerings into either 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.

MONEY FUND

Shares of the Money Fund are continuously offered through securities dealers
which execute an agreement with Distributors, the principal underwriter of the
Fund's shares, and by the Fund directly. The use of the term "securities
dealers" 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. All shares of the
Fund are purchased at the net asset value, without a sales charge, next
determined after receipt of a purchase order in proper form. The minimum
initial investment is $500 and subsequent investments must be $25 or more.
These minimums may be waived when the shares are purchased through plans
established at Franklin providing for regular periodic investments. Purchases
in proper form received by the Fund prior to 3:00 p.m. Pacific time will be
credited to the shareholders account on that business day. If received after
3:00 p.m., the purchase will be credited the following business day. Many of
the types of instruments in which the Fund invests must be paid for in federal
funds, which are monies held by its custodian bank on deposit at the Federal
Reserve Bank of San Francisco and elsewhere. Therefore, the monies paid by an
investor for shares of the Fund generally cannot be invested by the Fund until
they are converted into and are available to the Fund in federal funds, which
may take up to two days. In such cases, purchases by investors may not be
considered in proper form and effective until such conversion and availability.
In the event the Fund is able to make investments immediately (within one
business day), it may accept a purchase order with payment other than in
federal funds; in such event, shares of the Money Fund will be purchased at the
net asset value next determined after receipt of the order and payment. Shares
may be purchased in any of the following ways.

<PAGE>
BY MAIL:

(1) For an initial investment, include the completed Shareholder Application.
For subsequent investments, the deposit slips which are included with the
shareholder's monthly statement or checkbook (if one has been requested)
may be used, or the shareholder should reference the account number on the
check.

(2) Make the check, Federal Reserve draft or negotiable bank draft payable to
Franklin California Tax-Exempt Money Fund. Instruments drawn on other
investment companies may not be accepted.

(3) Send the check, Federal Reserve draft or negotiable bank draft to Franklin
California Tax-Exempt Money Fund, 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777.

BY WIRE:

(1) Call Franklin's Shareholder Services Department at 1-800/632-2301. If that
line is busy, call 415/312-2000 collect, to advise that funds will be wired
for investment. The Fund will supply a wire control number for the
investment. It is necessary to obtain a new wire control number every time
money is wired into an account in the Fund. Wire control numbers are
effective for one transaction only and may not be used more than once.
Shareholders should contact Franklin's Shareholder Services Department at
the above telephone number to obtain a wire control number each time funds
are to be wired for investment to the Fund. Wired money which is not
properly identified with a currently effective wire control number will be
returned to the bank from which it was wired and will not be credited to
the shareholder's account.

(2) Wire funds to Bank of America, ABA routing number 121000358, for credit to
Franklin California Tax-Exempt Money Fund, A/C 1493-3-04779. The wire
control number and shareholder's name must be included. Wired funds
received by the Bank and reported by the Bank to the Fund by 3:00 p.m.
Pacific time are normally credited on that day. Later wires are credited
the following business day.

(3) If the purchase is not to an existing account, a completed Shareholder
Application must be sent to Franklin California Tax-Exempt Money Fund at
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777,
to assure proper credit for the wire.

THROUGH SECURITIES DEALERS:

Investors may, if they wish, invest in the Fund by purchasing shares through a
securities dealer. Securities dealers who process orders on behalf of their
customers may charge a reasonable fee for their services. Investments made
directly, without the assistance of a securities dealer, are without charge.
In certain states, shares of the Fund may be purchased only through registered
securities dealers.

GENERAL

The Trust and the Manager reserve the right to reject any order for the
purchase of shares of either Fund and to waive any minimum investment
requirements. In addition, the offering of shares of either Fund may be
suspended by such Fund at any time and resumed at any time thereafter.

Securities laws of states in which the Funds' 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.

A shareholders' investment in the Money Fund will be included for purposes of
determining the sales

<PAGE>
charge discount to which the shareholder may be entitled as set forth in
Rights of Accumulation and Letter of Intent under "Quantity Discounts in Sales
Charges".

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO SHAREHOLDERS OF THE FUNDS

CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUNDS 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 a 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 an account. A confirmation statement will be sent
monthly to shareholders in the Money Fund to confirm the daily dividends
reinvested as well as after each transaction which affects an account, except a
redemption effected by a check. These statements will also show the total number
of shares owned by the shareholder, including the number of shares in "plan
balance" for the account of the shareholder.

AUTOMATIC INVESTMENT PLAN

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

The market value of the Insured 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 nor protect against a loss.

SYSTEMATIC WITHDRAWAL PLAN

<PAGE>
lished on a monthly, quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and income dividends paid by
the Fund will be reinvested for the shareholder's account in additional shares
at net asset value. Payments will then be made from the liquidation of shares
at net asset value on the day of the transaction (which is generally the first
business day of the month in which the payment is scheduled) with payment
generally received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for Distributions"
(Insured Fund) or "Special Payment Instructions for Dividends" (Money Fund)
section of the Shareholder Application included with this prospectus, a
shareholder may direct the selected withdrawals to another fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record. Liquidation of
shares may reduce or possibly exhaust the shares in the shareholders 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 shareholders 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 Insured 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 Funds, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Funds' receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.

MULTIPLE ACCOUNTS FOR FIDUCIARIES
(MONEY FUND ONLY)

Special procedures have been designed for banks and other institutions wishing
to open multiple accounts in the Money Fund. Further information is included in
the SAI.

INSTITUTIONAL ACCOUNTS

There may be additional methods of purchasing, redeeming or exchanging shares
of the Funds 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 compa-

<PAGE>
nies 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 funds stated eligibility requirements
and investment minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to exchange 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 OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT
1-800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

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

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Funds 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 Insured Fund
which were pur-

<PAGE>
chased 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 a Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.

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

If a substantial portion of the Insured 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
Insured 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 objective 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 Funds 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 Funds reserve the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of a Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) makes 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 1/4 of 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 market indicators, will be
aggregated for purposes of the exchange limits.

The Funds reserve 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

<PAGE>
affected. A shareholder's purchase exchanges may be restricted or refused if a
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 Funds and therefore may be
refused.

The Funds 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 FUNDS

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:

1. REGULAR REDEMPTIONS BY MAIL (INSURED FUND AND MONEY FUND)

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 for the Insured Fund and at 3:00
p.m. Pacific time for the Money Fund) each day that the New York Stock Exchange
(the "Exchange") is open for business will receive the price calculated on the
following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.

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

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

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

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

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

(5) the Funds 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 Funds, (c) the Funds have
been notified of an adverse claim, (d) the instructions received by the
Funds are given by an agent, not the actual registered owner, (e) the Funds
determine 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 Funds.

<PAGE>
ings and loan associations, trust companies, savings banks, industrial loan
companies and credit unions; (2) national securities exchanges, registered
securities associations and clearing agencies; (3) securities dealers which are
members of a national securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that participate in the
Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.

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

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

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

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

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

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

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.

2. BY CHECK (MONEY FUND ONLY):

The Money Fund will supply redemption drafts (which are similar to checks and
are referred to as checks throughout this Prospectus) to shareholders who have
requested them on the Shareholder Application. The election of the check
redemption procedure does not create a checking account or other bank account
relationship between a shareholder and the Money Fund or any bank. These checks
are drawn through the Fund's Custodian, Bank of America NT & SA (the
"Custodian" or "Bank"). Shareholders will generally not be able to convert a
check drawn on a Fund account into a certified or cashier's check by
presentation at the Fund's Custodian. The shareholder may make checks payable
to the order of any person in any amount not less than $100. There is no
charge to the shareholder for this check redemption procedure.

When such a check is presented for payment, the Money Fund will redeem a
sufficient number of full and fractional shares in the shareholder's account to
cover the amount of the check. This enables the shareholder to continue earning
daily income dividends until the check has cleared. Shares will be redeemed at
their net asset value next determined after receipt of a check which

<PAGE>
does not exceed the collected balance of the account. Only shareholders having
accounts in which no stock certificates have been issued will be permitted to
redeem shares by check.

Because the Fund is not a bank, no assurance can be given that stop payment
orders on checks written by shareholders will be effective. However, the Fund
will use its best efforts to see that such orders are carried out.

Shareholders will be subject to the right of the Bank to return unpaid checks in
amounts exceeding the collected balance of their account at the time the check
is presented for payment. Checks should not be used to close a Money Fund
account because when the check is written, the shareholder will not know the
exact total value of the account on the day the check clears. The Bank reserves
the right to terminate this service at any time upon notice to shareholders.

3. REDEMPTIONS BY TELEPHONE INSURED FUND

Shareholders who file a Franklin/Templeton Telephone Redemption Authorization
Agreement (the "Agreement") included with this Prospectus may redeem shares of
the Fund by telephone, subject to the Restricted Account exception noted
under "Telephone Transactions - Restricted Accounts".

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.

MONEY FUND

A shareholder may redeem shares by telephoning the Fund at 1-800/632-2301.
Payment of redemption requests of $1,000 or less (once per business day) will
be sent by mail to the shareholder's address as reflected on the Fund's
records. For payments over $1,000, the shareholder must complete the "Wire
Redemptions Privilege" section of the Shareholder Application. Proceeds will
then be wired directly to the commercial bank or brokerage firm designated by
the shareholder. Wires will not be sent for redemption requests of $1,000 or
less. Shareholders may have redemption proceeds in excess of $1,000, up to
$50,000 per day per Fund account, sent directly to their address of record by
filing a completed Franklin/Templeton Telephone Redemption Authorization
Agreement.

Telephone redemption requests received before 3:00 p.m. Pacific time on any
business day will be processed that same day. Wire payments will be transmitted
the next business day following receipt prior to 3:00 p.m. Pacific time of a
request for redemption in proper form. Shareholders may wish to allow for longer
processing time if they want to assure that redemption proceeds will be
available at a specific time for a specific transaction. Shareholders may be
able to have redemption proceeds wired to an escrow account the same day,
provided that the request is received prior to 9:00 a.m. Pacific time.

GENERAL

The redemption check will be sent within seven days, made payable to all the
registered owners on the account, and will be sent only to the address of
record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, a shareholder should
follow the other redemption procedures set forth in this Prospectus.
Institutional accounts (certain corporations, bank trust departments, government
entities, and qualified retirement plans which qualify to purchase shares at
net asset value pur-

<PAGE>

suant 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. The requirements for telephone transactions extend
to transactions transmitted by facsimile or computer, as well as those
communicated directly to a customer representative. Payment may be made by
wire directly to any commercial bank previously designated by the shareholder in
a Shareholder Account Application or Revision.

THE AGREEMENT OR OTHER INFORMATION MAY ALSO 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".

Redemption instructions must include the shareholders name and account number
and be called to the Fund. No shares for which share certificates have been
issued may be redeemed by telephone instructions. The telephone redemption
privilege may be modified or discontinued by the either Fund at any time upon
60 days' notice to shareholders.

4. THROUGH A SECURITIES DEALER (INSURED FUND ONLY):

The Insured 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 at
the net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Insured 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 Insured Fund will still require a
signed letter of instruction and all other documents set forth above. A
shareholder's letter should reference the Insured 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 Insured 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.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Funds 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

<PAGE>
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 Funds.

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. The SAI contains more information
on the redemption of shares.

TELEPHONE TRANSACTIONS

Shareholders of the Funds 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, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file the Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Funds.

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 callers identification, and sending a confirmation statement
on redemptions to the address of record each time account activity is initiated
by telephone. So long as the Funds 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 Funds or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Funds nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance or send written instructions to
a 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 Funds
at any time upon 60 days' written notice to shareholders.

<PAGE>
VALUATION OF SHARES OF EACH OF THE FUNDS

Valuations for the Insured and Money Funds are currently made as of 1:00 and
3:00 p.m. Pacific time, respectively, each day that the Exchange is open for
trading. Many newspapers carry daily quotations of the prior trading day's
closing bid (net asset value) and "ask" (offering price, which includes the
maximum sales charge of the Insured 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. Portfolio securities for which market quotations are readily available
are valued within the range of the most recent bid and ask prices as obtained
from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. 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 Trustees. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All money
market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees 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 trustees
determine that it does not constitute fair value for such purposes. With the
approval of trustees, the Insured Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.

The valuation of the Money Fund's portfolio securities is based upon their
amortized cost value, which does not take into account unrealized capital gain
or loss. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The Fund's use of amortized cost which facilitates the
maintenance of the Fund's per share net asset value of $1.00 is permitted by
Rule 2a-7. Further information is included under "Determination of Net Asset
Value" in the SAI.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUNDS

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

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin Tele-

<PAGE>
FACTS system (day or night) at 1-800/247-1753. Information about the Funds may
be accessed by entering Fund Code 24 for the Insured Fund and 25 for the Money
Fund followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS system is also available for exchange transactions. See
"Exchange Privilege".

To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation. 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>

In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.

PERFORMANCE

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

INSURED FUND

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

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

<PAGE>
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
dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders are reflected in
the current distribution rate or taxable equivalent distribution rate, which
may be quoted to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by the Fund during the
past 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). The state, federal and the combined state
and federal income tax rates upon which the Trust's tax equivalent quotations
are based are 11.0%, 39.6% and 46.24%, respectively. The tax equivalent yield
and distribution rate for shareholders in the highest California tax brackets
will be higher. More information regarding tax equivalent yield and
distribution rate is included in the SAI. From time to time, as any changes to
such rates become effective, tax equivalent yield and distribution rate
quotations published by the Trust will be updated to reflect such changes.
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.

MONEY FUND

Current yield, as prescribed by the SEC, is an annualized percentage rate which
reflects the change in value of a hypothetical account based on the income
received from the Money Fund during a seven-day period. It is computed by
determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period. A hypothetical charge reflecting deductions from shareholder
accounts for management fees or shareholder services fees, for example, is
subtracted from the value of the account at the end of the period, and the
difference is divided by the value of the account at the beginning of the base
period to obtain the base period return. The result is then annualized.
Effective yield is computed in the same manner except that the annualization of
the return for the seven-day period reflects the results of compounding (that
is, the effect of reinvesting dividends paid on both the original share and
those acquired from the reinvestment of such dividends). The Fund may also quote
tax equivalent yield and tax equivalent effective yield, which demonstrate the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of a fund's yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the fund's yield.

INSURED FUND AND MONEY FUND

Tax equivalent effective yield demonstrates the effective yield from a taxable
investment necessary to produce an after-tax effective yield equivalent to that
of a fund which invests in tax-exempt obligations. It is computed in the same
manner as is the

<PAGE>
fund's tax equivalent yield, except that it is based on the tax exempt portion
of the fund's effective, rather than its current, yield. The figure is
calculated by dividing the tax-exempt portion of a fund's effective yield by
one minus a stated income tax rate and adding the product to the taxable
portion (if any) of the fund's effective yield.

In each case, performance figures are based upon past performance, reflect all
recurring charges against a Fund's income and for the Insured Fund 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 of the Fund, the historical
performance figures will be restated to reflect the new rate. For the Money
Fund, such quotations will reflect the value of any additional shares purchased
with dividends from the original share and any dividends declared on both the
original share and such additional shares. The investment results of the Funds,
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 a Fund's yield, tax equivalent yield,
distribution rate, taxable equivalent distribution rate or total return may be
in any future period.

GENERAL INFORMATION
REPORTS TO SHAREHOLDERS

Each Funds fiscal year ends June 30. Annual Reports containing audited financial
statements of the Trust, 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 Trust at the telephone number or address set forth on the cover page of
this prospectus.

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

ORGANIZATION

The Trust was organized as a Massachusetts business trust on July 18, 1985. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in any number of series. Shares issued will be fully paid
and non-assessable and will have no preemptive, conversion, or sinking rights.
Shares of each series have equal and exclusive rights as to dividends and
distributions as declared by such series and the net assets of such series upon
liquidation or dissolution.

VOTING RIGHTS

Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the 1940
Act. Voting rights are noncumulative, so that in any election of trustees the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of
Trustees.

The Trust does not intend to hold annual shareholder's meetings. The Trust may,
however, hold a special shareholders meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or any
other matters which are required to be acted on by shareholders under the 1940
Act. A meeting may also be called by a majority of the Board of Trustees in
their discretion or by shareholders holding at

<PAGE>
least ten percent of the outstanding shares of any series. Shareholders may
receive assistance in communicating with other shareholders in connection with
the election or removal of trustees such as that provided in Section 16(c) of
the 1940 Act.

The Board of Trustees may from time to time issue other Funds of the Trust, the
assets and liabilities of which will likewise be separate and distinct from
any other Fund.

Each Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50 in the Insured Fund and
$250 in the Money Fund, but only where the value of such account has been
reduced by the shareholders prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided advance notice is given to the shareholder. More
information is included in the SAI.

OTHER INFORMATION

Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Funds nor their 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 each Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.

Shares of the Funds may or may not constitute a legal investment for investors
whose investment authority is restricted by applicable law or regulation.

ACCOUNT REGISTRATIONS

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

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

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

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

Except as indicated, a shareholder may transfer an account in the Funds 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 Funds 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

<PAGE>
dealer(s) to evidence consent to the transfer. Under current procedures the
account transfer may be processed by the delivering securities dealer and the
Funds after the Funds receive 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 Funds may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Funds 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 NSCCs "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, each 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 Funds 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.

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

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolios. Their business history for at least the last five years
and positions with the Manager are also provided.

Don Duerson
Vice President and Senior Portfolio Manager
Franklin Advisers, Inc.

Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Franklin California Insured Tax-Free Income Fund since he joined Advisers in
1986. He has a Bachelor of Science degree in Business and Public Administration
from the University of Arizona and experience in the portfolio management
business dating back to

<PAGE>
1956. He is a member of various industry-related committees and associations.

Gregory Harrington
Senior Vice President and Managing Director
Franklin Advisers, Inc.

Mr. Harrington has been responsible for portfolio recommendations and decisions
since inception of the Franklin California Insured Tax-Free Income Fund. He is
a graduate of Mount Saint Mary's College in Maryland and has studied at the New
York School of Finance. His experience in the municipal securities industry
dates back to 1946. He joined Advisers in 1983.

Thomas Kenny
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.

Mr. Kenny is Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986 and 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 Pomeroy
Portfolio Manager
Franklin Advisers, Inc.

Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Franklin California Tax-Exempt Money Fund since he joined Advisers in 1986.
He received a Bachelor of Arts degree in Business Administration from San
Francisco State University in 1986 and is a member of various industry-related
committees and associations.

Bernard Schroer
Vice President and Senior Portfolio Manager
Franklin Advisers, Inc.

Mr. Schroer has been responsible for portfolio recommendations and decisions of
the Franklin California Insured Tax-Free Income Fund since he joined Advisers in
1987. From 1974 to 1984, he was the manager of trading at Kidder, Peabody and
Company, Inc. He has a degree in Finance from Santa Clara University and is a
member of various municipal securities industry-related committees and
associations.

Stella Wong
Senior Portfolio Manager
Franklin Advisers, Inc.

Ms. Wong has been responsible for portfolio recommendations and decisions for
the Franklin California Tax-Exempt Money Fund since 1986, when she joined
Advisers. She holds a Bachelor of Science degree in Business Administration from
San Francisco State University and a Master's degree in Financial Planning from
Golden Gate University. She is a member of various industry-related committees
and associations.

RISK FACTORS IN CALIFORNIA

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

Changes in California constitutional and other laws during the last several
years have raised questions

<PAGE>
about the ability of California state and municipal issuers to obtain sufficient
revenue to pay their bond obligations. In 1978, California voters approved an
amendment to the California Constitution known as Proposition 13. Proposition 13
limits ad valorem taxes on real property and restricts the ability of taxing
entities to increase real property taxes. Legislation passed subsequent to
Proposition 13, however, provided for the redistribution of California's General
Fund surplus to local agencies, the reallocation of revenues to local agencies
and the assumption of certain local obligations by the state so as to help
California municipal issuers to raise revenue to pay their bond obligations. It
is unknown, however, whether additional revenue redistribution legislation will
be enacted in the future and whether, if enacted, such legislation would provide
sufficient revenue for such California issuers to pay their obligations. The
state is also subject to another constitutional amendment, Article XIIIB, which
may have an adverse impact on California state and municipal issuers. Article
XIIIB restricts the state from spending certain appropriations in excess of an
appropriations limit imposed for each state and local government entity. If
revenues exceed such appropriations limit, such revenues must be returned as
revisions in the tax rates or fee schedules. Because of the uncertain impact of
the aforementioned statutes, the possible inconsistencies in the respective
terms of the statutes and the impossibility of predicting the level of future
appropriations and applicability of related statutes to such questions, it is
not currently possible to assess the impact of such legislation and policies on
the long-term ability of California state and municipal issuers to pay
interest or repay principal on their obligations.

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

Key sectors of California's economy have been severely affected by the most
recent recession, with job losses totaling over 850,000 since May of 1990. The
continuing growth of the state's population and labor force has produced high
unemployment rates compared to the nation as a whole. While total job loss has
declined with a slightly improving economy, key areas of California's economy,
including government, real estate and aerospace have been slow to recover.
Contraction in California's defense related industries, overbuilding in
commercial real estate, and consolidation and decline in the state's financial
services industry are expected to produce slower growth for several years.
Wealth levels in the state remain high relative to the nation, although this
gap continues to narrow.

In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California. These revisions reflect the state's heavy
reliance on short-term financing to cure cash imbalances and only moderate
economic growth projections for the state in fiscal 1994-95. For more
information on these ratings revisions and the state's current budget, please
refer to the SAI.

SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND
FRANKLIN CALIFORNIA TAX-FREE TRUST
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 as paragraph two:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*,***
------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $100,000.................................... 2.25% 2.30% 2.00%
$100,000 but less than $250,000....................... 1.75% 1.78% 1.50%
$250,000 but less than $500,000....................... 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000..................... 1.00% 1.01% 0.85%
$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
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."

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

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% 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 1, 1995, "Timing Accounts" will no longer be permitted to buy
shares of the Fund. See "Exchange Privilege" for a description.

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

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased without the imposition of either a
front-end sales charge "net asset value" or a contingent deferred sales
charge by (1) officers, directors, trustees and full-time employees of the
Trust, 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 by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.

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

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

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

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

<PAGE>
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 contingency 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.

6. The section "Portfolio Operations" is changed to add Thomas Kenny as
Portfolio Manager in place of Gregory Harrington. Mr. Kenny is Senior Vice
President of the investment manager and director of Franklin's municipal
bond department. He joined Franklin in 1986. 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.

<PAGE>

FRANKLIN CALIFORNIA INTERMEDIATE-TERM
TAX-FREE INCOME FUND
FRANKLIN CALIFORNIA TAX-FREE TRUST

PROSPECTUS November 1, 1994

[LOGO]

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

Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company, consisting of two diversified and one non-diversified
series. This Prospectus relates only to the Franklin California
Intermediate-Term Tax-Free Income Fund (the "Fund"), the non-diversified series
of the Trust. The Fund offers individual investors, corporations and other
institutions a convenient way to invest in a professionally managed portfolio
of municipal securities, primarily issued by the state of California and its
political subdivisions. The Fund's investment objective is to provide investors
with as high a level of income exempt from federal income taxes and California
personal income taxes as is consistent with prudent investment management and
the preservation of shareholders' capital. The Fund invests primarily in a
portfolio of investment grade obligations with a dollar weighted average
portfolio maturity of more than three years but not more than ten years. There
can be no assurance that the investment objective of the Fund will be realized.

This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and 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 (the "SAI"), dated
November 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.

<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 Trust.................................. 4
Investment Objective and
Policies of the Fund............................. 4
Management of the Fund........................... 9
Distributions to Shareholders.................... 11
Taxation of the Fund
and Its Shareholders ............................ 12
How to Buy Shares of the Fund.................... 13
Other Programs and Privileges
Available to Fund Shareholders................... 19
Exchange Privilege............................... 21
How to Sell Shares of the Fund................... 23
Telephone Transactions........................... 26
Valuation of Fund Shares......................... 27
How to Get Information Regarding
an Investment in the Fund........................ 27
Performance...................................... 28
General Information.............................. 29
Account Registrations............................ 30
Important Notice Regarding
Taxpayer IRS Certifications...................... 31
Portfolio Operations............................. 31
Risk Factors of California....................... 32
</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 (including fees set by contract) for the fiscal
year ended June 30, 1994.

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... 2.25%
Maximum Sales Charge Imposed on Reinvested Dividends... NONE
Deferred Sales Charge.................................. NONE
Redemption Fees........................................ NONE
Exchange Fee (per transaction)......................... $5.00*
</TABLE>

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

<PAGE>

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fees ............................................ 0.63%**
12b-1 Fees.................................................. 0.05%***
Other Expenses:
Reports to shareholders........................... 0.04%
Shareholder servicing costs....................... 0.02%
Other............................................. 0.06%
-----
Total Other Expenses........................................ 0.12%
-------
Total Fund Operating Expenses............................... 0.80%**
=======
</TABLE>

**Represents the amount that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager has
voluntarily agreed to limit its management fees and assume responsibility for
making payments to offset certain operating expenses otherwise payable by the
Fund. With this reduction, management fees and total operating expenses
represented 0.11% and 0.25%, respectively, of the average net assets of the
Fund.

***Consistent with National Association of Securities Dealers, Inc.'s
rules, it is possible that the combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.

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

EXAMPLE

As required by 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>
$30 $47 $66 $119
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES (INCLUDING
FEES SET BY CONTRACT) SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are 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 from the effective date of the registration statement, September 21,
1992, through the period ended June 30, 1993 and for the fiscal year ended June
30, 1994. This information has been audited by Coopers & Lybrand, independent
auditors, whose audit report appears in the Trust's SAI. See the discussion
"Report to Shareholders" under "General Information."

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DIVIDENDS NET ASSET
YEAR VALUE NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM TOTAL AT END
JUNE 30 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTION OF YEAR
- ------- --------- ---------- ------------- ---------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993** $10.00 $0.29 $0.550 $0.840 $(0.290) $ - $(0.290) $10.55
1994 10.05 0.54 (0.360) 0.180 (0.530) - (0.530) 10.20
</TABLE>

<TABLE>
<CAPTION>
BANK/SUPPLEMENTAL DATA
-----------------------------------------------------
NET ASSETS RATIO OF RATIO OF
YEAR AT END EXPENSES NET INCOME PORTFOLIO
ENDED TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
JUNE 30 RETURN+ (IN 000'S) NET ASSETS++ NET ASSETS RATE
- ------- ------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
1993** 10.95%* $42,831 0.09%* 4.73% 0.08%
1994 1.65 94,015 0.25 5.11 14.95
</TABLE>

*Annualized

**For the period September 21, 1992 (effective date of registration) to June
30, 1993.

+Total return measures the change in value of an investment over the period
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.

++During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced management fees and reimbursed other expenses. Had such action
not been taken, the ratio of operating expenses to average net assets would
have been .95% (annualized) and .80%, respectively.

ABOUT THE TRUST

Franklin California Tax-Free Trust is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust in July
1985 and registered with the SEC under the Investment Company Act of 1940 (the
"1940 Act"). The Trust currently consists of three series, each of which issues
a separate series of the Trust's shares and maintains a totally separate
investment portfolio.

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 2.25% 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 seeks to provide investors with as high a level of income exempt from
federal income taxes and California personal income taxes as is consistent with
prudent investment management and the preservation of shareholders' capital.
The objective is a fundamental policy of the Fund and may not be changed
without the approval of a majority of the Fund's outstanding shares. The Fund
invests primarily in a portfolio of investment grade obligations with a dollar
weighted average portfolio maturity of more than three years but not more than
ten years. There is, of course, no assurance that the Fund's objective will be
achieved.

Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its total assets in
debt obligations issued by or on behalf of the state of California or any
state, territory or possession of the United States, the District of Colum-

<PAGE>
bia and their respective authorities, agencies, instrumentalities and political
subdivisions, the interest on which is exempt from federal income tax. It is
possible, although not anticipated, that up to 20% of the Fund's net assets
could be in municipal securities subject to the alternative minimum tax and/or
in taxable obligations.

The Fund may invest, without percentage limitation, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A,
BBB), or in securities which are not rated, provided that, in the opinion of
the Fund's investment manager, such securities are comparable in quality to
those within the four highest ratings. These are considered to be "investment
grade" securities, although bonds rated in the fourth highest ratings level
(Baa by Moody's) are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
as having some speculative characteristics. In the event the rating of an issue
held in the Fund's portfolio is lowered by the rating services, 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. For a description of municipal securities
ratings, see "Appendix B" in the SAI.

In addition, under normal market conditions, the Fund will invest at least 65%
of its total assets in municipal securities and obligations issued by or on
behalf of the state of California and its local governments, municipalities,
authorities, agencies and political subdivisions, and those of certain other
governmental issuers, such as the Commonwealth of Puerto Rico, which pay income
exempt from federal and California income taxes ("California Municipal
Securities"). Dividends paid by the Fund which are derived from interest on
tax-exempt obligations that are not California Municipal Securities will be
exempt from federal income tax, but will be subject to California income taxes.
It is possible, although not anticipated, that up to 35% of the Fund's net
assets could be in municipal securities from a state other than California.

For temporary defensive purposes only, the Fund may invest (i) 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) more than 35% 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 California personal income
taxes. Any such temporary taxable investments will be limited to obligations
issued or guaranteed by the full faith and credit of the U.S. government or
commercial paper rated A-1 by S&P.

The Fund may borrow from banks for temporary or emergency purposes and pledge
up to 5% of its total assets therefor. As approved by the Board of Trustees and
subject to the following conditions, the Fund may lend its portfolio securities
to qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the
time of the most recent loan. The borrower must deposit with the Fund's
custodian collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily
to maintain collateral coverage of at least 102%. Such collateral shall consist
of cash. The lending of securities is a common practice in the securities
industry. The Fund engages in security

<PAGE>
loan arrangements with the primary objective of increasing the Fund's income
either through investing the cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.

MUNICIPAL SECURITIES

The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of the state of California or any state, territory or
possession 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 is generally rendered to the issuer by the issuer's bond 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 obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.

It is possible, from time to time, that the Fund 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 upon 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 need
for the projects) might also affect other bonds in the same segment, thereby
potentially increasing market risk.

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 "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"), and under the income tax provisions of some states. This interest
could subject a shareholder to, or increase the shareholder's liability under,
the federal alternative minimum tax (but not under California's alternative
minimum

<PAGE>
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 its liability under, the
federal alternative minimum tax, because such distributions are included in the
corporation's "adjusted current earnings." Consistent with the Fund's
investment objective, the Fund may acquire such private activity bonds if, in
the investment manager's opinion, such bonds represent the most attractive
investment opportunity then available to the Fund. As of June 30, 1994, the
Fund derived 1.48% of its income from bonds, the interest on which constitutes
a preference item subject to the federal alternative minimum tax for certain
investors.

The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at rates that are not fixed, but that vary with
changes in prevailing market rates on predesignated dates. The Fund may also
invest in variable or floating rate demand notes ("VRDNs"), which carry a
demand feature that permits the Fund to tender the obligation back to the
issuer or a third party at par value plus accrued interest prior to maturity,
according to the terms of the obligations, which amount may be more or less
than the amount the Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements provided by
banks. Because of the demand feature, the prices of VRDNs may be higher and the
yields lower than they otherwise would be for obligations without a demand
feature. The Fund will limit its purchase of municipal securities that are
floating rate and variable rate obligations to those meeting the quality
standards set forth in this Prospectus.

The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the
buyer in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions,
it will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective 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, COPs may be created when
long-term lease revenue bonds are issued by a governmental corporation to pay
for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs may 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 munici
pality may terminate the lease without penalty if

<PAGE>
the municipality's appropriating body does not allocate the necessary funds.
Local administrations, being faced with increasingly tight budgets, therefore
have more discretion to curtail payments under COPs than they do to curtail
payments on traditionally funded debt obligations. If the government lessee
does not appropriate sufficient monies to make lease payments, the lessor or
its agent is typically entitled to repossess the property. In most cases,
however, the private sector value of the property will be less than the amount
the government lessee was paying.

While the risk of nonappropriation is inherent to COPs 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, evaluation of how essential the leased
property is to the municipality and the term of the lease compared to the
useful life of the leased property. The Board of Trustees reviews the COPs held
in the Fund's portfolio to assure that they constitute liquid investments based
on various factors reviewed by the investment manager and monitored by the
Board. Such factors include (a) the credit quality of such securities and the
extent to which they are rated or, if unrated, comply with existing criteria
and procedures followed to ensure that they are of quality comparable to the
ratings required for Fund investment, including an assessment of the likelihood
that the leases will not be canceled; (b) the size of the municipal securities
market, both in general and with respect to COPs; and (c) the extent to which
the type of COPs held by the Fund trade on the same basis and with the same
degree of dealer participation as other municipal bonds of comparable credit
rating or quality. While there is no limit as to the amount of assets which the
Fund may invest in COPs, as of June 30, 1994, the Fund held 31.09% of its net
assets in COPs and other municipal leases.

The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time during which the bonds may not be called)
which usually lasts for five to ten 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 such bonds were
redeemed. Notwithstanding the call feature, any such investment would still be
subject to the policy whereby the Fund is required to maintain a dollar
weighted average portfolio maturity of between three and ten years.

INVESTMENT RISK CONSIDERATIONS

While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce the investor's risk.
There are two categories of risks to which a Fund is subject: credit risk and
market risk. Credit risk is a function of the ability of an issuer of a
munici-

<PAGE>
pal 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. Market risk is the risk of price
fluctuation of a municipal security caused by changes in general economic and
interest rate conditions generally affecting the market as a whole. A municipal
security's maturity length also affects its price. As with other debt
instruments, the price of the 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 securities held
by the Fund have a direct impact on the net asset value per share of the Fund.
Since the Fund will generally invest primarily in California Municipal
Securities, there are certain specific factors and considerations concerning
California which may affect the credit and market risk of the municipal
securities that the Fund may purchase. See "Risk Factors in California" for a
discussion of these factors.

As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to the concentration of
its investments in the assets of one or more issuers. This concentration may
present greater risks than in the case of a diversified company. (See the SAI
for the diversification requirements the Fund intends to meet in order to
qualify as a regulated investment company under the Code.)

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

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. In addition to the factors which affect the value of
individual securities, as described in the preceding sections, a shareholder
may anticipate that the value of Fund shares will fluctuate with movements in
the broader equity and bond markets as well. In particular, changes in interest
rates will affect the value of the Fund's portfolio and thus its share price.
Increased interest rates, which frequently accompany higher inflation and/or a
growing economy, are likely to have a negative effect on the value of Fund
shares. History reflects both increases and decreases in the prevailing rate of
interest which may reoccur unpredictably in the future.

MANAGEMENT OF THE FUND

The Board of Trustees has the primary responsibility for the overall
management of the Trust and for electing the officers of the Trust 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

<PAGE>
20%, 16% and 10%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (112 separate series) with aggregate assets of
over $75 billion, approximately $41 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 June 30, 1994, fees totaling 0.63% of the average
monthly net assets of the Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented 0.80% of the
average monthly net assets of the Fund. Pursuant to an agreement by Advisers to
limit its fees, the Fund paid management fees totaling 0.11% of the average
monthly net assets of the Fund and operating expenses totaling 0.25%.

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 information is included under "The Trust's Policies
Regarding Brokers Used on Portfolio Transactions" in the SAI.

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

PLAN OF DISTRIBUTION

The Fund has adopted a plan of distribution pursuant to Rule 12b-1 under the
1940 Act (the "Plan"), whereby it may reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and distribution
of the Fund's shares. Such expenses may include, but are not limited to, the
printing of prospectuses and reports used for sales purposes, expenses of
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.10% per annum
of the average daily net assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.10% per annum will be
borne by Distributors, or others who have incurred them, without reimbursement
from the Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers or Distributors,
to the extent

<PAGE>
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund.

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 a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.

DISTRIBUTION DATE

Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. The amount of income dividend payments by the Fund is dependent upon the
amount of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board of Trustees. THE FUND
DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT
IN ITS SHARES.

DIVIDEND REINVESTMENT

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

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

DISTRIBUTIONS IN CASH

<PAGE>
other person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

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

Each series of the Trust is treated as a separate entity for federal income tax
purposes. 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.

The Fund intends to qualify and elect to pay exempt-interest dividends to its
shareholders. To the extent that dividends are derived from interest income
from debt obligations of California or its political subdivisions or from
interest on U.S. territorial obligations (including Puerto Rico, the U.S.
Virgin Islands and Guam) which are exempt from regular federal and California
personal income tax, they will not be subject to either federal or California
personal income tax when received by the Fund's shareholders. The pass through
of exempt-interest dividends is allowed only if the Fund meets its federal and
California requirements that at least 50% of its total assets are invested in
such exempt obligations at the end of each quarter of its fiscal year. In
addition, to the extent that exempt-interest dividends are derived from direct
obligations of the federal government, they will also be exempt from California
personal income taxes. For corporate taxpayers subject to the California
franchise tax, however, all distributions will be fully 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, 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 (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 income tax 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, instead, to pay federal income or excise taxes on
this income at the Fund level.

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

<PAGE>
are treated as long-term capital gain regardless of the length of time a
shareholder has owned Fund shares and regardless of whether such distributions
are received in cash or in additional shares.

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

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.

Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction.

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, such as market
discount income, if any, or interest 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 federal income tax.
Shareholders are required to disclose the receipt of exempt-interest dividends
on their federal income tax returns.

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

The foregoing description relates solely to federal income tax law and to
California personal income tax treatment to the extent indicated. Shareholders
should consult their tax advisors with respect to the applicability of other
state and local income tax laws to distributions and redemption proceeds
received from the Fund. Corporate, individual and trust shareholders should
contact their tax advisors to determine the impact of Fund dividends and
capital gain distributions under the alternative minimum tax that may be
applicable to a shareholder's particular tax situation.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult 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
insti-

<PAGE>
tutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.

PURCHASE PRICE OF FUND SHARES

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
-------------------- ------------------ -------------- -------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 through $2,500,000 0.50% 0.50% 0.50%
$2,500,000 but less than $5,000,000 0.25% 0.25% 0.25%
$5,000,000 or more 0.00% 0.00% 0.00%
</TABLE>

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

All sales charges on purchases of $1,000,000 or more are paid to the securities
dealer, if any, involved in the trade, who may therefore be deemed an
"underwriter" under the Securities Act of 1933, as amended.

<PAGE>
ule 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
$5,000,000 or more will be at net asset value. Purchases pursuant to the Rights
of Accumulation will be at the applicable sales charge until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $5,000,000, in which event there will be no sales charge
on the excess. Sales charge reductions based upon purchases in more than one of
the funds in the Franklin Group or Templeton Group (the "Franklin/Templeton
Group") may be effective only after notification to Distributors that the
investment qualifies for a discount.

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

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

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.

<PAGE>

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 the sales charge. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less
redemptions) during the period. An investor who executes a Letter of Intent
prior to a change in the sales charge structure for the Fund will be entitled
to complete the Letter at the lower of (i) the new sales charge structure or
(ii) the sales charge structure in effect at the time the Letter was filed with
the Fund.

<PAGE>
actually paid and the amount of sales charge which would have applied to the
aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for the investor's account
will be deposited to an account in the name of the investor or delivered to the
investor or to the investor's order. If within 20 days after written request
such difference in sales charge is not paid, the redemption of an appropriate
number of reserved shares to realize such difference will be made. In the event
of a total redemption of the account prior to fulfillment of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption, and the balance will be forwarded to the investor. By
completing the Letter of Intent section of the Shareholder Application, an
investor grants to Distributors a security interest in the reserved shares and
irrevocably appoints Distributors as attorney-in-fact, with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. Purchases under the Letter of Intent
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.

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

GROUP PURCHASES

An individual who is a member of a qualified group 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 1.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.

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

<PAGE>
chases are subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors. Currently, those criteria
require that the amount invested or to be invested during the subsequent
13-month period in this Fund or any other company in the Franklin/Templeton
Group must total at least $1,000,000. Orders for such accounts will be accepted
by mail accompanied by a check, or by telephone or other means of electronic
data transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following such
order. If an investment by a trust company or bank trust department at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.

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

Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, and full-time employees of the Fund or any fund in the Franklin Group
of Funds or the Templeton Group, the Manager and Distributors and affiliates of
such compa nies, 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

<PAGE>

application from their employers or from Franklin's Sales Department in order
to qualify.

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

GENERAL

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

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.

<PAGE>

AUTOMATIC INVESTMENT PLAN

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

<PAGE>
time such a plan is in effect. A Systematic Withdrawal Plan may be terminated
on written notice by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the account, or
upon the Fund's receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the amount (but not below the specified
minimum) and schedule of withdrawal payments, or suspend one such payment, by
giving written notice to Investor Services at least seven business days prior
to the end of the month preceding a scheduled payment. Share certificates may
not be issued while a Systematic Withdrawal Plan is in effect.

INSTITUTIONAL ACCOUNTS

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

EXCHANGE PRIVILEGE

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

EXCHANGES BY MAIL

EXCHANGES BY TELEPHONE

Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by telephone by calling Investor Services at
1-800/632-2301 or the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. If the shareholder does not wish this privilege extended to a
particular account, the Fund or Investor Services should be notified.

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

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the
other exchange procedures discussed in this section,

<PAGE>

including the procedures for processing exchanges through securities dealers.

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

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

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

If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective 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

<PAGE>

RESTRICTIONS ON EXCHANGES

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

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

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

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

HOW TO SELL SHARES OF THE FUND

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

REDEMPTIONS BY MAIL

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

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

<PAGE>
address of record, preauthorized bank account or brokerage firm account;

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

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

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

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.

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.

<PAGE>

REDEMPTIONS BY TELEPHONE

Shareholders who complete the Franklin/Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone. Information may also be obtained by
writing to the Fund or Investor Services at the address shown on the cover or
by calling 1-800/632-2301. The Fund and Investor Services will employ
reasonable procedures to confirm that instructions given by telephone are
genuine. Shareholders, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification Procedures."

For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, and government entities 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 be tween 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 SAI contains more information on the redemption of
shares.

<PAGE>

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

OTHER

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

TELEPHONE TRANSACTIONS

Shareholders of the Fund and their investment representative of record, if any,
may be able to execute 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, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.

VERIFICATION PROCEDURES

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

GENERAL

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

<PAGE>

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

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

VALUATION OF FUND SHARES

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

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, accrued expenses and taxes and any
necessary reserves is deducted from the aggregate gross value of all assets,
and the difference is divided by the number of shares of the Fund outstanding
at the time. For the purpose of determining the aggregate net assets of the
Fund, cash and receivables are valued at their realizable amounts. Interest is
recorded as accrued. Portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which are 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 Trustees. All
money market instruments with a maturity of more than 60 days are valued at
current market, as discussed above. All money market instruments with a
maturity of 60 days or less are valued at their amortized cost, which the Board
of Trustees 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 trustees determine that it does not constitute fair
value for such purposes. With the approval of trustees, the Fund may utilize a
pricing service, bank or securities dealer to perform any of the above
described functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

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

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 52 followed by the # sign, when requested to do so by the automated
operator. The TeleFACTS system is also available for processing exchanges. See
"Exchange Privilege."

<PAGE>

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>

PERFORMANCE

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

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

<PAGE>

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

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends June 30. Annual Reports containing audited
financial statements of the Trust, 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 Trust 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 SAI.

ORGANIZATION

VOTING RIGHTS

Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees
the holders of more than 50% of the shares voting can elect all of the
trustees, if they choose to do so, and in such event, the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board

<PAGE>

of Trustees. The Trust does not intend to hold annual shareholders' meetings.
The Trust may, however, hold a special meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or
any other matters which are required to be acted on by shareholders under the
1940 Act. A meeting may also be called by a majority of the Board of Trustees
or by shareholders holding at least ten percent of the outstanding shares of
any series. Shareholders will receive assistance in communicating with other
shareholders in connection with the election or removal of trustees, such as
that provided in Section 16(c) of the 1940 Act.

The Board of Trustees may from time to time issue other funds of the Trust, the
assets and liabilities of which will likewise be separate and distinct from any
other fund.

REDEMPTIONS BY THE FUND

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

OTHER INFORMATION

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

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

ACCOUNT REGISTRATIONS

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

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

Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer.
Both the delivering

<PAGE>

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

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

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

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS

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

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

PORTFOLIO OPERATIONS

The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio and have been since its inception:

Gregory Harrington
Senior Vice President
Franklin Advisers, Inc.

<PAGE>

Mr. Harrington is a graduate of Mount Saint Mary's College in Maryland and has
studied at the New York School of Finance. His experience in the municipal
securities industry dates back to 1946. He joined Advisers in 1983.

Bernard Schroer
Vice President
Franklin Advisers, Inc.

Mr. Schroer was the manager of trading at Kidder Peabody and Company, Inc. from
1974 to 1984. He has a degree in Finance from Santa Clara University and is
currently a member of various municipal securities industry related committees
and associations. He joined Advisers in 1987.

Andrew Jennings, Sr.
Vice President
Franklin Advisers, Inc.

Mr. Jennings attended Villanova University in Philadelphia and has been in the
securities industry for over 33 years. From 1985 to 1990, Mr. Jennings was
First Vice President and Manager of the Municipal Institutional Bond Department
at Dean Witter Reynolds, Inc. He is a member of several municipal securities
industry related committees and associations.

RISK FACTORS IN CALIFORNIA

Changes in California constitutional and other laws during the last several
years have raised questions about the ability of California state and municipal
issuers to obtain sufficient revenue to pay their bond obligations. In 1978,
California voters approved an amendment to the California Constitution known as
Proposition 13. Proposition 13 limits ad valorem taxes on real property and
restricts the ability of taxing entities to increase real property taxes.
Legislation passed subsequent to Proposition 13, however, provided for the
redistribution of California's General Fund surplus to local agencies, the
reallocation of revenues to local agencies and the assumption of certain local
obligations by the state so as to help California municipal issuers to raise
revenue to pay their bond obligations. It is unknown, however, whether
additional revenue redistribution legislation will be enacted in the future and
whether, if enacted, such legislation would provide sufficient revenue for such
California issuers to pay their obligations. The state is also subject to
another constitutional amendment, Article XIIIB, which may have an adverse
impact on California state and municipal issuers. Article XIIIB restricts the
state from spending certain appropriations in excess of an appropriations limit
imposed for each state and local government entity. If revenues exceed such
appropriations limit, such revenues must be returned as revisions in the tax
rates or fee schedules. Because of the uncertain impact of the aforementioned
statutes, the possible inconsistencies in the respective terms of the statutes
and the impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation and policies on the long-term
ability of California state and municipal issuers to pay interest or repay
principal on their obligations.

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

<PAGE>
52 P

AMENDMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN CALIFORNIA TAX-FREE TRUST
DATED NOVEMBER 1, 1994

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 Prospectuses, certain
categories of investors may purchase shares of the Funds 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 each Fund, as described in the prospectuses. 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.
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 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.

<PAGE>

<PAGE>
FRANKLIN
CALIFORNIA [LOGO]
TAX-FREE TRUST FRANKLIN

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

<PAGE>
FRANKLIN
CALIFORNIA [LOGO]
TAX-FREE TRUST FRANKLIN

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Funds' Investment
Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . 2
Description of Municipal
and Other Securities . . . . . . . . . . . . . . . . . . . . . . . . 3
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 8
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Advisory and Other Services . . . . . . . . . . . . . . . . 11
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions . . . . . . . . . . . . . . . 13
Additional Information Regarding
the Funds' Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Additional Information
Regarding Taxation . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Trust's Underwriter . . . . . . . . . . . . . . . . . . . . . . . . 18
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Miscellaneous Information . . . . . . . . . . . . . . . . . . . . . . . 25
Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>

Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company consisting of three separate series: Franklin California
Intermediate-Term Tax-Free Income Fund (the "Intermediate-Term Fund"), Franklin
California Insured Tax-Free Income Fund (the "Insured Fund") and Franklin
California Tax-Exempt Money Fund (the "Money Fund"). The Intermediate-Term Fund
is nondiversified; the Insured and Money Funds are diversified. The series may
separately or collectively be referred to hereafter as the "Fund", "Funds" or
individually by the policy included as part of its name.

Each Fund intends to concentrate its investments in California municipal
securities and seeks to provide investors with as high a level of income exempt
from federal and California personal income taxes as is consistent with prudent
investment management and the preservation of shareholders' capital. The Money
Fund also seeks liquidity in its investments.

The Intermediate-Term Fund seeks to accomplish its objective by investing
primarily in a portfolio of investment grade obligations with a dollar-weighted
average portfolio maturity of more than three years but not more than ten
years.

The Insured Fund invests in California municipal securities which are covered
by insurance guaranteeing the scheduled payment of principal and interest, in
securities backed by the full faith and credit of the U.S. government, in
municipal securities secured by such U.S. government obligations and in
short-term obligations of issuers with the highest ratings from Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch"). All insured securities not insured through
the issuer will be insured by a qualified municipal bond insurer.

The Money Fund is a no-load money market fund offering investors a convenient
way to invest in a diversified, professionally managed portfolio of high
quality, short-term California municipal securities. The Money Fund attempts to
maintain a stable net asset value of $1.00 per share (although no assurances
can be given that this will be achieved) and offers shareholders the
convenience of redemption drafts (similar to checks) as one of the means of
redeeming their shares.

A Prospectus for the Intermediate-Term Fund and a Prospectus for the Insured
and Money Funds, both dated November 1, 1994, as may be amended from time to
time, provide the basic information a prospective investor should know before
investing in any Fund of the Trust and may be obtained without charge from the
Trust or from the Trust's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address listed above.

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

<PAGE>
ABOUT THE TRUST

The Trust is an open-end management investment company, commonly called a
"mutual fund", and registered with the Securities and Exchange Commission
(the "SEC") under the Investment Company Act of 1940 (the "1940 Act"). The
Trust was organized as a Massachusetts business trust on July 18, 1985. The
Trust issues its shares of beneficial interest with no par value in three
series, each of which maintains a totally separate investment portfolio.

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

As noted in the Prospectuses, each Fund seeks to provide investors with as high
a level of income exempt from federal income taxes and from the personal income
taxes of California as is consistent with prudent investment management and the
preservation of shareholders' capital. The Money Fund also seeks liquidity in
its investments. The Intermediate-Term Fund seeks to accomplish its objective
by investing primarily in a portfolio of investment grade obligations with a
dollar-weighted average portfolio maturity of more than three years but not
more than ten years. Under California law, a mutual fund must have at least 50%
of its total assets invested in California state and local municipal securities
or in other obligations exempt from taxation by the laws of California
(including U.S. territorial obligations) at the end of each quarter of its
taxable year in order to be eligible to pay dividends to California residents
which will be exempt from California personal income taxes. Federal tax law
also requires that, in order to be eligible to pay "exempt-interest dividends",
a mutual fund must have at least 50% of its total assets invested in state and
local municipal obligations (defined to include all U.S. territorial
obligations) at the end of each quarter of its taxable year. Accordingly, as
described in each Prospectus, under normal market conditions, each Fund will
attempt to invest 100% and, as a matter of fundamental policy, will invest at
least 80% of the value of its net assets in securities the interest on which is
exempt from federal income taxes, including the alternative minimum tax, and,
in the case of the Insured and Money Funds, the personal income taxes of
California. The Intermediate-Term Fund will invest, under normal market
conditions, at least 65% of its net assets in securities the interest on which
is exempt from the personal income taxes of California. Thus, it is possible,
although not anticipated, that up to 20% of a Fund's net assets could be
invested in municipal securities subject to the alternative minimum tax and/or
in taxable obligations and, with respect to the Insured and Money Funds,
municipal securities from another state, and up to 35% of the Intermediate-Term
Funds net assets could be in municipal securities from a state other than
California.

Although each 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 manager's
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. For temporary defensive
purposes only, when the investment manager believes that market conditions,
such as rising interest rates or other adverse factors, would cause serious
erosion of portfolio value, a Fund may invest more than 20% and up to 100% of
the value of its net assets in fixed-income obligations, the interest on which
is subject to federal income tax, and each Fund may invest more than 20%, or
more than 35% for the Intermediate-Term Fund, and up to 100% of its net assets
in instruments the interest on which is exempt from federal income taxes only.

With respect to the Money Fund, the municipal securities in the Money Funds
portfolio will be invested in issues which have been rated, at the time of
purchase, not lower than Aa (applicable to municipal bonds), MIG-2 (applicable
to municipal notes), or Prime-2 (applicable to commercial paper) by Moody's, or
AA (bonds), SP-1 (notes), or A-1 (commercial paper) by S&P or which are
unrated, but only if the investment manager believes that the financial
condition of the issuer of such securities limits the risks of the Money Fund
to a degree comparable to securities rated at least within the two highest
grades by Moody's or S&P. Any municipal security which depends on the credit of
the federal government will be regarded as having a rating of Aaa (Moody's) or
AAA (S&P). (See the Appendix at the end of this Statement of Additional
Information for more information concerning Moody's and S&P ratings.)

Subsequent to its purchase by the Money Fund, a municipal security may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment manager
will consider such an event in determining whether the Fund should continue to
hold the security in its portfolio. In addition to considering ratings assigned
by the rating services in its selection of portfolio securities for the

<PAGE>
Money Fund, the investment manager will consider, among other things,
information concerning the financial history and condition of the issuer and
its revenue and expense prospects and, in the case of revenue bonds, the
financial history and condition of the source of revenue to service the debt
securities.

Generally, all of the instruments held by the Money Fund are offered on the
basis of a quoted yield to maturity, and the price of the security is adjusted
so that, relative to the stated rate of interest, it will return the quoted
rate to the purchaser. The maturities of these instruments held by the Money
Fund at the time of issuance will generally range between three months and one
year.

The Intermediate-Term Fund is non-diversified and not subject to any statutory
restriction under the 1940 Act with respect to the investment of its assets in
one or relatively few issuers. This concentration may present greater risks
than in the case of a diversified company. The Intermediate-Term Fund, however,
intends to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") and, therefore, will be
restricted in that, at the close of each quarter of its taxable year, at least
50% of the value of its total assets must be represented by cash, government
securities, and other securities limited in respect of any one issuer to not
more than 5% in value of its total assets. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of the
Intermediate-Term Fund's total assets may be invested in securities of one
issuer other than government securities. These limitations are not fundamental
policies and may be revised to the extent applicable federal income tax
requirements are revised. As a fundamental policy, with respect to 75% of their
net assets, the Insured and Money Funds, the two diversified series of the
Trust, will not purchase a security if, as a result of the investment, more
than 5% of each Funds assets would be in the securities of any single issuer.
For this purpose, each political subdivision, agency, or instrumentality and
each multistate agency of which a state, including California, is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of each Funds portfolio. Furthermore, for purposes of
determining issuer diversification, an escrow-secured or defeased bond,
discussed under "Description of Municipal and Other Securities", will generally
not be treated as an obligation of the original municipality provided certain
conditions, as prescribed by the SEC, are followed. The investment objectives
and policies of the Funds, as set forth above, are fundamental, unless
otherwise noted, and may not be changed without the approval of a majority of
the respective Fund's outstanding shares.

GENERAL

To assure compliance with adopted procedures pursuant to Rule 2a-7 under the
1940 Act, the Money Fund will limit its investments to those U.S. dollar
denominated instruments which the Board of Trustees of the Trust determines
present minimal credit risks and which are, as required by the federal
securities laws, rated in one of the two highest rating categories as
determined by nationally recognized statistical rating agencies, or which are
unrated and of comparable quality, with remaining maturities of 397 calendar
days or less. The Money Fund will maintain a dollar weighted average maturity
of the securities in its portfolio of 90 days or less. These procedures are
not fundamental policies of the Money Fund.

DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES

The Prospectuses describe the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which each of the Funds 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 other kinds of revenue,
such as federal revenues available under the Federal Revenue Sharing Program.
They, also, are usually general obligations of the issuer.

Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. 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.

<PAGE>
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, roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.

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 or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities;
and hospitals. The principal security behind these bonds may vary. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, and/or the
net revenues from housing or other public projects. Many bonds provide
additional security in the form of a debt service reserve fund which may be
used to make principal and interest payments on the issuer's obligations. Some
authorities are provided further security in the form of a state's assurance
(although without obligation) to make up deficiencies in the debt service
reserve fund.

Industrial Development Bonds which pay tax-exempt interest are in most cases
revenue bonds and are issued by or on behalf of public authorities to raise
money to finance 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 facility's user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payments.

When-Issued Purchases. Municipal bonds are frequently offered on a "when-
issued" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
During the period between purchase and settlement, no payment is made by a Fund
to the issuer and no interest accrues to a Fund. To the extent that assets of
a 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 above.
While when-issued securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them,
unless a sale appears desirable for investment reasons. At the time a Fund
makes the commitment to purchase a municipal bond on a when-issued basis, it
will record the transaction and reflect the value of the security in
determining its net asset value. The Funds believe that their net asset value
or income will not be adversely affected by their purchase of municipal bonds
on a when-issued basis. Each Fund will establish a segregated account in which
it will maintain cash and marketable securities equal in value to commitments
for when-issued securities.

Callable Bonds. There are municipal bonds which are issued with provisions
which prevent them from being called, typically for periods of 5 to 10 years.
During times of generally declining interest rates, if the call-protection on
callable bonds expires, there is an increased likelihood that a number of such
bonds may, in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used by the Funds'
investment manager, the Funds believe they have reduced the risk of adverse
impact on net asset value based on calls of callable bonds. The investment
manager may dispose of such bonds in the years prior to their call dates, if
the investment manager believes such bonds are at their maximum premium
potential. In pricing such bonds in each Funds portfolio, each callable bond is
marked-to-market daily based on the bond's call date. Thus, the call of some or
all of a Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because each Fund follows
certain amortization procedures required by the Internal Revenue

<PAGE>
Service, the Funds are not expected to suffer any material adverse impact
related to the value at which each Fund has carried the bonds in connection
with calls of bonds purchased at a premium. Notwithstanding such policies,
however, the re-investment of the proceeds of any called bond may be in bonds
which pay a higher or lower rate of return than the called bonds; and, as with
any investment strategy, there is no guarantee that a call may not have a more
substantial impact than anticipated or that each Funds objective will be
achieved.

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

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

Variable or Floating Rate Demand Notes ("VRDN's") 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,
and are calculated to maintain the market value of the VRDN at approximately
the par value upon the adjustment date.

Certificates of Participation. As stated in each Prospectus, a 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
"non-appropriation" or "abatement" clause. A nonappropriation clause provides
that, while the municipality will use its best efforts to make lease payments,
the municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. While the risk of
nonappropriation is inherent to COP financing, each Fund believes that this
risk is mitigated by its policy of investing only in COPs rated within the four
highest rating categories, in the case of the Intermediate-Term Fund, or, in
the case of the Money Fund, the two highest rating categories, of Moody's, S&P
or Fitch, or in unrated COPs believed to be of comparable quality and, with
respect to the Insured Fund, only in insured COPs. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, the essentiality of the leased property
to the municipality and the term of the lease compared to the useful life of
the leased property. The Board of Trustees has determined that COPs held in
each Fund's portfolio constitute liquid investments based on various factors
reviewed by the investment manager and monitored by the Board. Such factors
include (a) the credit quality of such securities and the extent to which they
are rated; (b) the size of the municipal securities market for a Fund, both in
general and with respect to COPs; and (c) the extent to which the type of COPs
held by a 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.

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

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

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.

Banker's 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.

Repurchase Agreements. The Money Fund may engage in repurchase transactions, in
which the Fund purchases a U.S. government security subject to resale to a bank
or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar

<PAGE>
amount invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A
default by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with government securities
dealers recognized by the Federal Reserve Board or with member banks of the
Federal Reserve System. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by the Fund to the seller, collateralized by the
underlying security. The U.S. government security subject to resale (the
collateral) will be held pursuant to a written agreement and the Funds
custodian will take title to, or actual delivery of, the security. The period
of these repurchase agreements will usually be short, from overnight to one
week, and at no time will the Money Fund invest in repurchase agreements with a
term of more than one year. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The Money Fund may not enter into a
repurchase agreement with more than seven days to maturity if, as a result,
more than 10% of the market value of the Funds total assets would be invested
in such repurchase agreements.

Lending Portfolio Securities. Each Fund may lend its portfolio securities to
nonaffiliated brokers, dealers and financial institutions provided that cash
equal to 102% of the market value of the securities loaned is deposited by the
borrower with the lending Fund and is maintained each business day. While such
securities are on loan, the borrower will pay a Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. Each Fund will not lend its portfolio
securities if such loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale and will not lend more than
10% of the value of its total assets. Loans are typically subject to
termination by the Fund in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan
inures to the lending Fund and its shareholders. A Fund may pay reasonable
finder's, borrower's, administrative, and custodial fees in connection with a
loan of its securities.

Income derived by a Fund from securities lending transactions, repurchase
transactions, and investments in commercial paper, banker's acceptances and
certificates of deposit will be taxable for federal and California personal
income tax purposes when distributed to shareholders. Income derived by a Fund
from interest on direct obligations of the U.S. government will be taxable for
federal income tax purposes when distributed to shareholders. If the Fund,
however, meets the 50% asset investment requirement of California law described
above and properly designates such distributions, they will be excludable from
income for California personal income tax purposes.

Interest on obligations which are classified as private activity bonds is not
excluded from gross income for federal income tax purposes under Section
103(b)(1) of the Code, unless such bonds are registered (Section 149 of the
Code) and certain other requirements are satisfied. If such bonds do not
satisfy these requirements, such bonds are not included in the Funds'
definition of "municipal securities", and the Funds will therefore not invest in
them. Section 141(e) of the Code, however, describes certain private activity
bonds the interest on which is excluded from federal gross income (certain
small issues and obligations to finance certain exempt facilities which may be
leased to or used by persons other than the issuer), except when the bonds are
held by "substantial users" or persons related to substantial users as defined
below. The Fund may invest periodically in private activity bonds described in
Section 141 of the Code. Since the Fund's holding of such bonds may be
attributed to such substantial users, the Fund may not be an appropriate
investment for persons or entities which are substantial users of facilities
financed by private activity bonds or for investors who are "related persons".
Generally, an individual will not be a related person under the Code unless
such investor or investor's immediate family (spouse, brothers, sisters and
lineal descendants) own, directly or indirectly, in the aggregate more than 50%
in value of the equity of a corporation or partnership which is a substantial
user of a facility financed with the proceeds of private activity bonds. A
"substantial user" of such facilities is defined generally by Section 1.103-11
(b) of the Treasury regulations as a "non-exempt person who regularly uses a
part of a facility" financed with the proceeds of a private activity bond.

<PAGE>
Interest on private activity bonds, as well as interest on municipal bonds
which are not private activity bonds, may become includable in gross income,
retroactively to the date of issue, if the bonds become "arbitrage bonds" as
defined in Section 148 of the Code or, in the case of private activity bonds,
certain requirements of the Code are not satisfied subsequent to the date of
issue.

Opinions relating to the validity of municipal securities and to the exclusion
from gross income for federal income tax purposes of the interest thereon are
rendered by bond counsel at the time of issuance. The Funds do not review the
proceedings relating to the issuance of municipal securities, the basis for
such opinions, or actions of any of the parties thereto with respect to
compliance with requirements of the Code subsequent to the date of issue to
preserve the exclusion from gross income.

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

TIMING OF SECURITIES TRANSACTIONS

Each 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 the Fund's objective of seeking interest income
while conserving capital. While short-term trading increases portfolio
turnover, the execution costs for municipal bonds are substantially less than
for equivalent dollar values of equity securities. Portfolio turnover rates for
the Insured and Intermediate-Term Funds are in the Financial Highlights table
in their respective prospectuses. No calculation of turnover rate is shown for
the Money Fund because the short-term securities which compose its portfolio
are excluded in making such a calculation.

INSURANCE

Except for certain temporary short-term investments or U.S. government
guaranteed securities, the investment in municipal securities by the Insured
Fund is covered by insurance guaranteeing the scheduled payment of principal
and interest thereon. Depending on market conditions, and under current
portfolio insurance restrictions, it is expected that California municipal
securities will compose a major portion of the portfolio of the Insured Fund.

As described in its Prospectus, the Insured Fund will receive payments of
insurance for any installment of interest and principal due for payment but
which shall be unpaid by reason of nonpayment by the issuer. The term "due for
payment", in reference to the principal of a security, means its stated maturity
date or the date on which it shall have been called for mandatory sinking fund
redemption and does not refer to any earlier date on which payment is due by
reason of call for redemption (other than by mandatory sinking fund
redemption), acceleration or other advancement of maturity; when referring to
interest on a security, the term means the stated date for payment of interest.
When, however, the interest on the security shall have been determined, as
provided in the underlying documentation relating to such security, to be
subject to federal income taxation, due for payment, when referring to the
principal of such security, also means the date on which it has been called for
mandatory redemption as a result of such determination of taxability; when
referring to interest on such security, the term means the accrued interest at
the rate provided in such documentation to the date on which it has been called
for such mandatory redemption, together with any applicable redemption premium.
The insurance feature insures the scheduled payment of interest and principal
and does not guarantee the market value of the insured municipal securities nor
the value of the shares of the Insured Fund.

As stated in the Insured Fund's prospectus, each insured municipal security in
the Insured Fund's portfolio will be covered by either a "New Issue Insurance
Policy" obtained by the issuer of the security at the time of its original
issuance or a "Secondary Insurance Policy" or a Portfolio Insurance Policy
issued by a qualified municipal bond insurer.

Under the provisions of the Portfolio Insurance Policy, the insurer
unconditionally and irrevocably agrees to pay to the appointed trustee or its
successor and its agent (the "Trustee") that portion of the principal of and
interest on the securities which shall become due for payment but shall be
unpaid by reason of nonpayment by the issuer. The insurer will make such
payments to the Trustee on the date such principal or interest becomes due for
payment or on the business day next following the day on which the insurer
shall have received notice of nonpayment, whichever is later. The Trustee will
disburse to the Insured Fund the face amount of principal and interest which is
then due for payment but is unpaid by reason of nonpayment by the issuer but

<PAGE>

only upon receipt by the Trustee of (i) evidence of the Insured Fund's right to
receive payment of the principal or interest due for payment and (ii) evidence,
including any appropriate instruments of assignment, that all of the rights to
payment of such principal or interest due for payment shall thereupon vest in
the insurer. Upon such disbursement, the insurer shall become the owner of the
security, appurtenant coupon or right to payment of principal or interest on
such security and shall be fully subrogated to all of the Insured Fund's rights
thereunder, including the right to payment thereof.

Bond insurers are often referred to as "monolines" in that they only write
financial guarantees as opposed to "multiline" insurers who write several
different types of insurance policies, such as life, auto and home insurance,
and are exposed to many types of risk. Additionally, bond insurers are not
exposed to "run risk" (which occurs when too many policyholders rush to cash in
their policies), because they only guarantee payment when due. Also, in order
to maintain triple-A status by the recognized national securities rating
agencies (which is required by the Insured Fund), the bond insurers invest
their assets mainly in high quality municipal and corporate bonds rated
double-A or better and U.S. government obligations.

Neither the Insured Fund nor its investment manager make any representations as
to the ability of any insurance company to meet its obligation to the Insured
Fund if called upon to do so.

INVESTMENT RESTRICTIONS

The Trust has adopted the following restrictions as additional fundamental
policies of each Fund. These policies may not be changed, with respect to a
Fund, without the approval of a majority of the outstanding voting securities
of that Fund. Under the 1940 Act, a "vote of a majority of the outstanding
voting securities" of the Trust or of a Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Trust or of a Fund
or (2) 67% or more of the shares of the Trust or of a Fund present at a
shareholders' meeting if more than 50% of the outstanding shares of the Trust
or of a Fund are represented at the meeting in person or by proxy. Each Fund
MAY NOT:

1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value. Secured
temporary borrowings may take the form of a reverse repurchase agreement,
pursuant to which a Fund would sell portfolio securities for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash plus an interest component.

2. Buy any securities on "margin" or sell any securities "short", except that it
may use such short-term credits as are necessary for the clearance of
transactions.

3. Make loans, except through the purchase of debt securities which are either
publicly distributed or customarily purchased by institutional investors, 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 a
Fund from loaning portfolio securities to broker-dealers or other institutional
investors if at least 102% cash collateral is pledged and maintained by the
borrower; provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the Fund's
total assets at the time of the most recent loan.

4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under 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 securities from or sell to the Trust's officers and trustees, or any
firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
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 and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.

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, except that it may purchase, hold, and
dispose of "obligations with puts attached" in accordance with its investment
policies.

<PAGE>

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

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

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

12. Invest more than 25% of its assets in securities of any industry, although,
for purposes of this limitation, tax-exempt securities and U.S. government
obligations are not considered to be part of any industry.

TRUSTEES AND OFFICERS

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

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin,
Park Avenue at Morris County Kipp & Szuch; Director of General Host
P.O. Box 1945 Corporation; director of certain of the
Morristown, NJ 07962-1945 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.
---------------------------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant
111 New Montgomery St., #402 Secretary/Treasurer and Director, Berkeley
San Francisco, CA 94105 Science Corporation (a venture capital
company); 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 Chairman of the President and Director, Franklin
777 Mariners Island Blvd. Board and Trustee Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, 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. President and Executive Vice President and Director,
777 Mariners Island Blvd. Trustee 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.
---------------------------------------------------------------------------------------------------------------------
Frank W.T. LaHaye Trustee General Partner, Peregrine Associates and
20833 Stevens Creek Blvd. Miller & LaHaye, which are General
Suite 102 Partners of Peregrine Ventures and
Cupertino, CA 95014 Peregrine Ventures II (venture capital
firms); Chairman of the Board and
Director, Quarterdeck Office Systems,
Inc.; Director, FischerImaging
Corporation; and director or trustee, as
the case may be, of most of the investment
companies in the Franklin Group of Funds.
---------------------------------------------------------------------------------------------------------------------

<PAGE>

</TABLE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gordon S. Macklin Trustee Chairman, White River Corporation
8212 Burning Tree Road (information services); Director, Infovest
Bethesda, MD 20817 Corporation, Medimmune, Inc., Fundamerican
Enterprises Holdings, Inc., Martin Marietta
Corporation, and MCI Communications
Corporation; director of certain of the
investment companies in the Templeton Group of
Funds; and director, trustee or managing
general partner, as the case may be, of most of
the investment companies in the Franklin Group
of Funds; formerly, Chairman, Hambrecht and
Quist Group; Director, H & Q Healthcare
Investors; and President, National Association
of Securities Dealers, Inc.
---------------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales
777 Mariners Island Blvd. Manager, Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; and officer of many of the
investment companies in the Franklin Group
of Funds.
---------------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President, Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. Treasurer and Inc. and Franklin Advisers, Inc.; Vice
San Mateo, CA 94404 Chief President, Franklin/Templeton
Financial Officer Distributors, Inc.; officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.;
and officer and/or managing general
partner, as the case may be, of all the
investment companies in the Franklin Group
of Funds.
---------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President and Senior Vice President - Legal, Franklin
777 Mariners Island Blvd. Secretary 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 trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager are currently paid fees of $640 per month plus $640 per
meeting attended and are reimbursed for expenses incurred in connection with
attending such meetings. During the fiscal year ended June 30, 1994, fees
totaling $66,231 (Insured Fund) and $32,260 (Money Fund) were paid to trustees
of the Trust who are not affiliated with the investment manager. The
Intermediate-Term Fund paid no such fees but may do so in the future. No
officer or trustee received any other compensation directly from the Trust. As
of August 2, 1994, the trustees and officers, as a group, owned of record and
beneficially approximately 9,725,986.065 shares or 1.2% of the total
outstanding shares of the Trust. Certain officers or trustees 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.

INVESTMENT ADVISORY AND OTHER SERVICES

The investment manager of the Trust is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $117
billion in assets for more than 3.7 million shareholders. The preceding table
indicates those officers and trustees who are also affiliated persons of
Distributors and Advisers.

Pursuant to separate management agreements, the Manager provides investment
research and

<PAGE>

portfolio management services, including the selection of securities for each
Fund to purchase, hold or sell and the selection of brokers through whom each
Fund's portfolio transactions are executed. The Managers extensive research
activities include, as appropriate, traveling to meet with issuers and to
review project sites. The Manager's activities are subject to the review and
supervision of the Trust's Board of Trustees, to whom the Manager renders
periodic reports of each Fund's investment activities. The Manager, at its own
expense, furnishes the Trust with office space and office furnishings,
facilities and equipment required for managing the business affairs of the
Trust; 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 Trust. The Trust
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 agreements, the Intermediate-Term and Insured Funds
are obligated to pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96 of 1%
(approximately 5/8 of 1% per year) for the first $100 million of net assets of
the Fund; 1/24 of 1% (approximately 1/2 of 1% per year) on net assets of the
Fund in excess of $100 million up to $250 million; and 9/240 of 1%
(approximately 45/100 of 1% per year) of net assets of the Fund in excess of
$250 million. The Money Fund pays a daily fee (payable at the request of the
Manager) computed at the rate of 1/584 of 1% (approximately 5/8 of 1% per year)
of the net assets of the Fund at the close of each business day on net assets
up to and including $100 million; plus 1/730 of 1% (approximately 1/2 of 1% per
year) of net assets over $100 million up to and including $250 million; and
1/811 of 1% (approximately 45/100 of 1% per year) of net assets over $250
million.

The Manager has limited its management fees and has assumed responsibility for
making payments, if necessary, to offset certain operating expenses otherwise
payable by the Intermediate-Term Fund. This action by the Manager to limit its
management fees and to assume responsibility for payment of the expenses
related to the operations of the Intermediate-Term Fund may be terminated by
the Manager at any time. The management agreements specify 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 each Fund as prescribed by any
state in which each 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 each 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 each Fund, 2% of the next $70 million of average net
assets of each Fund and 1.5% of average net assets of each Fund in excess of
$100 million. Expense reductions have not been necessary based on state
requirements.

Management fees for the fiscal years ended June 30, 1992, 1993, and 1994 were
$3,563,944, $5,492,526 and $6,959,870, respectively, for the Insured Fund and
$4,119,552, $3,547,759 and $3,529,248, respectively, for the Money Fund. For
the period September 21, 1992 (effective date of registration) to June 30,
1993, the management fees for the Intermediate-Term Fund would have been
$76,166 had they not been absorbed by the Manager. For the fiscal year ended
June 30, 1994, the management fees the Intermediate-Term Fund was contractually
obligated to pay the Manager were $504,656 and the management fees actually
paid by the Intermediate-Term Fund for the same period were $83,062.

The management agreements are in effect until March 31, 1995. Thereafter, they
may continue in effect for successive annual periods, providing such
continuance is specifically approved at least annually by a vote of the Trusts
Board of Trustees or by a vote of the holders of a majority of the Trust's
outstanding voting securities, and in either event by a majority vote of the
Trust's trustees who are not parties to the management agreements or interested
persons of any such party (other than as trustees of the Trust), cast in person
at a meeting called for that purpose. The management agreements may be
terminated without penalty at any time by the Trust or by the Manager on 30
days' written notice and will automatically terminate in the event of their
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 Trust and

<PAGE>

acts as the Trust's transfer agent and dividendpaying agent. Investor Services
is compensated on the basis of a fixed fee per account.

Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Trust. 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
Trusts independent auditors. During the fiscal year ended June 30, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Trust included in the Trusts Annual Report and this Statement of
Additional Information.

THE TRUST'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS

Since most purchases made by the Funds are principal transactions at net
prices, the Funds incur little or no brokerage costs. Each Fund deals directly
with the selling or purchasing principal or market maker without incurring
charges for the services of a broker on its behalf unless it is determined that
a better price or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers include a spread between the bid and ask price. As a general rule,
the Funds do not purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to receive the
commission. Each 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 a Fund's shares may
also be considered as a factor in the selection of broker-dealers to execute a
Fund's portfolio transactions.

If purchases or sales of securities of a 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 a Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.

During the past three fiscal years ended June 30, 1994, the Funds paid no
brokerage commissions. As of June 30, 1994, the Funds did not own securities of
their regular broker-dealers.

ADDITIONAL INFORMATION REGARDING THE FUNDS' SHARES

All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of each Fund must be denominated in U.S. dollars. The Trust
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a 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 the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an
investment company generally are not available until the fifth business day
following the redemption, the funds into which the Funds' shareholders are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of the Funds
to complete an exchange for shares of any of the investment companies will be
effected at the close of business on the day the request for exchange is
received in proper form at the net asset value then effective.

Shares of the Money Fund are eligible to receive dividends beginning on the
first business day fol-

<PAGE>
lowing 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 Trust marked "unable to forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option and the proceeds will be reinvested in additional shares at
net asset value until new instructions are received.

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

Under agreements with certain banks in Taiwan, Republic of China, shares of the
Intermediate-Term and Insured Funds 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 Insured and Intermediate-Term Funds 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 either 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 Intermediate-Term and Insured Funds
received in proper form prior to 1:00 p.m. Pacific time any business day that
the Exchange is open for trading and promptly transmitted to the Fund will be
based upon the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions after 1:00 p.m.
Pacific time will be effected at the Intermediate-Term and Insured Fund's
public offering price on the day it is next calculated. The use of the term
"securities dealer" herein shall include other financial institutions which,
pursuant to an agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with a Fund. Such reference, however, is
for convenience only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion
and any loss to the customer resulting from failure to do so must be settled
between the customer and the securities dealer.

EFFECTIVENESS OF PURCHASE ORDERS (MONEY FUND)

The purchase price for shares of the Money Fund is the net asset value of such
shares next determined after receipt and acceptance of a purchase order in
proper form. Many of the types of instruments in which the Fund invests must be
paid for in federal funds which are monies held by the custodian on deposit at
the Federal Reserve Bank of San Francisco and elsewhere. Therefore, the monies
paid by an investor for shares of the Money Fund generally cannot be invested
by the Fund until they are converted into and are available to the Fund in
federal funds, which may take up to two days. In such cases, purchases by
investors may not be considered in proper form and effective until such
conversion and availability. In the event the Money Fund is able to make
investments immediately (within one business day), however, it may accept a
purchase order with payment other than in federal funds; in such event, shares
of the Money Fund will be purchased at the net asset value next determined
after receipt of the order and payment. Once shares of the Money Fund are
purchased, they begin earning income immediately, and income dividends will
start being credited to the investors account on the day following the
effective date of purchase and continue through the day all shares in the
account are redeemed.

Payments transmitted by wire and received by the custodian and reported by the
custodian to the Money Fund prior to 3:00 p.m. Pacific time on any business day
are normally effective on the same day as received. Wire payments received or
reported by the custodian to the Fund after that time will normally be
effective on the next business day. Payments transmitted by check or other
negotiable bank draft will normally be effective within two business days for
checks drawn on a member bank of the Federal Reserve System and longer for most
other checks. All checks are accepted subject to

<PAGE>

collection at full face value in United States funds and must be drawn in
United States dollars on a United States bank. Checks drawn in United States
funds on foreign banks will not be credited to the shareholder's account and
dividends will not begin accruing until the proceeds are collected, which can
take a long period of time. The Money Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or sale of shares
denominated in any other currency, or (b) honor the transaction or make
adjustments to the shareholder's account for the transaction as of a date and
with a foreign currency exchange factor determined by the drawee bank.

PURCHASES AT NET ASSET VALUE (INTERMEDIATE-TERM AND INSURED FUNDS)

As discussed in the Prospectuses, certain categories of investors may purchase
shares of the Intermediate-Term and Insured Funds at net asset value (without a
sales charge) or at a reduced sales charge. The reason for this is that there
is minimal or no sales effort required with respect to these investors. If
certain investments at net asset value are made through a dealer who has
executed a dealer or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested, paid pro rata on a quarterly
basis on average quarterly balances for a period of one year.

REDEMPTIONS IN KIND

Each 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 applicable
Fund's net assets at the beginning of such period. Such commitment is
irrevocable without the prior approval of the SEC. In the case of requests for
redemption in excess of such amounts, the Board of Trustees reserves 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 that Fund. In such circumstances, the securities distributed
would be valued at the price used to compute such Fund's net assets. Should a
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 TRUST

Due to the relatively high cost of handling small investments, the Trust
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption
of shares. Until further notice, it is the present policy of the Trust not to
exercise this right with respect to any shareholder whose account has a value
of $50 or more in the Intermediate-Term and Insured Funds and $250 or more in
the Money Fund. In any event, before the Trust 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 in the Insured and
Intermediate-Term Funds and $500 in the Money Fund.

CALCULATION OF NET ASSET VALUE

As noted in the Prospectuses, the Intermediate-Term and Insured Funds generally
calculate net asset value as of 1:00 p.m. Pacific time and the Money Fund
generally calculates net asset value as of 3:00 p.m. Pacific time each day that
the Exchange is open for trading. As of the date of this Statement of
Additional Information, the Trust is informed that the Exchange observes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

The valuation of the Money Fund's portfolio securities (including any
securities held in the separate account maintained for when-issued securities)
is based upon their amortized cost, which does not take into account unrealized
capital gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in calculation,
it may result in periods during which value, as determined by amortized cost,
is higher or lower than the price the Money Fund would receive if it sold the
instrument. During periods of declining interest rates, the

<PAGE>

daily yield on shares of the Money Fund computed as described above may tend to
be higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of
market prices for all of its portfolio instruments. Thus, if the use of
amortized cost by the Money Fund resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the Money Fund would be able to
obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values, and existing investors in the Money Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.

The Money Fund's use of amortized cost, which facilitates the maintenance of
the Money Fund's per share net asset value of $1.00 is permitted by a rule
adopted by the SEC. Pursuant to this rule, the Money Fund must adhere to
certain conditions. The Money Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, only purchase instruments having
remaining maturities of 397 calendar days or less, and invest only in those
United States dollar-denominated instruments that the Board of Trustees
determines present minimal credit risks and which are, as required by the
federal securities laws, rated in one of the two highest rating categories as
determined by nationally recognized statistical rating agencies, instruments
deemed comparable in quality to such rated instruments, or instruments, the
issuers of which, with respect to an outstanding issue of short-term debt that
is comparable in priority and protection, have received a rating within the two
highest categories of nationally recognized statistical rating agencies. As
discussed in the Prospectus, securities subject to floating or variable
interest rates with demand features in compliance with applicable rules of the
SEC may have stated maturities in excess of one year. The trustees have agreed
to establish procedures designed to stabilize, to the extent reasonably
possible, the Money Fund's price per share as computed for the purpose of sales
and redemptions at $1.00. Such procedures will include review of the Money
Fund's portfolio holdings by the trustees, at such intervals as they may deem
appropriate, to determine whether the Money Fund's net asset value calculated
by using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the trustees.
If such deviation exceeds 1/2 of 1%, the trustees will promptly consider what
action, if any, will be initiated. In the event the trustees determine that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, they will take such corrective action as
they regard as necessary and appropriate, which may include the sale of
portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, withholding dividends, redemptions of
shares in kind, or establishing a net asset value per share by using available
market quotations.

The Intermediate-Term and Insured Funds' portfolio securities are valued as
stated in their Prospectuses. Generally, trading in corporate bonds, U.S.
government securities and money market instruments is substantially completed
each day at various times prior to the close of the Exchange. The values of
such securities used in computing the net asset value of the Intermediate-Term
and Insured 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 Intermediate-Term and Insured 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 Trustees.

REINVESTMENT DATE (INTERMEDIATE-TERM AND INSURED FUNDS)

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

SPECIAL SERVICES

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

Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Funds 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 Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Funds normally
pay Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.

<PAGE>

MULTIPLE ACCOUNTS FOR FIDUCIARIES (MONEY FUND ONLY)

As noted in the Prospectus, special procedures have been designed for banks and
other institutions wishing to open multiple accounts in the Money Fund. The
institution may open a single master account by filing one application form
with the Money Fund, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is filed
by listing them or they may be added at a later date by written advice or by
filing forms supplied by the Money Fund. These sub-accounts may be established
by the institution with registration either by name or number. The investment
minimums applicable to the Money Fund are applicable to each subaccount. The
Money Fund will provide each institution with a written confirmation for each
transaction in a sub-account and arrangements may be made at no additional
charge for the transmittal of duplicate confirmations to the beneficial owner
of the sub-account. Further, the Money Fund will provide to each institution,
on a quarterly basis, or more frequently as requested, a statement which will
set forth for each sub-accounts share balance, income earned for the period,
income earned for the year to date, and total current market value.

ADDITIONAL INFORMATION REGARDING TAXATION

As stated in the Prospectuses, each Fund has elected and qualified to be
treated as a regulated investment company under Subchapter M of the Code. The
trustees reserve the right not to maintain the qualification of each Fund as a
regulated investment company if they determine such course of action to be
beneficial to shareholders. In such case, such Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, to the
alternative minimum tax on its taxable and tax-exempt income, and finally,
distributions of each Fund's income (including its tax-exempt income) will be
taxable dividend income to shareholders to the extent of the Fund's available
earnings and profits.

The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the twelve-month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed, nor taxed to the Funds) 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
Funds and received by the shareholder on December 31 of the calendar year in
which they are declared. Each 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.

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 each Fund to invest in such obligations, each Fund is authorized
to so invest for temporary or defensive purposes. To the extent that such
investments are made, a Fund will provide shareholders with the percentage of
any dividends paid which may qualify for such tax-free treatment at the end of
each calendar year. Shareholders should then consult with their own tax
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 a Fund.

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

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/Templeton Group of Funds(R) (defined in
the Prospectus under "How to Buy Shares of a 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 their tax advisors concerning the tax rules applicable to the
redemption or exchange of Fund shares.

<PAGE>

The following information on redemptions and share basis reporting primarily
concerns shareholders in the Insured and Intermediate-Term Funds.

Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For shareholders subject to taxation, gain or
loss will be recognized in an amount equal to the difference between the
shareholder's basis 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 such Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or 30 days after
such redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares purchased. Any loss realized upon the redemption of shares
within six months from the date of their purchase will be treated as a
long-term capital loss to the extent of amounts treated as distributions of net
long-term capital gain during such six-month period and will be disallowed to
the extent of exempt-interest dividends paid with respect to such shares.

THE TRUST'S UNDERWRITER

Pursuant to separate underwriting agreements in effect until March 31, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Funds.

Distributors pays the expenses of distribution of the Fund's shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each 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 agreements will continue in effect for successive annual
periods, provided that their continuance is specifically approved at least
annually by a vote of the Trusts Board of Trustees, or by a vote of the holders
of a majority of the Trusts outstanding voting securities, and in either event
by a majority vote of the Trusts trustees who are not parties to the
underwriting agreements or interested persons of any such party (other than as
trustees of the Trust), cast in person at a meeting called for that purpose.
The underwriting agreements terminate automatically in the event of their
assignment and may be terminated by either party on 90 days' written notice.

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

In connection with the offering of the Insured Fund's shares, aggregate
underwriting commissions for the fiscal years ended June 30, 1992, 1993, and
1994 were $11,269,777, $11,369,559, and $9,120,224, respectively. After
allowances to dealers, Distributors retained $243,275, $354,780 and $363,640
during the fiscal years ended June 30, 1992, 1993, and 1994, respectively. For
the Intermediate-Term Fund, aggregate underwriting commissions for the period
September 21, 1992 (effective date of registration) to June 30, 1993 and the
fiscal year ended June 30, 1994 were $468,834 and $623,133, respectively, of
which Distributors retained $39,257 and $81,979. Distributors received no other
compensation from either Fund for acting as underwriter.

DISTRIBUTION PLAN

The Intermediate-Term and Insured Funds have each adopted a distribution plan
pursuant to Rule 12b-1 under the 1940 Act (a "Plan" or "Plans") whereby each
Fund may pay up to a maximum of 0.10% per annum (1/10 of 1%) of its average
daily net assets for expenses incurred in the promotion and distribution of its
shares.

Pursuant to each Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred
in the distribution and promotion of each Fund's shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparation and distribution of sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors overhead expenses attributable to the
distribution of each Fund's 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 Plans, each Plan also

<PAGE>

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

In no event shall the aggregate asset-based sales charges which include
payments made under the Plans, plus any other payments deemed to be made
pursuant to the Plans, 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 Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do 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 Plans 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 Plans 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 Funds, 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 each Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions selling shares of the Fund may be required to register as dealers
pursuant to state law.

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

The Insured Fund's shareholders approved the Plan on April 11, 1994 and it is
effective for an initial period through April 30, 1995. The Plan for the
Intermediate-Term Fund has been approved by Resources, the initial shareholder
of the Trust, and by the trustees of the Trust, including those trustees who
are not interested persons, as defined in the 1940 Act. The Plan for the
Intermediate-Term Fund is effective through March 31, 1995 and renewable
annually by a vote of the Trusts Board of Trustees, including a majority vote
of the trustees who are non-interested persons of the Trust 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
trustees. The Plans and any related agreement may be terminated at any time,
without any penalty, by vote of a majority of the non-interested trustees on
not more than 60 days' written notice, by Distributors on not more than 60
days' written notice, by any act that constitutes an assignment of the
management agreements between the Trust on behalf of the Intermediate-Term and
Insured Funds and the Manager or the underwriting agreement between the Trust
on behalf of the Intermediate-Term and Insured Funds and Distributors, or by
vote of a majority of a Fund's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.

The Plans 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 Intermediate-Term and Insured Funds' outstanding shares, and all
material amendments to the Plans or any related agreements 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 of Trustees at least
quarterly on the amounts

<PAGE>

and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board of Trustees with such other
information as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans should be
continued.

GENERAL INFORMATION

PERFORMANCE

As noted in the Prospectuses, each Fund may from time to time quote various
performance figures to illustrate a Funds past performance. The
Intermediate-Term and Insured Funds may occasionally cite statistics to reflect
their volatility or risk.

INTERMEDIATE-TERM AND INSURED FUNDS

Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
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 Funds are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by a 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 the maximum sales charge
is deducted from the initial $1,000 purchase order, and that income dividends
and capital gains 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 on the sales charge structure,
historical performance information will be restated to reflect the maximum
sales charge in effect currently.

In considering the quotations of total return by the Funds, investors should
remember that the maximum sales charge reflected in each quotation is a
one-time fee (charged on all direct purchases) which will have its greatest
impact during the early stages of an investors investment in the Funds. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in a Fund. The average annual
compounded rates of return for the Intermediate-Term and Insured Funds for the
indicated periods ended on the date of the financial statements included herein
were as follows:

FROM
ONE-YEAR FIVE-YEAR INCEPTION
-------- --------- ---------
Intermediate-Term
Fund -0.61% N/A 4.24%
Insured Fund -3.47% 6.33% 7.96%

These figures were calculated according to the SEC formula:

P(1+T)(n) = ERV

where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one-, five-, or ten-year periods at the end
of the one-, five-, or ten-year periods (or fractional portion
thereof)

As discussed in the Prospectuses, the Funds may quote total rates of return in
addition to their 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 on their average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Funds for the
indicated periods ended on the date of the financial statements included herein
were as follows:

FROM
ONE-YEAR FIVE-YEAR INCEPTION
-------- --------- ---------
Intermediate-Term
Fund -0.61% N/A 7.62%
Insured Fund -3.47% 35.90% 96.60%

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

<PAGE>

any fees charged to all shareholders during the base period. The yield for the
Intermediate-Term and Insured Funds for the 30-day period ended on the date of
the financial statements included herein was 5.33% and 5.02%, respectively.

These figures were obtained using the following SEC formula:

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

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

TAX EQUIVALENT YIELD

The Intermediate-Term and Insured Funds 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 a Fund (computed as
indicated above) which is tax-exempt by one minus the highest applicable
combined federal and California income tax rate (and adding the product to that
portion of the yield of the Fund that is not tax-exempt, if any). The tax
equivalent yield for the Intermediate-Term and Insured Funds for the 30-day
period ended on the date of the financial statements included herein was 9.91%
and 9.33%, respectively.

As of the date of this Statement of Additional Information, the state and the
combined state and federal income tax rates upon which the Funds tax equivalent
yield quotations were based were 11.0% and 46.24%, respectively. These rates do
not reflect the tax costs resulting from the full or partial loss of the
benefits of personal exemptions and itemized deductions that may result from
the receipt of additional taxable income by taxpayers with adjusted gross
income exceeding $100,000. Actual tax equivalent yields and tax equivalent
distribution rates may be higher for taxpayers subject to the loss of these
benefits than the rates reported by the Funds. Furthermore, from time to time,
as any changes to such rates become effective, tax equivalent yield quotations
advertised by the Funds will be updated to reflect such changes. The Funds
expect updates may be necessary as tax rates are changed by federal, state and
local governments. The advantage of tax-free investments, such as the
Intermediate-Term and Insured Funds, will be enhanced by any tax rate
increases. Therefore, the details of specific tax increases may be used in
sales material for the Funds.

Quotations of taxable equivalent yield by the Intermediate-Term and Insured
Funds 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.

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 a 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 a Fund during the past 12 months by
a current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to a Funds current
distribution rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current federal and
California state tax rates available to the Funds. Under certain circumstances,
such as when there has been a change in the amount of dividend payout or a
fundamental change in investment policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends during the past 12 months. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as
short-term capital gains, and is calculated over a different period of time.

VOLATILITY

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

<PAGE>

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 Intermediate-Term and Insured Funds at net asset value, sales
literature pertaining to a Fund may quote a Current Distribution Rate for Net
Asset Value Investments. This rate is computed by adding the income dividends
paid by a 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.

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

COMPARISONS

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

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

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

c) Donoghues Money Fund Report - Industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.

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

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

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

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

h) 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, and Long-Term Utility High
Yield Index.

i) 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.

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

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

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

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

n) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.

o) Standard & Poors Bond Indices - Measure yield and price of corporate,
municipal, and government bonds.

<PAGE>

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

Advertisements or information may also compare each Funds performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in a 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 a 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 a Funds shares can be expected to increase. Certificates
of deposit are frequently insured by an agency of the U.S. government. An
investment in a 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 a Funds portfolio, that the indices and averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formula used by the Funds to calculate their figures.
In addition, there can be no assurance that the Funds will continue this
performance as compared to such other averages.

MONEY FUND

Current Yield Current yield reflects the interest income per share earned by
the Money Funds portfolio investments.

Current yield is calculated by determining the net change, excluding capital
changes, in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then annualizing the result by multiplying the base period
return by (365/7).

The yield for the Money Fund for the seven-day period ended on the date of the
financial statements included herein was 2.15%.

EFFECTIVE YIELD

Effective yield is computed in the same manner, except that the annualization
of the return for the seven-day period reflects the results of compounding by
adding one to the base period return, raising the sum to a power equal to 365
divided by seven, and subtracting one from the result.

Effective yield for the Money Fund for the seven-day period ended on the date
of the financial statements included herein was 2.17%.

This figure was obtained using the SEC formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1

TAX EQUIVALENT YIELD

The Fund may also quote tax equivalent yield and tax equivalent effective
yield, which demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to that of a fund which invests in tax-exempt obligations.
Such yields are computed by dividing that portion of the yield of the Fund
(computed as indicated above) which is tax-exempt by one minus the highest
combined federal and California income tax rate (and adding the product to that
portion of the yield of the Fund that is not tax-exempt, if any). The tax
equivalent yield based on the current yield of the Money Fund for the seven-day
period ended on the date of the financial statements included herein was 4.00%.
The tax equivalent effective yield based on the effective yield of the Money
Fund for the seven-day period ended on the date of the financial statements
included herein was 4.03%.

The tax rate and advertisement discussions under the subcaption Tax Equivalent
Yield, with respect to the Insured and Intermediate-Term Funds apply as well to
advertisements of tax equivalent yield by the Money Fund.

COMPARISONS

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

a) Donoghues Money Fund Report - Industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.

<PAGE>
b) Bank Rate Monitor - A weekly publication which reports various bank
investments such as CD rates, average savings account rates and average loan
rates.

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

d) Salomon Brothers Bond Market Roundup - A weekly publication which reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets. Also summarizes changes in banking statistics and
reserve aggregates.

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 Money 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 Money 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 (ALL FUNDS)

Each 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 Funds cannot guarantee that such goals
will be met.

The Funds of the Trust are members of the Franklin/Templeton Group, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 45 years
and now services more than 2.4 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin/Templeton Group has over
$117 billion in assets under management for more than 3.7 million shareholder
accounts and offers 111 U.S.-based mutual funds. The Funds may identify
themselves by their NASDAQ or CUSIP number.

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

Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1994, taxes could cost an
investor 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 projects. 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 a similar taxable
investment.

While municipal securities are generally considered to be creditworthy, second
in quality only to securities issued or guaranteed by the United States
government and its agencies, the market price of such securities may fluctuate.
This fluctuation will have a direct impact on the net asset value of an
investment in the Fund.

Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment objectives, no
two are exactly alike. As noted in the Prospectuses, shares of the Fund are
generally sold through securities dealers or other financial institutions.
Investment representatives of such securities dealers or financial institutions
are experienced professionals who can offer advice on the type of investment
suitable to an investors unique goals and needs, as well as the types of risks
associated with such investment.

<PAGE>
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.

From time to time, advertisements or sales material issued by the Funds 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.

MISCELLANEOUS INFORMATION

Distributions and distribution adjustments by the Money Fund resulting from
realized gains and losses on the sale of portfolio securities or from
unrealized appreciation or depreciation in the value of portfolio securities
are required to maintain a $1.00 net asset value and may result in under or
over distributions of investment company taxable income.

As noted in its Prospectus, the Money Fund declares dividends for each day that
the Funds net asset value is calculated equal to all of its daily net interest
income, payable to shareholders of record as of the close of business the
preceding day. The Intermediate-Term and Insured Funds make monthly income
distributions substantially equal to all of their net investment income for the
fiscal year.

Shareholders who so request may have their dividends paid out monthly in cash.
For Money Fund shareholders, the shares reinvested and credited to their
account during the month will be redeemed as of the close of business on the
last bank business day of the month and the proceeds will be paid to them in
cash. If a shareholder withdrew the entire amount in an account at any time
during the month, all dividends accrued with respect to the account during the
month to the time of withdrawal would be paid in the same manner and at the
same time as the proceeds of withdrawal. Each Money Fund shareholder will
receive a monthly summary of the account, including information as to dividends
reinvested or paid.

The Board of Trustees reserves the right to revise the above dividend policy or
postpone the payment of dividends, if warranted in its judgment, due to unusual
circumstances such as a large expense, loss or unexpected fluctuation in net
assets.

The portfolio insurance of the Insured Fund may affect the value of the Insured
Funds shares under certain circumstances. As discussed in its Prospectus,
unless a Secondary Market Insurance Policy is purchased with respect to the
portfolio security, the Insured Fund intends to hold any defaulted securities
or securities for which there is a significant risk of default in its portfolio
until the default has been cured or the principal and interest are paid by the
issuer or the insurer. In such circumstances, the Board of Trustees has
instructed the Manager to consider in its evaluation of these securities the
value of the insurance for the interest and principal payments, as well as the
market value of the portfolio securities, the market value of securities of
similar issuers whose securities carry similar interest rates, and the
discounted present value of the interest and principal payments to be received
from the insurance company. Absent any unusual or unforeseen circumstances, as
a result of the Portfolio Insurance Policy, the Manager would likely recommend
that the Insured Fund value the defaulted securities, or securities for which
there is a significant risk of default, at the same price as securities of a
similar nature which are not in default. A defaulted security covered by a
Secondary Market Policy would be valued at market.

The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations. The
Trusts Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds shares. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Thus, the
risk of a shareholders incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance exists
and the Trust itself is unable to meet its obligations.

<PAGE>

OWNERSHIP AND AUTHORITY DISPUTES

In the event of disputes involving multiple claims of ownership or authority to
control a shareholders account, each 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.

As of August 2, 1994, the only principal shareholder of any of the Funds,
beneficial or of record, the shareholders address and the amount of the
shareholders share ownership were as follows:

NUMBER OF
SHARES HELD PERCENTAGE
----------- ----------
Money Fund
Kenneth Rainin
5 400 Hollis St.
Emeryville, CA
94608-2508 58,411,270.399 8.38%

From time to time, the number of shares of the Funds 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.

Appendices
- -----------
Appendix A

As indicated in the Funds Prospectuses, the following information is given in
view of the Funds policies of investing primarily in California state and
municipal issuers. Such information constitutes only a brief discussion, does
not purport to be a complete description, and is based primarily upon
information derived from independent credit reports and historically reliable
sources, but has not been independently verified by the Funds.

On June 6, 1978, California voters approved Proposition 13, which added Article
XIIIA to the California Constitution. The principal thrust of Article XIIIA is
to limit the amount of ad valorem taxes on real property to one percent of the
full cash value, as determined by the county assessor. The assessed valuation
of all real property may be increased, but not in excess of two percent per
year, or decreased to reflect the rate of inflation or deflation as shown by
the consumer price index. Article XIIIA requires a vote of two-thirds of the
qualified electorate to impose special taxes, and completely prohibits the
imposition of any additional ad valorem, sales or transaction tax on real
property (other than ad valorem taxes to repay general obligation bonds issued
to acquire or improve real property), and requires the approval of two-thirds
of all members of the State Legislature to change any state tax laws resulting
in increased tax revenues.

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

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

Modest economic growth is projected for Californias economy during fiscal year
1994-95, with employment growth estimated at 0.1% and 1.6% during 1994 and
1995, respectively. Personal income is expected to grow 6.1% during 1994, up
from 4.7% growth in 1993. Total revenues are projected to increase 5.1%, while
spending will increase approximately 4.0%.

Adopted on July 8, 1994, the fiscal 1995 budget is designed to address
Californias accumulated $2.0 billion deficit over a 22-month period. In order
to balance the budget and generate sufficient cash to retire the $4 billion
deficit Revenue Anticipation Warrant and a $3 billion Revenue Anticipation Note
to be issued in July 1995, the states fiscal plan relies upon aggressive
assumptions of federal aid, projected at about $760 million in fiscal year 1995
and $2.8 billion in fiscal year 1996, to compensate the state for its costs of
providing services to illegal immigrants. These assumptions, combined with
fiscal year 1996 constitutionally mandated increases in spending for education,
and continued growth in social services and corrections expenditures, could
hinder the states efforts to restore fiscal stability. In response, the state
has enacted a Budget Adjust-

<PAGE>

ment Law, know as the trigger legislation, which
establishes a set of backup budget adjustment mechanisms to address potential
shortfalls in cash. The trigger mechanism will be in effect for both fiscal
years 1995 and 1996.

In July of 1994, S&P and Moodys lowered the general obligation bond rating of
the state of California. The rating agencies cited the states continuing
deferral of substantial portions of its accumulated deficit; continuing
structural budgetary constraints including a funding guarantee for education;
overly optimistic expectations of federal aid to balance fiscal year 1995s
budget and fiscal year 1996s cash flow projections; and reliance upon a trigger
mechanism to reduce spending if federal aid assumptions prove to be inflated as
reasons for the change.

Appendix B -
Description of Municipal Securities Ratings

Municipal Bonds

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

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

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

B: Municipal 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: Municipal 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: Municipal bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.

C: Municipal 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. (-): Municipal 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 municipal bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

S&P

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

<PAGE>

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

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

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

BB, B, CCC, CC: Municipal 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 an adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.

MUNICIPAL NOTES

Moodys Moodys ratings for state, municipal and other short-term obligations
will be designated Moodys Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in long-term borrowing risk are of lesser importance in the short
run. Symbols used will be as follows:

MIG-1:

Notes are of the best quality, enjoying strong protection from established cash
flows of funds for their servicing or from established and broad-based access
to the market for refinancing, or both.

MIG-2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.

MIG-3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market access
for refinancing, in particular, is likely to be less well established.

MIG-4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.

S&P

Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less,
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.

SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelm- ing safety
characteristics will be given a plus (+) designation.

SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.

<PAGE>

COMMERCIAL PAPER

Moodys

Moodys Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moodys employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:

P-1 (Prime-1): Superior capacity for repayment.

P-2 (Prime-2): Strong capacity for repayment.

S&P
S&Ps ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from A for the highest quality obligations to D
for the lowest. Issues within the A category are delineated with the numbers 1,
2, and 3 to indicate the relative degree of safety, as follows:

A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A plus (+) designation indicates an even stronger likelihood of
timely payment.

A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.

A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

FITCHS SHORT-TERM AND COMMERCIAL PAPER RATINGS

Fitchs short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuers
obligations in a timely manner.

F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.

F-1: Very strong credit quality. Reflects an assurance of timely payment only
slightly less in degree than issues rated F-1+.

F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.

F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.

F-S: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.

D: Default. Actual or imminent payment default.

LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Trustees
of Franklin California Tax-Free Trust:

We have audited the accompanying statements of assets and liabilities of the
three funds comprising the Franklin California Tax-Free Trust (the Funds),
including each Fund's statement of investments in securities and net assets, as
of June 30, 1994, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights, included under the caption
"Financial Highlights" for each of the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Funds' 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 June 30, 1994, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
three funds comprising the Franklin California Tax-Free Trust as of June 30,
1993, the results of each Fund's operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods indicated thereon, in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND
San Francisco, California
August 3, 1994

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 99.3%
BONDS 99.0%
$ 1,000,000 Alameda COP, Police Building and Equipment Financing Project, MBIA Insured,
7.25%, 08/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,081,100
2,000,000 Alameda County COP, Municipal Custody Receipts, Series 1, BIG Insured,
Pre-Refunded, 7.25%, 12/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,255,180
10,730,000 Alhambra COP, Police Facilities AD No. 91-1, AMBAC Insured, 6.75%, 09/01/23 . . . . 11,050,720
12,200,000 Alhambra RDA, Tax Allocation, Refunding, Redevelopment Project, AMBAC Insured,
5.85%, 05/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,290,856
Anaheim COP,
3,240,000 Anaheim Memorial Hospital, AMBAC Insured, Pre-Refunded, 7.25%, 05/15/20 . . . . 3,627,860
3,000,000 Anaheim Public Improvement Corp., Refunding, BIG Insured, 6.70%, 08/01/08 . . . 3,174,120
1,500,000 Parking Revenue, Refunding, AMBAC Insured, Pre-Refunded, 7.125%, 08/01/19 . . . 1,533,645
1,210,000 Refinancing Project, Series A, AMBAC Insured, Pre-Refunded, 7.50%, 05/01/11 . . 1,296,951
Anaheim Electric System, COP,
1,000,000 AMBAC Insured, Pre-Refunded, 6.75%, 10/01/10 . . . . . . . . . . . . . . . . . . 1,098,820
10,935,000 AMBAC Insured, Pre-Refunded, 6.75%, 10/01/22 . . . . . . . . . . . . . . . . . . 12,015,597
Anaheim Public Financing Authority Revenue, Refunding, Anaheim Electric
Utility Projects,
3,825,000 MBIA Insured, 5.60%, 10/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . 3,485,340
2,000,000 MBIA Insured, 5.625%, 10/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . 1,798,480
4,735,000 Antioch COP, Water Treatment Plant, MBIA Insured, Pre-Refunded, 7.875%,
07/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,174,077
3,485,000 Apple Valley USD, COP, MBIA Insured, Pre-Refunded, 6.875%, 09/01/21 . . . . . . . . 3,866,677
5,690,000 Arcata Joint Powers Financing Authority Revenue, Tax Allocation, Community
Development Project, Series A, AMBAC Insured, 6.00%, 08/01/23 . . . . . . . . . . 5,398,217
3,080,000 Azusa Public Financing Authority Revenue, Refunding, Water System Acquisition
Project, Series A, FGIC Insured, 5.50%, 07/01/13 . . . . . . . . . . . . . . . . . 2,812,502
4,150,000 Bakersfield Hospital Revenue, Refunding, Adventist Health System,
MBIA Insured, 5.50%, 03/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,675,530
2,000,000 Barstow RDA, Tax Allocation, Central Redevelopment Project, Series A,
MBIA Insured, 6.25%, 09/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,955,760
2,995,000 Benicia COP, Refunding, Water System Project, AMBAC Insured, 6.125%, 11/01/17 . . . 2,920,335
5,900,000 Benicia USD, Series A, AMBAC Insured, 6.85%, 08/01/16 . . . . . . . . . . . . . . . 6,186,091
Berkeley COP,
1,270,000 AMBAC Insured, 7.50%, 06/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,379,398
2,400,000 Civic Improvement Corp., AMBAC Insured, 7.00%, 06/01/15 . . . . . . . . . . . . 2,492,352
Big Bear Lake Water Revenue, Refunding,
720,000 FGIC Insured, 6.25%, 04/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . 720,432
400,000 FGIC Insured, 6.375%, 04/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . 399,172
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Brea Public Finance Authority Revenue, Tax Allocation, Redevelopment Project,
$ 1,520,000 Series A, MBIA Insured, 7.00%, 08/01/15 . . . . . . . . . . . . . . . . . . . . . $ 1,604,345
1,550,000 Series A, MBIA Insured, 6.75%, 08/01/22 . . . . . . . . . . . . . . . . . . . . . 1,589,990
12,500,000 Series A, MBIA Insured, 7.00%, 08/01/23 . . . . . . . . . . . . . . . . . . . . . 13,114,125
3,480,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 08/01/15 . . . . . . . . . . . . . . 3,883,680
3,700,000 Series A, MBIA Insured, Pre-Refunded, 6.75%, 08/01/22 . . . . . . . . . . . . . . 4,075,180
7,500,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 08/01/23 . . . . . . . . . . . . . . 8,370,000
Brea RDA, Tax Allocation, Refunding, Redevelopment Project,
5,220,000 MBIA Insured, 5.75%, 08/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,774,525
970,000 MBIA Insured, Pre-Refunded, 8.30%, 11/01/10 . . . . . . . . . . . . . . . . . . . 1,044,748
2,155,000 Buellton USD, Series A, MBIA Insured, 6.375%, 07/01/17. . . . . . . . . . . . . . . . 2,160,474
320,000 Buena Park CRDA, Tax Allocation, Refunding, Central Business District
Redevelopment Project, FGIC Insured, Pre-Refunded, 8.90%, 11/01/15 . . . . . . . . . 345,571
665,000 Burbank Waste Disposal Revenue, Series B, AMBAC Insured, 6.00%, 05/01/22. . . . . . . 633,047
2,100,000 Calaveras County Water District, COP, AMBAC Insured, Pre-Refunded,
7.10%, 01/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,325,120
3,950,000 Calaveras County Water District Revenue, Refunding, COP, Water and Sewer System
Improvement Project, AMBAC Insured, 6.00%, 05/01/16 . . . . . . . . . . . . . . . . 3,783,033
California Educational Facilities Authority Revenue,
3,500,000 Pooled Facilities Program, MBIA Insured, 6.70%, 11/01/09 . . . . . . . . . . . . 3,594,150
1,800,000 Pooled Facilities Program, MBIA Insured, 7.625%, 11/01/12 . . . . . . . . . . . . 1,962,054
1,000,000 Pooled Facilities Program, MBIA Insured, 7.00%, 03/01/16 . . . . . . . . . . . . 1,063,650
California Health Facilities Financing Authority Revenue,
3,000,000 Adventist Health Systems West, Series A, MBIA Insured, 7.00%, 03/01/13 . . . . . 3,121,800
5,065,000 Adventist Health Systems West, Series B, MBIA Insured, 6.75%, 03/01/14 . . . . . 5,187,522
3,900,000 Catholic Health Care, Series A, AMBAC Insured, Pre-Refunded, 7.00%,
07/01/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,291,989
8,405,000 Catholic Health Care, Series A, AMBAC Insured, Pre-Refunded, 7.00%,
07/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,249,787
2,250,000 Catholic Health Care, Series D, AMBAC Insured, Pre-Refunded, 6.50%,
07/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,443,905
11,250,000 Catholic Health Care, Series D, AMBAC Insured, Pre-Refunded, 6.65%,
07/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,317,063
7,605,000 Centinela Hospital Medical Center, MBIA Insured, 6.50%, 09/01/08 . . . . . . . . 7,820,221
150,000 Centinela Hospital Medical Center, Series A, MBIA Insured, Pre-Refunded,
9.375%, 09/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,929
4,000,000 Marin General Hospital, Series A, CGIC Insured, 7.00%, 08/01/15 . . . . . . . . . 4,141,480
11,110,000 San Diego Hospital Association, MBIA Insured, 6.625%, 05/01/19 . . . . . . . . . . 11,212,323
4,425,000 San Diego Hospital Association, Series A, MBIA Insured, 6.20%, 08/01/12 . . . . . 4,363,360
4,850,000 San Diego Hospital Association, Series A, MBIA Insured, 6.20%, 08/01/20 . . . . . 4,679,911
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California Health Facilities Financing Authority Revenue (cont.)
$ 3,500,000 Scripps Memorial Hospital, Series A, MBIA Insured, 6.40%, 10/01/12 . . . . . . . $ 3,517,780
3,000,000 Sharp Ternecula Hospital, MBIA Insured, 7.05%, 08/01/21 . . . . . . . . . . . . 3,134,460
California HFAR,
1,630,000 Series A, MBIA Insured, 7.75%, 08/01/10 . . . . . . . . . . . . . . . . . . . . 1,718,590
1,350,000 Series A, MBIA Insured, 7.15%, 08/01/11 . . . . . . . . . . . . . . . . . . . . 1,389,758
4,790,000 Series A, MBIA Insured, 8.20%, 02/01/20 . . . . . . . . . . . . . . . . . . . . 5,097,279
3,500,000 Series A, MBIA Insured, 7.20%, 02/01/26 . . . . . . . . . . . . . . . . . . . . 3,612,420
70,000 Series B, MBIA Insured, 8.50%, 02/01/05 . . . . . . . . . . . . . . . . . . . . 74,367
2,000,000 Series B, MBIA Insured, 6.80%, 08/01/11 . . . . . . . . . . . . . . . . . . . . 2,032,160
440,000 Series B, MBIA Insured, 8.625%, 08/01/15 . . . . . . . . . . . . . . . . . . . . 450,978
9,750,000 California Public Capital Improvements Financing Authority Revenue, Pooled
Projects, Series B, BIG Insured, 8.10%, 03/01/18 . . . . . . . . . . . . . . . . . 10,567,830
9,000,000 California State GO, AMBAC Insured, 6.30%, 09/01/06 . . . . . . . . . . . . . . . . 9,292,410
1,000,000 California State GO, Various Purposes, MBIA Insured, 6.00%, 10/01/21. . . . . . . . 944,940
California State Loan Purchase Authority Revenue, Loan Contract,
3,450,000 Refunding, Series A, CGIC Insured, 5.60%, 10/01/14 . . . . . . . . . . . . . . . 3,179,278
515,000 Refunding, Series A, CGIC Insured, 5.75%, 10/01/18 . . . . . . . . . . . . . . . 477,575
2,000,000 Series A, CGIC Insured, 7.75%, 10/01/08 . . . . . . . . . . . . . . . . . . . . 2,246,960
3,365,000 Series A, CGIC Insured, Pre-Refunded, 7.80%, 10/01/18. . . . . . . . . . . . . . 3,788,250
3,000,000 California State Public Works Board Lease Revenue, University of California Project,
Series A, AMBAC Insured, 6.40%, 12/01/16 . . . . . . . . . . . . . . . . . . . . . 3,006,510
California State University and Colleges, Student Union Revenue,
1,310,000 Bakersfield, Series A, MBIA Insured, 6.30%, 11/01/22 . . . . . . . . . . . . . . 1,292,813
2,375,000 San Bernardino, Series B, MBIA Insured, 6.30%, 02/01/22. . . . . . . . . . . . . 2,344,291
2,000,000 California Statewide Communities Development Authority Revenue, COP, Salk
Institute, Connie Lee Insured, 6.20%, 07/01/24 . . . . . . . . . . . . . . . . . . 1,908,560
California Statewide Communities Development Corp., COP, San Diego State
University Foundation,
1,505,000 Connie Lee Insured, 5.625%, 03/01/13 . . . . . . . . . . . . . . . . . . . . . . 1,372,801
1,500,000 Connie Lee Insured, 5.625%, 03/01/23 . . . . . . . . . . . . . . . . . . . . . . 1,323,195
7,945,000 Calleguas Municipal Water District, COP, System Improvement Project,
AMBAC Insured, Pre-Refunded, 6.625%, 07/01/21. . . . . . . . . . . . . . . . . . . 8,687,142
2,000,000 Castaic Lake Water Agency, COP, Water System Improvement Project, MBIA
Insured, 7.125%, 08/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,141,860
1,830,000 Central Basin Municipal Water District, COP, Century Reclamation Program,
FGIC Insured, Pre-Refunded, 6.875%, 02/01/16 . . . . . . . . . . . . . . . . . . . 2,008,516
Central Coast Water Authority Revenue, System Water Project, Regional Facilities,
2,500,000 AMBAC Insured, 6.50%, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . 2,536,975
4,650,000 AMBAC Insured, 6.60%, 10/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . 4,718,401
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 3,035,000 Central School District, San Bernardino County, Crossover Refunding
AMBAC Insured, 5.60%, 05/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,764,551
Central Union High School District, Imperial County,
890,000 Series A, AMBAC Insured, 5.50%, 08/01/17 . . . . . . . . . . . . . . . . . . . . 798,010
1,005,000 Series A, AMBAC Insured, 5.50%, 08/01/18 . . . . . . . . . . . . . . . . . . . . 899,173
5,000,000 Cerritos Public Financing Authority Revenue, Los Coyotes Redevelopment Project,
Series A, AMBAC Insured, 5.75%, 11/01/22 . . . . . . . . . . . . . . . . . . . . 4,583,050
1,000,000 Chico Public Financing Authority Revenue, Southeast Chico Redevelopment Project,
Series A, FGIC Insured, 6.625%, 04/01/21 . . . . . . . . . . . . . . . . . . . . 1,010,930
2,000,000 (b)Chino Basin Regional Financing Authority Revenue, Refunding, Municipal Water
District, Sewer System Project, AMBAC Insured, 6.00%, 08/01/16. . . . . . . . . . 1,917,400
3,590,000 Chino COP, RDA, Refunding, Water System Improvement Project, AMBAC Insured,
6.20%, 09/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,506,245
6,250,000 Chino, Ontario, Upland, Etc. Water Facilities Authority, COP, Refunding, Agua de
Lejos Projects, Series A, FGIC Insured, 6.75%, 10/01/11 . . . . . . . . . . . . . 6,476,500
2,940,000 Chula Vista, Elementary School District, COP, MBIA Insured, 6.60%, 08/01/16. . . . 3,015,823
1,000,000 Clayton RDAR, Tax Allocation, Clayton Redevelopment Project, CGIC Insured,
5.55%, 08/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 892,850
520,000 Clovis Hospital Revenue, COP, Clovis Community Hospital Project, Series A,
AMBAC Insured, Pre-Refunded, 8.75%, 02/01/15 . . . . . . . . . . . . . . . . . . 545,043
975,000 Concord RDA, Tax Allocation, Concord Center Redevelopment Project, AMBAC
Insured, Pre-Refunded, 8.875%, 07/01/16 . . . . . . . . . . . . . . . . . . . . 1,074,177
Contra Costa County COP,
1,250,000 Buildings Acquisition Project, AMBAC Insured, 6.70%, 02/01/21 . . . . . . . . . 1,270,438
1,000,000 Public Facilities Corp., BIG Insured, 7.80%, 06/01/08 . . . . . . . . . . . . . 1,127,080
2,535,000 Contra Costa Mosquito Abatement District, COP, Refunding, Public Improvements
Project, CGIC Insured, 6.25%, 02/01/06 . . . . . . . . . . . . . . . . . . . . . 2,614,852
5,425,000 Coronado CDA, Tax Allocation, Coronado Community Development Project,
MBIA Insured, 6.375%, 09/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . 5,420,823
4,500,000 Covina COP, Housing Revenue, AMBAC Insured, 7.00%, 03/01/17. . . . . . . . . . . . 4,749,660
1,105,000 Delano USD, Series A, CGIC Insured, 6.10%, 05/01/17 . . . . . . . . . . . . . . . 1,065,375
Desert Hot Springs RDA, Tax Allocation, Refunding, Redevelopment Project No. 1,
2,000,000 Series A, MBIA Insured, 5.35%, 09/01/14 . . . . . . . . . . . . . . . . . . . . 1,784,660
2,735,000 Series A, MBIA Insured, 5.375%, 09/01/19 . . . . . . . . . . . . . . . . . . . . 2,401,986
4,155,000 Dublin-San Ramon Services District, COP, AMBAC Insured, 7.00%, 12/01/20. . . . . . 4,369,689
East Bay MUD, Wastewater Treatment System Revenue,
1,000,000 AMBAC Insured, Pre-Refunded, 7.125%, 06/01/17. . . . . . . . . . . . . . . . . . 1,114,100
2,000,000 AMBAC Insured, Pre-Refunded, 7.20%, 06/01/20 . . . . . . . . . . . . . . . . . . 2,235,740
East Bay MUD, Water System Revenue,
2,000,000 AMBAC Insured, Pre-Refunded, 6.375%, 06/01/21 . . . . . . . . . . . . . . . . . 2,163,580
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (C0NT.)
BONDS (C0NT.)
East Bay MUD, Water System Revenue (cont.)
$ 5,000,000 MBIA Insured, Pre-Refunded, 7.50%, 06/01/18 . . . . . . . . . . . . . . . . . . . $ 5,664,800
5,000,000 East Yolo Community Services District, Water Revenue, Refunding, FGIC Insured,
Pre-Refunded, 7.25%, 06/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . 5,384,400
Eastern Municipal Water and Sewer District Revenue, COP,
1,000,000 FGIC Insured, Pre-Refunded, 6.75%, 07/01/08 . . . . . . . . . . . . . . . . . . . 1,100,630
1,400,000 Refunding, Series A, FGIC Insured, 6.30%, 07/01/20. . . . . . . . . . . . . . . . 1,377,124
1,000,000 El Centro COP, AMBAC Insured, 6.875%, 06/01/09 . . . . . . . . . . . . . . . . . . 1,051,330
5,960,000 El Cerrito RDA, Tax Allocation, Refunding, Redevelopment Project, Series A,
CGIC Insured, 6.80%, 07/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . 6,129,502
6,900,000 Eureka Public Financing Authority Revenue, Tax Allocation, Eureka Redevelopment
Project, CGIC Insured, Pre-Refunded, 7.40%, 11/01/12 . . . . . . . . . . . . . . . 7,674,732
905,000 Fairfield COP, Refunding, Fairfield Utility Improvement Project, FGIC Insured,
7.35%, 04/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 957,282
Fairfield Public Financing Authority Revenue,
2,000,000 Fairfield Redevelopment Project, Series C, CGIC Insured, 5.25%, 08/01/13. . . . . 1,748,660
5,000,000 Fairfield Redevelopment Project, Series C, CGIC Insured, 5.50%, 08/01/23. . . . . 4,409,300
4,750,000 Municipal Park, ID No. 1, FGIC Insured, 6.30%, 07/01/23 . . . . . . . . . . . . . 4,687,632
2,150,000 Refunding, Series B, MBIA Insured, 5.80%, 04/01/23 . . . . . . . . . . . . . . . 1,981,160
1,265,000 Farmersville USD, Series A, AMBAC Insured, 5.70%, 07/01/18. . . . . . . . . . . . . 1,157,159
2,525,000 Fillmore Public Financing Authority Revenue, Refunding, Central City Redevelopment
Project, Series A, AMBAC Insured, 5.75%, 10/01/16. . . . . . . . . . . . . . . . . 2,348,401
Folsom Public Financing Authority Revenue, Refunding,
2,000,000 AMBAC Insured, 6.00%, 10/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . 1,994,100
1,000,000 AMBAC Insured, 6.00%, 10/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . 975,030
2,000,000 AMBAC Insured, 6.00%, 10/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,917,140
5,850,000 Fontana RDA, Tax Allocation, Refunding, Southwest Industrial Park Project,
FGIC Insured, 6.125%, 09/01/25 . . . . . . . . . . . . . . . . . . . . . . . . . . 5,648,643
1,000,000 Fresno COP, City Hall Refinancing Project, AMBAC Insured, 6.25%, 08/01/19 . . . . . 987,480
2,795,000 Fresno COP, Refunding, Conference Center/Arena Facilities Project, AMBAC
Insured, 7.60%, 04/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,959,290
350,000 Fresno Health Facilities Revenue, Fresno Community Hospital and Medical Project,
Series A, AMBAC Insured, 8.75%, 02/01/15 . . . . . . . . . . . . . . . . . . . . . 366,856
1,000,000 Fulton El Camino Recreational and Park District, COP, Series A, CGIC Insured,
Pre-Refunded, 6.375%, 12/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068,160
1,000,000 Glendale Hospital Revenue, Refunding, Adventist Health, Series A, MBIA Insured,
6.75%, 03/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,032,900
Glendale RDAR, Tax Allocation, Refunding, Central Glendale Redevelopment Project,
1,500,000 AMBAC Insured, 5.50%, 12/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . 1,366,365
4,255,000 AMBAC Insured, 5.60%, 12/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . 3,878,135
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Glendale RDAR, Tax Allocation, Refunding, Central Glendale Redevelopment
Project (cont.)
$ 4,490,000 AMBAC Insured, 5.60%, 12/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,085,047
9,775,000 (b) AMBAC Insured, 6.00%, 12/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . 9,302,965
1,000,000 Goleta Water District Revenue, Refunding, COP, Goleta Reclamation Project,
FGIC Insured, 5.50%, 12/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . 915,540
2,000,000 Grand Terrace CDA, COP, Refunding, Civic Center Project, AMBAC Insured,
Pre-Refunded, 7.25%, 03/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,131,640
2,000,000 Grossmont Hospital District Revenue, La Mesa, Series A, MBIA Insured,
Pre-Refunded, 8.00%, 11/15/17 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,234,580
1,000,000 Hercules COP, Refunding, Capital Improvement Projects, AMBAC Insured,
6.00%, 06/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,610
3,425,000 Hesperia Water District, COP, Refunding, Water Facilities Improvement Projects,
FGIC Insured, 7.15%, 06/01/26 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,706,775
5,875,000 Imperial Irrigation District, COP, Electric System Project, MBIA Insured, 6.00%,
11/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,649,224
2,260,000 Industry, City of, Public Works Capital Improvement, FGIC Insured, Pre-Refunded,
6.80%, 07/01/15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,467,468
8,535,000 Kern County Board of Education, COP, Administration Building Financing Project,
MBIA Insured, 6.20%, 02/01/23. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,322,820
Kern County High School District,
1,535,000 CGIC Insured, 6.625%, 08/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . 1,598,426
1,400,000 CGIC Insured, 6.625%, 08/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . 1,459,262
3,080,000 La Mirada RDA, Industrial Commercial Redevelopment Project, Series A,
MBIA Insured, 6.60%, 08/15/21. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125,984
Lake Arrowhead Community Services District, COP, Refunding,
7,600,000 FGIC Insured, 6.125%, 06/01/05. . . . . . . . . . . . . . . . . . . . . . . . . 7,809,228
14,000,000 FGIC Insured, 6.50%, 06/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . 14,218,960
4,000,000 San Bernardino County, Series C, BIG Insured, Pre-Refunded, 7.80%, 09/01/10 . . 4,433,800
Lake Elsinore Public Financing Authority Revenue, Tax Allocation, Lake Elsinore
Redevelopment Project,
1,335,000 Series A, FGIC Insured, 6.25%, 02/01/19 . . . . . . . . . . . . . . . . . . . . 1,318,419
16,250,000 Series C, FGIC Insured, 6.625%, 02/01/17. . . . . . . . . . . . . . . . . . . . 16,514,062
2,500,000 Lakewood RDA, Subordinate Tax Allocation, Refunding, Town Center Redevelopment
Project, CGIC Insured, Pre-Refunded, 8.50%, 09/01/13 . . . . . . . . . . . . . . . 2,819,450
3,000,000 Lakewood RDA, Tax Allocation, Refunding, Redevelopment Project No. 1, Series A,
CGIC Insured, 6.50%, 09/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,037,440
Lancaster RDA, Tax Allocation,
2,020,000 Combination Redevelopment Project, Fire Protection, MBIA Insured, 5.75%,
08/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,129
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Lancaster RDA, Tax Allocation (cont.)
$ 1,330,000 Combination Redevelopment Project, Library Areas, MBIA Insured, 5.75%,
08/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,214,862
11,245,000 Refunding, Lancaster Redevelopment Project No. 5, MBIA Insured, 6.85%,
02/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,689,740
Lincoln RDA, Tax Allocation, Local Government Finance Authority Revenue,
1,500,000 AMBAC Insured, 9.00%, 08/01/11. . . . . . . . . . . . . . . . . . . . . . . . . . 1,704,990
480,000 AMBAC Insured, 9.00%, 08/01/12. . . . . . . . . . . . . . . . . . . . . . . . . . 545,597
2,425,000 Lincoln USD, CFD No. 1, AMBAC Insured, 6.90%, 09/01/21 . . . . . . . . . . . . . . . 2,563,613
1,250,000 Livermore Public Building COP, AMBAC Insured, 7.05%, 04/01/17. . . . . . . . . . . . 1,322,350
2,000,000 Local Government Finance Authority Revenue, Refunding, Bunker Hill Project,
AMBAC Insured, Pre-Refunded, 6.75%, 12/01/14. . . . . . . . . . . . . . . . . . . . 2,189,300
8,800,000 Lodi COP, Refunding, Wastewater Treatment Project, AMBAC Insured, 6.70%,
08/01/26. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,088,816
Loma Linda Hospital Revenue, Loma Linda University Medical Center Project,
1,910,000 Refunding, Series B, AMBAC Insured, 7.00%, 12/01/15 . . . . . . . . . . . . . . . 2,030,788
2,500,000 Series B, MBIA Insured, Pre-Refunded, 7.00%, 12/01/10 . . . . . . . . . . . . . . 2,785,300
8,500,000 Series B, MBIA Insured, Pre-Refunded, 7.00%, 12/01/22 . . . . . . . . . . . . . . 9,470,020
980,000 Series E, AMBAC Insured, 9.125%, 12/01/05 . . . . . . . . . . . . . . . . . . . . 1,061,144
2,500,000 Long Beach RDA, Refunding, Downtown Redevelopment Project, Series A,
AMBAC Insured, Pre-Refunded, 7.75%, 11/01/10. . . . . . . . . . . . . . . . . . . 2,814,350
500,000 Los Angeles Community RDA, Tax Allocation, Hollywood Redevelopment Project,
Series B, MBIA Insured, 6.10%, 07/01/22 . . . . . . . . . . . . . . . . . . . . . 479,945
3,500,000 Los Angeles Convention and Exhibition Center, COP, AMBAC Insured, Pre-
Refunded, 7.00%, 08/15/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,886,470
3,000,000 Los Angeles County Capital Assets Leasing Corp., Leasehold Revenue, Refunding,
AMBAC Insured, 6.00%, 12/01/16. . . . . . . . . . . . . . . . . . . . . . . . . . 2,875,170
8,050,000 Los Angeles County COP, Correctional Facilities Project, MBIA Insured, 6.50%,
09/01/13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,140,321
Los Angeles County COP, Refunding, San Pedro Peninsula Hospital Project,
5,825,000 AMBAC Insured, 6.25%, 05/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . 5,744,324
1,000,000 AMBAC Insured, Pre-Refunded, 8.75%, 05/01/15. . . . . . . . . . . . . . . . . . . 1,057,510
Los Angeles County Transportation Authority Revenue, Commission Sales Tax,
21,775,000 FGIC Insured, Pre-Refunded, 6.75%, 07/01/18 . . . . . . . . . . . . . . . . . . . 23,966,218
1,440,000 Series A, FGIC Insured, Pre-Refunded, 6.75%, 07/01/20 . . . . . . . . . . . . . . 1,584,907
2,740,000 Series B, FGIC Insured, 6.50%, 07/01/13 . . . . . . . . . . . . . . . . . . . . . 2,780,826
5,025,000 Series B, FGIC Insured, 6.50%, 07/01/15 . . . . . . . . . . . . . . . . . . . . . 5,082,737
2,000,000 Los Angeles Department of Water and Power Electric Plant Revenue,
MBIA Insured, 6.00%, 08/15/32 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,886,180
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Los Angeles Mortgage Revenue, Refunding,
$ 2,000,000 Series I, MBIA Insured, 6.50%, 07/01/22 . . . . . . . . . . . . . . . . . . . . $ 1,950,440
4,735,000 Series II-E, MBIA Insured, 5.625%, 07/01/22 . . . . . . . . . . . . . . . . . . 4,116,704
Los Angeles Wastewater System Revenue,
1,000,000 FGIC Insured, 6.70%, 08/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . 1,022,360
2,000,000 MBIA Insured, Pre-Refunded, 7.00%, 02/01/13 . . . . . . . . . . . . . . . . . . 2,193,260
4,440,000 MBIA Insured, Pre-Refunded, 6.80%, 08/01/19 . . . . . . . . . . . . . . . . . . 4,828,766
2,000,000 Refunding, Series A, MBIA Insured, 5.70%, 06/01/20. . . . . . . . . . . . . . . 1,823,900
5,500,000 Series A, MBIA Insured, Pre-Refunded, 7.10%, 02/01/21 . . . . . . . . . . . . . 6,053,630
6,130,000 Series B, AMBAC Insured, Pre-Refunded, 7.10%, 06/01/18. . . . . . . . . . . . . 6,764,823
19,255,000 Series D, MBIA Insured, Pre-Refunded, 6.70%, 12/01/21 . . . . . . . . . . . . . 21,141,027
4,000,000 Lynwood Public Financing Authority Revenue, Series A, AMBAC Insured,
5.75%, 09/01/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,686,680
4,000,000 Madera RDA, Tax Revenue, Refunding, Madera Redevelopment Project Area,
CGIC Insured, 5.80%, 09/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,734,200
4,500,000 Marysville Hospital Revenue, Fremont Rideout Health Group, AMBAC Insured,
6.30%, 01/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,453,515
Menlo Park CDA, Tax Allocation, Las Pulgas Community Project,
13,265,000 AMBAC Insured, 6.625%, 10/01/21 . . . . . . . . . . . . . . . . . . . . . . . . 13,524,596
3,095,000 AMBAC Insured, 6.70%, 10/01/22 . . . . . . . . . . . . . . . . . . . . . . . . 3,172,839
5,600,000 Mesa Construction Water District COP, Water Project, FGIC Insured, 6.40%, 03/15/18 5,612,880
2,000,000 Modesto COP, Municipal Improvement, FGIC Insured, Pre-Refunded, 7.30%,
11/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,216,860
5,000,000 Modesto COP, Water System Improvement Project, AMBAC Insured, 6.25%,
10/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,895,600
Modesto Health Facilities Revenue, Memorial Hospital Association,
5,565,000 Refunding, Series A, MBIA Insured, 6.00%, 06/01/18. . . . . . . . . . . . . . . 5,307,007
1,500,000 Series 1991, MBIA Insured, 6.875%, 06/01/21 . . . . . . . . . . . . . . . . . . 1,544,550
3,000,000 Modesto Irrigation COP, Refunding and Capital Improvements Project, Series A,
MBIA Insured, 6.00%, 10/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,845,860
6,745,000 Modesto Irrigation District, COP, Crossover Refunding, Geysers Geothermal Power
Project, BIG Insured, 5.00%, 10/01/17 . . . . . . . . . . . . . . . . . . . . . . 5,575,012
2,000,000 Modesto Irrigation District, Financing Authority Revenue, Domestic Water Project,
Series A, AMBAC Insured, 6.125%, 09/01/19 . . . . . . . . . . . . . . . . . . . . 1,943,640
4,000,000 Modesto Wastewater Treatment Facilities Revenue, Refunding, AMBAC Insured,
8.00%, 11/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,323,640
2,000,000 Monrovia RDA, Public Parking Facilities, Lease Revenue, Refunding, Series A,
AMBAC Insured, 5.20%, 04/01/13. . . . . . . . . . . . . . . . . . . . . . . . . . 1,751,880
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 1,000,000 Mount Diablo Hospital District Revenue, Series A, AMBAC Insured, Pre-Refunded,
7.00%, 12/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,114,120
Mount Diablo USD, CFD No. 1, Special Tax,
500,000 AMBAC Insured, 6.25%, 08/01/14. . . . . . . . . . . . . . . . . . . . . . . . . . 497,710
1,000,000 FGIC Insured, 7.05%, 08/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,069,800
250,000 Montebello CRDA, Tax Allocation, Refunding, Montebello Hills Redevelopment
Project, AMBAC Insured, Pre-Refunded, 8.90%, 04/15/10. . . . . . . . . . . . . . . . 261,725
720,000 Montebello USD, COP, Series B, MBIA Insured, 7.25%, 06/01/10. . . . . . . . . . . . . 785,887
3,215,000 Monterey County, COP, Refunding, Sheriffs Facilities Project, CGIC Insured,
5.25%, 12/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,755,512
1,750,000 Morgan Hill RDAR, Tax Allocation, Ojo de Agua Community Development Project,
FGIC Insured, Pre-Refunded, 7.875%, 03/01/11 . . . . . . . . . . . . . . . . . . . . 1,882,405
Moulton Niguel California Water District,
1,420,000 AMBAC Insured, Pre-Refunded, 7.25%, 04/01/16. . . . . . . . . . . . . . . . . . . 1,587,418
2,280,000 Refunding, Consolidated Improvement Districts, MBIA Insured, 5.25%, 09/01/13. . . 1,997,303
3,310,000 Moulton Niguel California Water District, COP, AMBAC Insured, 5.375%, 09/01/13. . . . 2,961,755
1,500,000 Mountain View COP, Improvement Financing Authority Revenue, City Hall/
Community Theatre, MBIA Insured, 6.50%, 08/01/16 . . . . . . . . . . . . . . . . . . 1,522,455
2,535,000 Mountain View School District, Refunding, CFD, Special Tax, Series A, CGIC
Insured, 7.25%, 10/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,752,832
2,000,000 National City Joint Powers Authority, Lease Revenue, National City Police Facilities
Project, AMBAC Insured, 6.75%, 10/01/17. . . . . . . . . . . . . . . . . . . . . . . 2,052,160
North Tahoe PUD, COP, Refunding and Improvement, Water System Project,
545,000 AMBAC Insured, 5.15%, 02/01/10 . . . . . . . . . . . . . . . . . . . . . . . . . 484,865
570,000 AMBAC Insured, 5.20%, 02/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . 504,997
600,000 AMBAC Insured, 5.25%, 02/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . 529,542
630,000 AMBAC Insured, 5.30%, 02/01/13 . . . . . . . . . . . . . . . . . . . . . . . . . 560,322
665,000 AMBAC Insured, 5.35%, 02/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . 593,114
5,000,000 Northern California Power Agency Revenue, Multiple Capital Facilities, Series A,
MBIA Insured, 6.50%, 08/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,114,500
Northern California Power Agency Revenue, Refunding, Public Power Hydroelectric
Project No. 1,
3,200,000 AMBAC Insured, Pre-Refunded, 7.50%, 07/01/23 . . . . . . . . . . . . . . . . . . 3,765,312
8,960,000 Series A, AMBAC Insured, Pre-Refunded, 7.50%, 07/01/23. . . . . . . . . . . . . . 9,645,619
Northern California Transmission Revenue, California/Oregon Transmission Project,
2,500,000 Series A, MBIA Insured, 6.25%, 05/01/10 . . . . . . . . . . . . . . . . . . . . . 2,519,750
4,000,000 Series A, MBIA Insured, 6.50%, 05/01/16 . . . . . . . . . . . . . . . . . . . . . 4,045,760
5,000,000 Series A, MBIA Insured, 5.25%, 05/01/20 . . . . . . . . . . . . . . . . . . . . . 4,227,850
10,000,000 Series A, MBIA Insured, 6.00%, 05/01/24 . . . . . . . . . . . . . . . . . . . . . 9,482,100
4,000,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 05/01/10 . . . . . . . . . . . . . . 4,411,960
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Northern California Transmission Revenue, California/Oregon Transmission Project,
(cont.)
$18,050,000 Series A, MBIA Insured, Pre-Refunded, 7.00%, 05/01/24.............................. $19,908,969
5,810,000 Norwalk Community Facilities Financing Authority, Lease Revenue, MBIA Insured,
6.90%, 02/01/21...................................................................... 6,053,381
7,000,000 Oakland RDA, Tax Allocation, Refunding, Central District Redevelopment Project,
AMBAC Insured, Pre-Refunded, 7.50%, 02/01/14......................................... 7,471,450
4,000,000 Oakland Special Revenue, Refunding, Series A, FGIC Insured, 7.60%, 08/01/21........... 4,353,920
Oceanside COP,
4,715,000 Corporation Yard Project, AMBAC Insured, Pre-Refunded, 7.30%, 08/01/21............. 5,372,177
2,500,000 Wastewater System, Refunding, AMBAC Insured, 5.70%, 05/01/14....................... 2,325,950
5,000,000 Wateruse Finance Association of California, Series A, AMBAC Insured, 6.50%,
10/01/17.......................................................................... 5,047,650
3,940,000 Oceanside Community Development COP, Public Parking Project, CGIC Insured, Pre-
Refunded, 7.875%, 04/01/19........................................................... 4,667,324
10,000,000 Ontario Redevelopment Financing Authority Revenue, Ontario Redevelopment
Project No. 1, MBIA Insured, 5.80%, 08/01/23......................................... 9,212,200
Orange County CFD No. 86-1, Special Tax, Rancho Santa Margarita,
5,000,000 Series A, CGIC Insured, 7.30%, 08/15/09............................................ 5,369,300
10,000,000 Series A, CGIC Insured, Pre-Refunded, 7.625%, 07/01/18............................. 11,158,700
Orange County COP,
11,250,000 Civic Center Expansion Project, AMBAC Insured, 6.70%, 08/01/18..................... 11,564,325
4,770,000 Juvenile Justice Center Facilities, AMBAC Insured, 6.375%, 06/01/11................ 4,827,145
5,000,000 Juvenile Justice Center Facilities, AMBAC Insured, 6.00%, 06/01/17................. 4,813,200
3,500,000 Orange County Financing Authority Revenue, Tax Allocation, Refunding, Series A,
MBIA Insured, 6.50%, 09/01/22........................................................ 3,528,385
4,875,000 Orange County Sanitation District, FGIC Insured, Pre-Refunded, 6.75%, 08/01/13........ 5,369,325
5,200,000 Orange RDAR, Tax Allocation, Refunding, Southwest Redevelopment Project,
Series A, AMBAC Insured, 5.70%, 10/01/23............................................. 4,720,820
600,000 Oroville RDA, Tax Allocation, Refunding, Redevelopment Project No. 1,
Series 1985-A, AMBAC Insured, Pre-Refunded, 8.90%, 11/01/15.......................... 647,946
1,185,000 Otay Water District, COP, Water Facilities Project, MBIA Insured, 5.60%, 09/01/14..... 1,089,690
1,000,000 Oxnard Financing Authority Wastewater Revenue, Refunding, FGIC Insured, 5.50%,
06/01/14 ............................................................................ 909,900
3,955,000 Oxnard Public Facilities Corp., COP, AMBAC Insured, Pre-Refunded, 7.50%,
09/01/06............................................................................. 4,389,022
1,025,000 Palm Desert RDA, Tax Allocation, Project Area No. 1, Original Territory Only,
FGIC Insured, Pre-Refunded, 7.90%, 12/01/05.......................................... 1,097,396
2,250,000 Palmdale Water District, COP, Littlerock Dam Project, Series A, MBIA Insured,
5.75%, 10/01/23...................................................................... 2,049,210

</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 1,000,000 Petaluma COP, Refunding, Series A, AMBAC Insured, 5.625%, 08/01/13 . . . . . . . . . $ 925,640
8,000,000 Pico Rivera Public Financing Authority Revenue, Refunding, Water Enterprise
Project, Series A, FGIC Insured, 6.00%, 12/01/17. . . . . . . . . . . . . . . . . . 7,641,840
1,000,000 Pinole RDA, Tax Allocation, Pinole Vista Redevelopment Project, Series A,
MBIA Insured, 6.125%, 08/01/17. . . . . . . . . . . . . . . . . . . . . . . . . . . 976,430
1,500,000 Pittsburg Public Financing Authority, Wastewater Revenue, FGIC Insured,
Pre-Refunded, 6.80%, 06/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,653,960
Pittsburg RDA, Tax Allocation, Refunding, Los Medanos Community
Development Project,
3,000,000 MBIA Insured, Pre-Refunded, 7.50%, 08/01/14 . . . . . . . . . . . . . . . . . . . 3,236,280
5,000,000 Series B, CGIC Insured, 5.70%, 08/01/32 . . . . . . . . . . . . . . . . . . . . . 4,451,000
4,700,000 Series B, CGIC Insured, 5.80%, 08/01/34 . . . . . . . . . . . . . . . . . . . . . 4,244,852
1,285,000 Placer County Water Agency Revenue, Refunding, COP, MBIA Insured,
5.625%, 07/01/18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166,639
5,500,000 Pleasant Hill RDA, Tax Allocation, Refunding, Pleasant Hill Commons Project,
CGIC Insured, 6.90%, 07/01/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,755,310
Port Hueneme RDA, Tax Allocation, Refunding, Central Community
Redevelopment Project,
2,000,000 AMBAC Insured, 5.50%, 05/01/23. . . . . . . . . . . . . . . . . . . . . . . . . . 1,766,700
1,915,000 Series A, AMBAC Insured, Pre-Refunded, 7.20%, 05/01/11. . . . . . . . . . . . . . 2,042,711
Port of Oakland, Port Revenue,
1,500,000 Series B, BIG Insured, 7.25%, 11/01/16. . . . . . . . . . . . . . . . . . . . . . 1,603,695
1,165,000 Series C, BIG Insured, Pre-Refunded, 7.25%, 11/01/19. . . . . . . . . . . . . . . 1,264,386
Porterville COP, Refunding,
4,935,000 Sewer System and Improvement Project, AMBAC Insured, 6.30%, 10/01/18. . . . . . . 4,904,058
6,075,000 Sewer System Project, AMBAC Insured, 6.30%, 10/01/18. . . . . . . . . . . . . . . 6,036,910
2,460,000 Poway RDA, Tax Allocation, Refunding, Parguay Redevelopment Project, FGIC
Insured, 5.75%, 12/15/26. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,226,940
3,000,000 Ramona Municipal Water District, COP, Refunding, AMBAC Insured, 7.20%, 10/01/10. . . 3,235,740
Rancho Cucamonga RDA, Tax Allocation, Refunding, Rancho Redevelopment Project,
1,215,000 Series A, FGIC Insured, Pre-Refunded, 7.75%, 05/01/06. . . . . . . . . . . . . . . 1,334,495
9,690,000 Series A, FGIC Insured, Pre-Refunded, 7.70%, 05/01/16. . . . . . . . . . . . . . . 10,640,008
Rancho Water District, COP, Refunding,
4,420,000 AMBAC Insured, 7.125%, 11/01/15. . . . . . . . . . . . . . . . . . . . . . . . . . 4,632,514
1,080,000 AMBAC Insured, Pre-Refunded, 7.125%, 11/01/15. . . . . . . . . . . . . . . . . . . 1,142,478
5,000,000 Redding Electric System Revenue, Refunding, COP, Series A, FGIC Insured,
5.50%, 06/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,621,550
3,230,000 Redding Joint Powers Financing Authority, Water Revenue, Series A, AMBAC
Insured, 5.60%, 06/15/13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,988,525
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 2,120,000 Redding RDA, Tax Allocation, Hilltop, Cypress Redevelopment, Series C, CGIC
Insured, 6.00%, 09/01/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,015,060
1,500,000 Redlands COP, Series C, MBIA Insured, Pre-Refunded, 7.00%, 12/01/10 . . . . . . . . 1,671,180
2,115,000 Redlands USD, Series B, CGIC Insured, 6.25%, 06/01/19 . . . . . . . . . . . . . . . 2,091,143
1,000,000 Redondo Beach RDA, Tax Allocation, South Bay Center Redevelopment Project,
FGIC Insured, 8.625%, 05/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,098,490
2,745,000 Redwood City, Public Financing Authority Revenue, Local Agency, Series A,
AMBAC Insured, 6.50%, 07/15/11 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,795,480
2,000,000 Rohnert Park Public Building, COP, MBIA Insured, Pre-Refunded, 7.125%, 07/01/17 . . 2,230,580
11,800,000 Sacramento COP, MBIA Insured, 6.50%, 06/01/15 . . . . . . . . . . . . . . . . . . . 11,907,616
5,000,000 Sacramento COP, Refunding, Sacramento Main Detention, MBIA Insured, 5.75%,
06/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,655,100
Sacramento MUD, Electric Revenue,
1,000,000 Series R, FGIC Insured, Pre-Refunded, 7.125%, 02/01/13 . . . . . . . . . . . . . 1,078,160
1,970,000 Series S, FGIC Insured, Pre-Refunded, 7.125%, 02/01/11 . . . . . . . . . . . . . 2,123,975
2,530,000 Series S, FGIC Insured, Pre-Refunded, 6.625%, 02/01/17 . . . . . . . . . . . . . 2,697,486
2,600,000 Series X, MBIA Insured, Pre-Refunded, 7.00%, 07/01/20. . . . . . . . . . . . . . 2,883,218
3,000,000 Series Y, MBIA Insured, Pre-Refunded, 6.75%, 09/01/19. . . . . . . . . . . . . . 3,306,450
5,000,000 Series Y, MBIA Insured, Pre-Refunded, 6.50%, 09/01/21. . . . . . . . . . . . . . 5,437,100
2,000,000 Sacramento RDA, Tax Allocation, Merged Downtown Redevelopment Project A,
MBIA Insured, 6.50%, 11/01/13. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,034,380
5,300,000 San Bernardino County COP, Refunding, Capital Improvement Projects,
MBIA Insured, 7.60%, 07/01/15. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,715,467
5,680,000 San Bernardino County Mortgage Revenue, Refunding, Don Miguel Apartments
Project, MBIA Insured, 6.40%, 03/01/25 . . . . . . . . . . . . . . . . . . . . . . 5,722,373
San Bernardino Joint Powers Financing Authority Revenue, Tax Allocation, Refunding,
1,965,000 Northwest Redevelopment Project, Series E, MBIA Insured, 7.375%, 01/01/15. . . . 2,109,408
3,515,000 Southeast Industrial Park, Series F, MBIA Insured, 7.375%, 03/01/14. . . . . . . 3,777,816
4,265,000 State College Project No. 4, AMBAC Insured, 7.20%, 09/01/08. . . . . . . . . . . 4,670,388
2,060,000 State College Project, Series D, FGIC Insured, 7.375%, 09/01/10. . . . . . . . . 2,222,307
4,750,000 San Bernardino Municipal Water and Sewer Department, COP, FGIC Insured,
6.25%, 02/01/17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,681,980
2,382,000 San Bernardino RDA, Capital Appreciation, Series B, AMBAC Insured, 7.70%,
01/10/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,251,192
2,000,000 San Buenaventura COP, Water Project, AMBAC Insured, Pre-Refunded, 7.50%,
10/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,276,700
2,000,000 San Diego Community College District, COP, Series 1991, MBIA Insured, 6.50%,
12/01/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,030,700
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Diego Mortgage Revenue, Refunding, University Canyon North,
$ 385,000 Series A, MBIA Insured, 5.125%, 07/01/03 . . . . . . . . . . . . . . . . . . . $ 372,222
3,105,000 Series A, MBIA Insured, 5.75%, 07/01/25 . . . . . . . . . . . . . . . . . . . $ 2,873,522
San Diego RDA, Tax Allocation, Center City Redevelopment,
3,000,000 Series B, AMBAC Insured, 5.375%, 09/01/15. . . . . . . . . . . . . . . . . . . 2,649,210
3,000,000 Series B, AMBAC Insured, 5.40%, 09/01/16 . . . . . . . . . . . . . . . . . . . 2,650,350
2,580,000 San Francisco BART District Revenue, Sales Tax, FGIC Insured, 6.60%, 07/01/12 . . 2,671,745
San Francisco City and County Sewer Revenue,
730,000 AMBAC Insured, Pre-Refunded, 6.50%, 10/01/16 . . . . . . . . . . . . . . . . . 789,298
28,000,000 AMBAC Insured, Pre-Refunded, 6.50%, 10/01/21 . . . . . . . . . . . . . . . . . 30,274,440
1,500,000 Series A, AMBAC Insured, Pre-Refunded, 7.25%, 10/01/15 . . . . . . . . . . . . 1,632,615
2,370,000 Series B, AMBAC Insured, Pre-Refunded, 7.25%, 10/01/15 . . . . . . . . . . . . 2,579,532
3,000,000 San Jacinto USD, COP, Refunding Project, AMBAC Insured, 6.50%, 10/01/23 . . . . . 3,006,270
San Joaquin County COP,
3,000,000 BIG Insured, Pre-Refunded, 6.70%, 05/15/09 . . . . . . . . . . . . . . . . . . 3,276,690
2,770,000 MBIA Insured, Pre-Refunded, 6.75%, 11/15/15. . . . . . . . . . . . . . . . . . 3,030,629
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project,
3,500,000 Refunding, Series A, MBIA Insured, Pre-Refunded, 7.50%, 08/01/09 . . . . . . . 3,775,660
1,250,000 Series A, AMBAC Insured, Pre-Refunded, 6.90%, 08/01/11 . . . . . . . . . . . . 1,351,112
5,235,000 Series B, MBIA Insured, Pre-Refunded, 6.625%, 08/01/11 . . . . . . . . . . . . 5,680,446
8,645,000 San Marcos Public Facilities Authority Revenue, Tax Allocation, Refunding, Series A,
CGIC Insured, 5.50%, 08/01/23. . . . . . . . . . . . . . . . . . . . . . . . . . 7,592,903
San Mateo County Transit District Revenue, Sales Tax,
4,100,000 Series A, MBIA Insured, 6.70%, 06/01/10. . . . . . . . . . . . . . . . . . . . 4,381,260
6,700,000 Series A, MBIA Insured, 6.50%, 06/01/20. . . . . . . . . . . . . . . . . . . . 7,112,921
San Ramon COP,
4,000,000 Public Financing Authority, CGIC Insured, Pre-Refunded, 7.80%, 01/01/19. . . . 4,365,280
12,070,000 Refunding, Capital Improvement Project, AMBAC Insured, 7.05%, 03/01/21 . . . . 12,714,417
1,000,000 Sanger USD, Series A, CGIC Insured, 5.60% , 08/01/14. . . . . . . . . . . . . . . 925,130
3,250,000 Santa Ana COP, Refunding, Parking Facilities Project, Series A, AMBAC Insured,
6.125%, 06/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,163,875
2,790,000 Santa Ana CRDA, Tax Allocation, Refunding, South Main Street, Redevelopment
Project, Series A, FGIC Insured, Pre-Refunded, 7.375%, 12/01/16. . . . . . . . . 3,020,315
15,000 Santa Ana HMR, Series A, FGIC Insured, 8.875%, 06/01/17 . . . . . . . . . . . . . 15,875
Santa Barbara COP, Refunding,
3,575,000 Municipal Improvement Program, AMBAC Insured, 6.15%, 08/01/17. . . . . . . . . 3,480,406
4,500,000 Water System Improvement Project, AMBAC Insured, 6.70%, 04/01/27 . . . . . . . 4,620,780
4,500,000 Santa Clara County COP, Partner Refunding, Project I, AMBAC Insured, 6.25%,
10/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,435,695
1,350,000 Santa Clara Electric Revenue, Series A, MBIA Insured, 6.50%, 07/01/21 . . . . . . 1,357,249

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

</TABLE>
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 3,300,000 Santa Clara Local Government Finance Authority Revenue, Refunding, BIG Insured,
Pre-Refunded, 7.25%, 02/01/13....................................................... $ 3,652,176
4,000,000 Santa Clara RDA, Tax Allocation, Refunding, Bayshore North Project, AMBAC
Insured, 7.50%, 06/01/08............................................................ 4,296,720
3,840,000 Santa Cruz County, COP, Sub-Joint Wastewater Treatment Project, AMBAC Insured,
6.20%, 09/01/19..................................................................... 3,753,600
11,830,000 Santa Fe Springs RDA, Tax Allocation, Redevelopment Project, Series A, MBIA
Insured, 6.40%, 09/01/22............................................................ 11,798,059
2,750,000 Santa Fe Springs RDAR, Tax Allocation, Series A, AMBAC Insured, Pre-Refunded,
7.25%, 08/01/14 .................................................................... 3,059,953
Santa Maria COP, Local Water System, Refunding,
3,675,000 FGIC Insured, 5.50%, 08/01/13..................................................... 3,354,981
1,785,000 FGIC Insured, 5.50%, 08/01/21..................................................... 1,581,599
1,050,000 Santa Rosa High School District, Refunding, CGIC Insured, 5.75%, 05/01/18............ 973,067
Santa Rosa Water Revenue,
1,115,000 Refunding, Series A, FGIC Insured, 5.25%, 09/01/12................................ 989,362
2,000,000 Series A, BIG Insured, Pre-Refunded, 7.60%, 09/01/17.............................. 2,120,340
2,500,000 Series A, FGIC Insured, Pre-Refunded, 7.00%, 09/01/16............................. 2,757,000
2,000,000 Subregional Wastewater Project, Series A, AMBAC Insured, 6.50%, 09/01/16.......... 2,024,960
3,450,000 Sebastopol CDA, Tax Allocation, Community Development Project, CGIC Insured,
6.85%, 12/01/20..................................................................... 3,577,443
Selma Public Financing Authority Revenue,
145,000 Series A, MBIA Insured, 5.80%, 09/15/11........................................... 139,497
125,000 Series A, MBIA Insured, 5.80%, 09/15/12........................................... 119,448
2,400,000 Series A, MBIA Insured, 5.875%, 09/15/22.......................................... 2,239,152
5,000,000 Simi Valley Public Financing Authority Revenue, Refunding, MBIA Insured, 5.75%,
09/01/23............................................................................ 4,572,650
2,065,000 Solano County COP, Refunding, MBIA Insured, 7.375%, 10/01/02......................... 2,178,534
1,325,000 Sonoma CDA, COP, Refunding, Sonoma Creek Senior Housing Project, AMBAC
Insured, 6.75%, 02/01/13............................................................ 1,373,999
6,500,000 South Coast Air Quality Management District Revenue, Refunding, Building Corp.,
MBIA Insured, 5.50%, 08/01/14....................................................... 5,939,635
10,000,000 South Orange County Public Financing Authority Revenue, Refunding, Special Tax,
Senior Lien, Series A, MBIA Insured, 6.20%, 09/01/13................................ 9,855,800
Southern California Public Power Authority Revenue,
3,150,000 Refunding, Palo Verde Project, Series B, FGIC Insured, 5.75%, 07/01/17............ 2,923,042
9,400,000 Refunding, Sub-Crossover, Southern Transmission Project, MBIA Insured,
5.75%, 07/01/21.................................................................. 8,619,612
2,340,000 Refunding, Transmission Project, Series B, FGIC Insured, 7.375%, 07/01/21......... 2,505,766
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 4,000,000 Southgate Public Financing Authority Revenue, Tax Allocation, Southgate
Redevelopment Project No. 1, AMBAC Insured, 5.875%, 09/01/24....................... $ 3,720,600
3,750,000 Stanton RDA, Tax Allocation, Refunding, Stanton Community Development Project,
AMBAC Insured, 5.45%, 12/01/17..................................................... 3,345,525
4,000,000 Stockton COP, Wastewater Facility, AMBAC Insured, Pre-Refunded, 7.40%,
09/01/10........................................................................... 4,411,440
1,640,000 Stockton-East Water District, COP, Series A, AMBAC Insured, Pre-Refunded,
7.30%, 04/01/20.................................................................... 1,837,374
7,000,000 Stockton Health Facilities Revenue, St. Joseph Medical Center, Series A, MBIA
Insured, 5.625%, 06/01/13.......................................................... 6,459,950
4,260,000 Suisun City RDA, Tax Allocation, Refunding, Suisun City Redevelopment Project,
MBIA Insured, 5.625%, 10/01/13..................................................... 3,950,511
800,000 Sulphur Springs USD, COP, Series 1991, AMBAC Insured, 7.20%, 02/01/21............... 807,856
5,485,000 Sunnyvale RDA, Parking Revenue, Refunding, AMBAC Insured, 6.50%, 10/01/22........... 5,522,408
2,785,000 Sunnyvale RDA, Tax Allocation, Refunding, Central Core Project, AMBAC Insured,
6.50%, 10/01/22.................................................................... 2,803,994
4,000,000 Susanville Public Financing Authority Revenue, Series A, AMBAC Insured, 6.30%,
09/01/17........................................................................... 3,975,480
1,335,000 Taft COP, Sewer Facilities Improvement Project, CGIC Insured, Pre-Refunded,
7.25%, 08/01/15.................................................................... 1,473,800
4,000,000 Transmission and Hydroelectric Generating Facilities Project, MBIA Insured,
Pre-Refunded, 7.30%, 11/01/14...................................................... 4,351,400
765,000 Torrance COP, Refunding, Improvement Project, AMBAC Insured, 7.20%, 04/01/16........ 806,792
1,630,000 Tracy COP, Tracy Public Facilities Corp., FGIC Insured, Pre-Refunded, 8.10%,
01/01/08........................................................................... 1,764,622
3,045,000 Tracy COP, Wastewater Enterprise Financing, AMBAC Insured, 5.25%, 12/01/13.......... 2,668,029
Tri-City Hospital District Revenue,
5,000,000 MBIA Insured, 7.90%, 02/01/18................................................... 5,475,900
2,350,000 MBIA Insured, 6.00%, 02/01/22................................................... 2,220,163
525,000 Refunding, Series A, MBIA Insured, Pre-Refunded, 9.00%, 02/01/15................ 571,898
Truckee-Donner,
100,000 COP, PUD, Headquarters Complex Project, AMBAC Insured, Pre-Refunded,
7.75%, 02/01/12................................................................ 107,110
2,925,000 Water System Improvement Project, MBIA Insured, 6.75%, 11/15/21................. 3,008,304
Tulare County COP, Capital Improvement Project, Refunding,
4,000,000 Public Facilities Corp., BIG Insured, Pre-Refunded, 8.10%, 11/01/07............. 4,477,080
500,000 Series A, AMBAC Insured, Pre-Refunded, 8.75%, 12/15/02.......................... 546,380
350,000 Series A, AMBAC Insured, Pre-Refunded, 8.80%, 12/15/05.......................... 382,708
1,500,000 Tulare Sewer Revenue, Refunding, AMBAC Insured, 5.70%, 11/15/18..................... 1,385,040
</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
$ 115,000 Turlock Irrigation District, COP, Administrative Facilities Project, FGIC Insured,
6.75%, 01/01/13................................................................... $ 118,867
7,125,000 Turlock Irrigation District Revenue, Refunding, Series A, MBIA Insured, 5.75%,
01/01/18.......................................................................... 6,598,605
University of California Revenue,
6,100,000 Housing System, Group A, Series X, MBIA Insured, Pre-Refunded, 7.60%,
11/01/18....................................................................... 6,620,574
2,800,000 Housing System, Group A-2, BIG Insured, Pre-Refunded, 7.80%, 11/01/15........... 3,028,564
3,750,000 Multiple Purpose Project, Series A, AMBAC Insured, Pre-Refunded, 6.75%,
09/01/23....................................................................... 4,093,500
1,000,000 Multiple Purpose Project, Series A, MBIA Insured, Pre-Refunded, 6.90%,
09/01/15....................................................................... 1,082,390
1,500,000 Multiple Purpose Project, Series A, MBIA Insured, Pre-Refunded, 7.00%,
09/01/23....................................................................... 1,627,935
Upland COP,
3,985,000 Refunding, Police Building Project, AMBAC Insured, 6.60%, 08/01/16.............. 4,057,766
2,385,000 Water System Improvement Project, FGIC Insured, 6.60%, 08/01/16................. 2,428,550
2,000,000 Water System Improvement Project, FGIC Insured, Pre-Refunded, 7.75%,
08/01/16....................................................................... 2,167,280
1,355,000 Vacaville Public Financing Authority Revenue, Tax Allocation, Refunding,
Vacaville Redevelopment Project, MBIA Insured, 6.35%, 09/01/22.................... 1,347,819
4,855,000 Vallejo Revenue, Water Improvement Project, Series B, FGIC Insured, 6.50%,
11/01/14.......................................................................... 4,930,932
1,495,000 Vista USD, COP, MBIA Insured, 5.50%, 12/01/16...................................... 1,332,673
3,000,000 Walnut Creek COP, John Muir Memorial Hospital, MBIA Insured, Pre-Refunded,
6.50%, 11/01/15................................................................... 3,184,320
2,200,000 Walnut Valley Water District, COP, Badillo Grand Transmission Project,
FGIC Insured, 6.125%, 02/01/18.................................................... 2,142,404
1,800,000 Watsonville Solid Waste Revenue, MBIA Insured, 6.50%, 05/15/16..................... 1,817,406
1,250,000 West Basin Municipal Water District, COP, Water Reclamation Project,
AMBAC Insured, Pre-Refunded, 6.85%, 08/01/16...................................... 1,377,787
4,185,000 (b) West Sacramento Financing Authority Revenue, MBIA Insured, 6.25%, 09/01/16......... 4,120,509
3,340,000 West Sacramento RDA, Tax Allocation, West Sacramento Redevelopment Project,
MBIA Insured, 6.25%, 09/01/21...................................................... 3,262,913
4,150,000 Whittier Health Facilities Revenue, Refunding, Presbyterian Intercommunity
Hospital, MBIA Insured, 6.50%, 06/01/10............................................ 4,221,007
2,340,000 Whittier Solid Waste Revenue, Refunding, Series A, AMBAC Insured, 5.375%,
08/01/14........................................................................... 2,097,740
2,000,000 Whittier Water Revenue, Series A, AMBAC Insured, 5.625%, 06/01/17................... 1,828,320
600,000 Wright Elementary School District, Series A, CGIC Insured, 5.60%, 03/01/08.......... 582,144
--------------
TOTAL BONDS (COST $1,399,143,878)............................................. 1,435,307,394
--------------

</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<S> <C>
PORTFOLIO ABBREVIATIONS:
AD - Assessment District GO - General Obligation
AMBAC - American Municipal Bond Assurance Corp. HFAR - Housing Finance Agency Revenue
BART - Bay Area Rapid Transit HMR - Home Mortgage Revenue
BIG - Bond Investors Guaranty Insurance Co. ID - Improvement District
CDA - Community Development Agency MBIA - Municipal Bond Investors Assurance Corp.
CFD - Community Facilities District MUD - Municipal Utility District
CGIC - Capital Guaranty Insurance Co. PUD - Public Utility District
COP - Certificate of Participation RDA - Redevelopment Agency
CRDA - Community Redevelopment Authority/Agency RDAR - Redevelopment Agency Revenue
ETM - Escrow to Maturity SFMR - Single Family Mortgage Revenue
FGIC - Financial Guaranty Insurance Co. USD - Unified School District
GNMA - Government National Mortgage Association
</TABLE>

(a) Zero coupon bonds. The current effective yield may vary. The original
accretion rate by security 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 relation to changes in a
designated rate (such as the prime interest rate or U.S. Treasury bills
rate).

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 97.9%
$ 585,000 ABAG Finance Authority of Nonprofit Corps., COP, 5.50%, 06/01/03............................. $ 559,582
ABAG Finance Corp., COP Authority,
100,000 Refunding. Series A, 5.90%, 06/01/02....................................................... 98,569
100,000 Series B, 6.40%, 10/01/03.................................................................. 100,610
Alameda County COP,
100,000 Capital Projects, Series 1992, 6.25%, 06/01/06............................................. 99,248
395,000 Series 1994, 5.70%, 04/01/02............................................................... 387,712
420,000 Series 1994, 5.80%, 04/01/03............................................................... 411,520
440,000 Series 1994, 5.90%, 04/01/04............................................................... 430,412
Atascadero USD, COP, Measure B, Capital Project,
220,000 Series B, 5.20%, 08/01/03.................................................................. 207,968
200,000 Series B, 5.30%, 08/01/04.................................................................. 188,232
Auburn COP, Refunding,
55,000 Civic Center Project, 4.00%, 09/01/95...................................................... 54,391
55,000 Civic Center Project, 4.50%, 09/01/96...................................................... 54,115
60,000 Civic Center Project, 4.70%, 09/01/97...................................................... 58,457
60,000 Civic Center Project, 4.90%, 09/01/98...................................................... 58,030
65,000 Civic Center Project, 5.10%, 09/01/99...................................................... 62,436
65,000 Civic Center Project, 5.30%, 09/01/00...................................................... 62,201
70,000 Civic Center Project, 5.45%, 09/01/01...................................................... 66,805
75,000 Civic Center Project, 5.60%, 09/01/02...................................................... 71,458
80,000 Civic Center Project, 5.70%, 09/01/03...................................................... 75,894
80,000 Civic Center Project, 5.75%, 09/01/04...................................................... 75,302
Bakersfield Central District Revenue, Development Agency,
Tax Allocation, Refunding,
295,000 Downtown Bakersfield Redevelopment, 6.00%, 04/01/01........................................ 292,717
310,000 Downtown Bakersfield Redevelopment, 6.10%, 04/01/02........................................ 307,331
330,000 Downtown Bakersfield Redevelopment, 6.20%, 04/01/03........................................ 326,898
350,000 Downtown Bakersfield Redevelopment, 6.30%, 04/01/04........................................ 346,451
100,000 Bakersfield Hospital Revenue, Bakersfield Memorial Hospital
Project, Series A, 5.70%, 01/01/00.......................................................... 99,998
1,105,000 California Educational Facilities Authority Revenue, Refunding,
Pooled College and University Financing, Series B, 5.90%, 06/01/03.......................... 1,067,132
100,000 California Health Facilities Financing, San Diego Hospital Association,
Series B, MBIA Insured, 5.60%, 08/01/03..................................................... 100,560
830,000 California State GO, Various Purposes, Series 1993, 5.10%, 04/01/02.......................... 809,242
California State Public Works, Board Lease Revenue, Department of
Corrections, Calpatria State Prison,
250,000 Imperial County, Series A, 6.125%, 09/01/04................................................ 251,800
750,000 Series A, 5.00%, 12/01/01.................................................................. 719,933
940,000 Series D, Susanville, 4.80%, 06/01/03...................................................... 864,875
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
California Statewide CDA Revenue, Refunding, COP, Health Facilities, Barton
Memorial Hospital,
$ 200,000 Series B, 5.70%, 12/01/00............................................................ $ 199,986
450,000 Series B, 6.40%, 12/01/05............................................................ 456,786
585,000 California Statewide Communities Development Corp., COP, Series A,
Pacific Homes,5.50%, 04/01/04......................................................... 552,088
350,000 Campbell COP, Refunding, Civic Center Project, 5.60%, 10/01/03......................... 334,894
200,000 Carson RDA Project, Area No. 1, Refunding, 6.10%, 10/01/02............................. 197,562
1,000,000 Central Joint Powers Health Financing Authority, COP, Refunding, Community
Central Hospital, 5.25%, 02/01/04..................................................... 921,320
100,000 Clovis COP, Water System Improvement Project, AMBAC Insured, 5.90%, 03/01/03........... 102,853
Coalinga Public Financing Authority Revenue,
395,000 Series A, MBIA Insured, 4.75%, 08/01/01.............................................. 378,726
410,000 Series A, MBIA Insured, 4.90%, 08/01/02.............................................. 392,587
430,000 Series A, MBIA Insured, 5.00%, 08/01/03.............................................. 411,540
455,000 Series A, MBIA Insured, 5.10%, 08/01/04.............................................. 433,956
1,405,000 Series B, 6.00%, 09/15/03............................................................ 1,368,147
Commerce Joint Powers Financing Authority, Water Facilities, Lease Revenue, Refunding,
340,000 Series A, 5.50%, 10/01/02............................................................ 323,330
360,000 Series A, 5.625%, 10/01/03........................................................... 341,456
470,000 Series A, 5.75%, 10/01/04 ........................................................... 444,907
Compton Sewer Revenue,
120,000 Series 1993, 5.40%, 07/01/98......................................................... 117,274
125,000 Series 1993, 5.60%, 07/01/99......................................................... 122,346
130,000 Series 1993, 5.70%, 07/01/00......................................................... 126,473
140,000 Series 1993, 5.80%, 07/01/01......................................................... 135,708
150,000 Series 1993, 5.90%, 07/01/02......................................................... 144,912
155,000 Series 1993, 6.00%, 07/01/03......................................................... 149,276
165,000 Series 1993, 6.10%, 07/01/04......................................................... 158,453
175,000 Series 1993, 6.20%, 07/01/05......................................................... 168,270
185,000 Series 1993, 6.30%, 07/01/06......................................................... 178,229
Concord RDA, Tax Allocation, Refunding, Central Concord Redevelopment Project,
625,000 Series A, 5.50%, 07/01/02............................................................ 590,256
655,000 Series A, 5.62%, 07/01/03............................................................ 616,453
500,000 Contra Costa County MFHR, Byron Park Project, Series C, 6.00%, 07/20/03.............. 491,455
1,305,000 Cupertino COP, Refunding, Series A, 5.25%, 01/01/03.................................. 1,257,433
Danville Financing Authority Revenue, Sycamore Valley,
340,000 Reassessment District No. 93-2, 5.40%, 09/02/01...................................... 330,749
535,000 Reassessment District No. 93-2, 5.60%, 09/02/02...................................... 518,971
255,000 Reassessment District No. 93-2, 5.70%, 09/02/03...................................... 246,690
1,040,000 Reassessment District No. 93-2, 5.80%, 09/02/04...................................... 1,003,600

</TABLE>

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

<PAGE>

FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$ 100,000 Desert Hospital District Revenue, COP, Desert Hospital Corp., CGIC Insured,
6.25%, 07/01/03....................................................................... $ 104,680
1,315,000 Elk Grove USD, COP, Education Facilities Project, AMBAC Insured, 5.10%, 12/15/03....... 1,260,743
920,000 Encinitas Union School District, COP, Measure B, Capital Projects, 5.20%, 09/01/03..... 876,144
Fontana COP, Refunding, Police Facilities Project,
330,000 Series 1993, 5.00%, 04/01/01......................................................... 310,345
350,000 Series 1993, 5.00%, 04/01/02......................................................... 324,681
365,000 Series 1993, 5.10%, 04/01/03......................................................... 336,121
1,150,000 Foster City Public Financing Authority Revenue, Community Development Project,
Series A, 5.60%, 09/01/03............................................................ 1,107,703
Fresno Joint Powers Financing Authority, Local Agency Revenue, Refunding,
1,500,000 Series A, 5.75%, 09/02/98............................................................ 1,491,135
1,000,000 Series A, 6.20%, 09/02/03............................................................ 992,340
Garden Grove CDA, Tax Allocation, Refunding, Garden Grove Community Project,
1,000,000 Series 1993, 5.00%, 10/01/99......................................................... 964,690
1,425,000 Series 1993, 5.40%, 10/01/04......................................................... 1,320,077
300,000 Garden Grove COP, Bahia Village/Emerald Isle Project, FSA Insured, 5.10%, 03/01/01 292,794
Glendale Parking Facilities, Joint Powers Authority Revenue,
215,000 Series A, 5.10%, 03/01/01............................................................ 202,590
255,000 Series A, 5.20%, 03/01/02............................................................ 238,601
125,000 Series A, 5.30%, 03/01/03............................................................ 116,200
1,500,000 Goleta Water District Revenue, COP, Refunding, Goleta Reclamation Project,
FGIC Insured, 5.50%, 12/01/08........................................................ 1,435,215
3,935,000 Hesperia Public Financing Authority Revenue, Series A, 5.80%, 10/01/03................. 3,785,116
Hollister RDA, Tax Allocation, Hollister Community Development Project,
525,000 Series 1994, 5.35%, 10/01/03......................................................... 487,310
550,000 Series 1994, 5.45%, 10/01/04......................................................... 507,656
585,000 Series 1994, 5.55%, 10/01/05......................................................... 537,182
Imperial County Local Transportation Authority, Sales Tax Revenue,
490,000 Series 1993, 5.50%, 05/01/04......................................................... 452,461
515,000 Series 1993, 5.50%, 05/01/05......................................................... 469,041
La Palma Community Development Commission, Tax Allocation, Refunding,
125,000 La Palma Community Development Project No. 1, 5.20%, 06/01/00........................ 120,026
130,000 La Palma Community Development Project No. 1, 5.40%, 06/01/01........................ 124,859
135,000 La Palma Community Development Project No. 1, 5.50%, 06/01/02........................ 129,078
145,000 La Palma Community Development Project No. 1, 5.60%, 06/01/03........................ 138,062
150,000 La Palma Community Development Project No. 1, 5.70%, 06/01/04........................ 142,272
160,000 La Palma Community Development Project No. 1, 5.80%, 06/01/05.......................... 151,219
Lancaster RDA, Tax Allocation, Refunding,
35,000 Central Business District Redevelopment, 5.00%, 08/01/98............................... 33,826
35,000 Central Business District Redevelopment, 5.125%, 08/01/99.............................. 33,545

</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
Lancaster RDA, Tax Allocation, Refunding (cont.)
$ 35,000 Central Business District Redevelopment, 5.25%, 08/01/00................................. $ 33,356
40,000 Central Business District Redevelopment, 5.375%, 08/01/01................................ 37,827
40,000 Central Business District Redevelopment, 5.50%, 08/01/02................................. 37,661
45,000 Central Business District Redevelopment, 5.60%, 08/01/03................................. 42,139
45,000 Central Business District Redevelopment, 5.70%, 08/01/04................................. 41,928
50,000 Central Business District Redevelopment, 5.70%, 08/01/05................................. 46,171
50,000 Fox Field Redevelopment Project Area, 5.00%, 08/01/98 ................................... 48,323
55,000 Fox Field Redevelopment Project Area, 5.125%, 08/01/99................................... 52,714
55,000 Fox Field Redevelopment Project Area, 5.25%, 08/01/00 ................................... 52,416
60,000 Fox Field Redevelopment Project Area, 5.375%, 08/01/01................................... 56,741
65,000 Fox Field Redevelopment Project Area, 5.50%, 08/01/02 ................................... 61,199
65,000 Fox Field Redevelopment Project Area, 5.60%, 08/01/03 ................................... 60,867
70,000 Fox Field Redevelopment Project Area, 5.70%, 08/01/04 ................................... 65,222
75,000 Fox Field Redevelopment Project Area, 5.70%, 08/01/05 ................................... 69,256
1,000,000 Lemon Grove MFHR, Refunding, Hillside Terrace Apartments, 5.375%, 01/01/19 958,770
1,025,000 Loma Linda Hospital Revenue, Refunding, Loma Linda University Medical Center,
Series B, MBIA Insured, 5.00%, 12/01/04.................................................. 967,692
Los Angeles County COP, Insured Health Clinic,
35,000 Series E, 3.70%, 12/01/95................................................................ 34,754
35,000 Series E, 4.10%, 12/01/96................................................................ 34,590
40,000 Series E, 4.35%, 12/01/97................................................................ 39,293
40,000 Series E, 4.50%, 12/01/98................................................................ 38,956
40,000 Series E, 4.60%, 12/01/99................................................................ 38,571
45,000 Series E, 4.75%, 12/01/00................................................................ 43,151
45,000 Series E, 4.85%, 12/01/01................................................................ 42,793
45,000 Series E, 4.95%, 12/01/02................................................................ 42,569
Los Angeles County Transport Commission, COP,
100,000 Series B, 5.90%, 07/01/00................................................................ 102,525
200,000 Series B, 6.00%, 07/01/01................................................................ 205,728
100,000 Los Angeles GO. Series A, 5.00%, 08/01/01.................................................. 96,988
Los Angeles MFHR, Refunding,
180,000 Series G, FSA Insured, 4.50%, 01/01/99 .................................................. 175,298
200,000 Series G, FSA Insured, 4.50%, 07/01/99 .................................................. 194,264
165,000 Series G, FSA Insured, 4.65%, 01/01/00 .................................................. 159,877
210,000 Series G, FSA Insured, 4.65%, 07/01/00 .................................................. 202,973
175,000 Series G, FSA Insured, 4.80%, 01/01/01 .................................................. 168,763
220,000 Series G, FSA Insured, 4.80%, 07/01/01 .................................................. 211,662
185,000 Series G, FSA Insured, 4.90%, 01/01/02 .................................................. 177,607
235,000 Series G, FSA Insured, 4.90%, 07/01/02 .................................................. 225,109
205,000 Series G, FSA Insured, 5.00%, 01/01/03 .................................................. 195,982
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
Los Angeles MFHR, Refunding, (cont.)
$ 245,000 Series G, FSA Insured, 5.00%, 07/01/03......................................... $ 233,732
220,000 Series G, FSA Insured, 5.10%, 01/01/04......................................... 209,502
260,000 Series G, FSA Insured, 5.10%, 07/01/04......................................... 247,107
600,000 Los Angeles Municipal Improvement Corp., Lease Revenue, Refunding, Central Library
Project, Series B, 4.875%, 06/01/01............................................. 568,452
1,000,000 Los Angeles USD, COP, Refunding, Multiple Property Project,
FSA Insured, 5.00%, 11/01/04 ................................................... 939,940
2,175,000 Lynwood Public Financing Authority Revenue, Series A, AMBAC Insured,
5.10%, 09/01/03 ................................................................ 2,097,809
515,000 Madera COP, Refunding, Madera Community Hospital, 5.10%, 03/01/03 490,043
Madera RDA, Tax Revenue, Refunding, Madera Redevelopment Project,
175,000 CGIC Insured, 5.15%, 09/01/02 .................................................. 172,020
185,000 CGIC Insured, 5.25%, 09/01/03 .................................................. 181,565
195,000 CGIC Insured, 5.35%, 09/01/04 .................................................. 191,840
540,000 Merced Irrigation District, COP, Water Facilities Project, 6.125%, 11/01/03 528,158
715,000 Merced Public Financing Authority, Local Agency Revenue, Tax Allocation,
Series A, 5.00%, 12/01/04 ...................................................... 657,636
MidPeninsula Regional Open Space District, COP, Special District Association
Finance Corp.,
510,000 Series 1993, 5.10%, 09/01/02................................................... 476,350
530,000 Series 1993, 5.20%, 09/01/03................................................... 491,973
100,000 Mohave Water Agency Improvement GO, District M-Morongo, 6.20%, 09/01/01.......... 101,836
100,000 Morgan Hill RDA, Tax Allocation, Refunding, 5.70%, 03/01/01...................... 98,958
100,000 Mount Diablo Hospital District Revenue, Series A, AMBAC Insured, 5.10%, 12/01/03. 96,875
Mountain View Shoreline Regional Park, Community Tax Allocation,
335,000 Series A, 5.00%, 08/01/02...................................................... 315,858
785,000 Series A, 5.10%, 08/01/03...................................................... 736,118
540,000 Series A, 5.20%, 08/01/04...................................................... 503,820
500,000 New Haven USD, COP, Refunding, 5.30%, 07/01/01................................... 493,690
300,000 Newark USD, COP, Crossover Refunding, 5.75%, 09/01/02............................ 291,828
100,000 Northern California, Public Power Agency Revenue, Refunding, Geothermal Project
No. 3, Series A, 7.00%, 07/01/07 ............................................... 105,026
1,745,000 Oakland USD, Alameda County COP, Refunding, 5.00%, 09/15/99...................... 1,694,465
1,825,000 Oakland USD, COP, 7.00%, 07/01/07................................................ 1,801,020
1,175,000 Ontario Redevelopment Financing Authority Revenue, Project No. 1, MBIA Insured,
5.10%, 08/01/03 ................................................................ 1,141,748
1,000,000 Orange County Local Transportation Authority, Sales Tax Revenues, Second Senior
Measure, FGIC Insured, 4.70%, 02/15/05 ......................................... 914,470
1,715,000 Paramount RDA, Tax Allocation, Refunding, Redevelopment Project, Area No. 1,
6.05%, 08/01/05 ................................................................ 1,655,987
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$ 100,000 Pasadena Community Development Commission Tax, Refunding, AMBAC Insured,
4.75%, 08/01/98 ................................................................... $ 99,850
300,000 Paso Robles Union School District, COP, Measure D, Capital Projects, Phase III,
5.75%, 08/01/02 ................................................................... 291,129
Pismo Beach Public Financing Authority Revenue,
45,000 Series 1993, 6.25%, 09/15/01...................................................... 44,815
50,000 Series 1993, 6.40%, 09/15/02...................................................... 49,931
50,000 Series 1993, 6.50%, 09/15/03...................................................... 49,925
55,000 Series 1993, 6.55%, 09/15/04...................................................... 54,711
1,760,000 Pleasant Hill RDA, RMR, Refunding, 5.40%, 02/01/05.................................. 1,656,442
200,000 Pleasanton USD, COP, Refunding, 6.30%, 02/01/00..................................... 200,066
Rialto RDA, Tax Allocation, Refunding, Industrial Redevelopment,
270,000 Series A, 5.40%, 09/01/02......................................................... 259,824
280,000 Series A, 5.50%, 09/01/03......................................................... 268,517
Riverside County Asset Leasing Corp., Leasehold Revenue, Riverside County
Hospital Project,
200,000 Series A, 5.90%, 06/01/02......................................................... 196,894
200,000 Series A, 6.00%, 06/01/04......................................................... 196,334
1,000,000 Sacramento MUD, Electric Revenue, Series E, 5.25%, 05/15/03......................... 966,950
San Bernardino City USD, COP, Refunding,
1,030,000 Series 1994, 4.625%, 05/01/02..................................................... 930,636
1,185,000 Series 1994, 4.75%, 05/01/03...................................................... 1,078,575
200,000 San Bernardino County Mortgage Revenue, Refunding, Don Miguel Apartments
Project, MBIA Insured, 6.00%, 09/01/03............................................. 203,642
San Clemente, 1915 ACT, Refunding,
415,000 AD No. 85-1, 5.00%, 09/02/02...................................................... 401,749
435,000 AD No. 85-1, 5.10%, 09/02/03...................................................... 419,858
460,000 AD No. 85-1, 5.20%, 09/02/04...................................................... 442,764
San Diego County COP,
100,000 Children's Center Project, 5.50%, 04/01/99........................................ 98,723
100,000 Children's Center Project, 6.00%, 10/01/02........................................ 99,604
485,000 San Diego Mortgage Revenue, Refunding, Mariners Cove, Series B, 5.125%, 09/01/03.... 468,646
100,000 San Diego Port Facilities Revenue, Refunding, National Steel & Shipbuilding Co.,
6.60%, 12/01/02.................................................................... 101,404
65,000 San Francisco City and County RDAR, Refunding, Series A, MBIA Insured. 6.125%,
07/01/02........................................................................... 64,938
400,000 San Joaquin County COP, General Hospital Project, 5.90%, 09/01/03................... 394,416
300,000 San Jose Financing Authority Revenue, Refunding, Convention Center Project,
Series C, 5.75%, 09/01/03.......................................................... 297,453
600,000 San Juan USD, COP, Gold River Elementary School Project, 5.65%, 04/01/03............ 598,302
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
San Ramon COP,
$ 80,000 Capital Improvements Project, 5.00%, 03/01/99........................................ $ 77,482
80,000 Capital Improvements Project, 5.10%, 03/01/00........................................ 76,846
85,000 Capital Improvements Project, 5.20%, 03/01/01........................................ 81,176
90,000 Capital Improvements Project, 5.30%, 03/01/02........................................ 85,486
95,000 Capital Improvements Project, 5.40%, 03/01/03........................................ 89,781
100,000 Capital Improvements Project, 5.50%, 03/01/04........................................ 94,066
105,000 Capital Improvements Project, 5.60%, 03/01/05........................................ 98,345
110,000 Capital Improvements Project, 5.70%, 03/01/06........................................ 103,048
120,000 Capital Improvements Project, 5.75%, 03/01/07........................................ 112,014
125,000 Capital Improvements Project, 5.80%, 03/01/08........................................ 116,294
3,035,000 San Ramon Valley USD, COP, Measure A, Capital Projects, Series A, 5.95%, 10/01/01...... 3,039,947
985,000 Santa Barbara RDA, Tax Allocation, Central City Redevelopment Project, 6.00%, 03/01/03. 948,299
100,000 Santa Monica Parking Authority, Lease Revenue, Refunding Project, 6.00%, 07/01/03...... 100,687
Sebastopol COP, Refunding,
200,000 Series 1994, 5.50%, 06/01/03......................................................... 188,954
215,000 Series 1994, 5.60%, 06/01/04......................................................... 202,216
240,000 Series 1994, 5.70%, 06/01/05......................................................... 224,798
Selma Public Financing Authority Revenue,
100,000 Series A, MBIA Insured, 5.15%, 09/15/01.............................................. 98,232
100,000 Series A, MBIA Insured, 5.25%, 09/15/02.............................................. 98,402
115,000 Series A, MBIA Insured, 5.50%, 09/15/04.............................................. 113,492
120,000 Series A, MBIA Insured, 5.60%, 09/15/05.............................................. 118,324
125,000 Series A, MBIA Insured, 5.65%, 09/15/06.............................................. 122,618
135,000 Series A, MBIA Insured, 5.70%, 09/15/07.............................................. 131,691
140,000 Series A, MBIA Insured, 5.70%, 09/15/08.............................................. 135,752
150,000 Series A, MBIA Insured, 5.75%, 09/15/09.............................................. 144,690
155,000 Series A, MBIA Insured, 5.75%, 09/15/10.............................................. 148,530
100,000 Shasta Joint Powers Financing Authority Lease Revenue, Courthouse Improvement
Project, Series A, 5.80%, 06/01/00 ................................................... 98,186
50,000 Solano Beach COP, City Hall Project, 5.80%, 10/01/02................................... 49,257
Solano Beach COP, Justice Facility and Public Building Project,
1,855,000 Refunding, 5.10%, 10/01/99........................................................... 1,775,198
1,100,000 Refunding, 5.875%, 10/01/05.......................................................... 1,065,218
South San Francisco, Capital Improvements Financing Authority Revenue, Refunding,
195,000 South San Francisco Conference Center, 5.70%, 09/01/02............................... 187,494
205,000 South San Francisco Conference Center, 5.80%, 09/01/03............................... 196,425
215,000 South San Francisco Conference Center, 5.90%, 09/01/04............................... 205,809
100,000 Southern California Rapid Transit District Revenue, Special Benefit AD No. A2,
5.80%, 09/01/01 ...................................................................... 100,397
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$ 855,000 Suisun City RDA, Tax Allocation, Refunding, Suisun City Redevelopment Project,
MBIA Insured, 5.10%, 10/01/03...................................................... $ 819,670
Sunline Transport Agency, COP, Transport Finance Corp.,
450,000 Series B, 5.50%, 07/01/03........................................................ 427,653
445,000 Series B, 5.75%, 07/01/06........................................................ 416,449
100,000 Susanville Public Financing Authority Revenue, Series A, AMBAC Insured, 5.90%,
09/01/02........................................................................... 102,986
Tahoe City PUD, COP, Capital Facilities Project,
290,000 Series B, 6.05%, 06/01/01........................................................ 290,464
835,000 Series B, 6.15%, 06/01/02........................................................ 836,486
545,000 Series B, 6.30%, 06/01/04........................................................ 544,161
Temecula RDAR, Tax Allocation, Temecula Redevelopment Project No. 1,
480,000 Series A, 5.40%, 02/01/00........................................................ 473,866
600,000 Series A, 5.40%, 02/01/04........................................................ 569,040
Templeton USD, COP, Measure C, Capital Projects,
375,000 Series A, Phase III, 5.00%, 03/01/03............................................. 351,157
580,000 Series A, Phase III, 5.00%, 03/01/05............................................. 528,403
Trinity County PUD, COP, Refunding, Electric District Facilities,
340,000 Series 1993, 5.80%, 04/01/01..................................................... 328,583
360,000 Series 1993, 5.90%, 04/01/02..................................................... 346,567
380,000 Series 1993, 6.00%, 04/01/03..................................................... 364,519
100,000 Torrance USD, COP, Series A, 5.85%, 10/01/99........................................ 98,795
200,000 Travis USD, Foxboro Elementary School Project, 6.30%, 09/01/02...................... 198,848
100,000 Tuolumne County COP, Multiple Facilities Project, 5.80%, 06/01/98................... 99,855
Ventura County Flood Center District, Zone No. 003, Refunding,
265,000 Series 1994, 4.625%, 03/01/02.................................................... 247,990
280,000 Series 1994, 4.75%, 03/01/03..................................................... 260,386
295,000 Series 1994, 4.875%, 03/01/04.................................................... 274,825
600,000 Walnut Creek COP, Refunding, John Muir Medical Center, MBIA Insured, 4.80%, 02/15/04 556,254
Watsonville RDA, Tax Allocation, Watsonville Redevelopment Project,
510,000 Series 1993, 6.00%, 08/01/02..................................................... 501,360
540,000 Series 1993, 6.10%, 08/01/03..................................................... 530,042
-----------
TOTAL BONDS (COST $95,301,403)................................................. 92,047,449
-----------
SHORT TERM INVESTMENTS .3%
50,000 Auburn COP, Refunding, Civic Center Project, 3.50%, 09/01/94........................ 49,915
200,000 (c)California PCFA, PCR, Refunding, Shell Oil Company Project, Series A, Daily VRDN
and Put. 2.75%, 10/01/10........................................................... 200,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $250,000)................................... 249,915
-----------
</TABLE>

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
Value
FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (COST $95,551,403) 98.2%...................................... $92,297,364
OTHER ASSETS AND LIABILITIES, NET 1.8%.......................................... 1,718,018
-----------
NET ASSETS 100.0%............................................................... $94,015,382
===========
At June 30, 1994, the net unrealized depreciation based on the cost of investments
for income tax purposes of $95,551,403 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost............................... $ 63,306
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value..................................................... (3,317,345)
-----------
Net unrealized depreciation........................................................ $(3,254,039)
===========
PORTFOLIO ABBREVIATIONS:
1915 ACT - Improvement Bond Act of 1915 MBIA - Municipal Bond Investors Assurance Corp.
ABAG - The Association of Bay Area Governments MFHR - Multi-Family Housing Revenue
AD - Assessment District MUD - Municipal Utility District
AMBAC - American Municipal Bond Assurance Corp. PCFA - Pollution Control Financing Authority
CDA - Community Development Agency/Authority PCR - Pollution Control Revenue
CGIC - Capital Guaranty Insurance Co. PUD - Public Utility District
COP - Certificate of Participation RDA - Redevelopment Agency
FGIC - Financial Guaranty Insurance Co. RDAR - Redevelopment Agency Revenue
FSA - Financial Security Assistance RMR - Residential Mortgage Revenue
GO - General Obligation USD - Unified School District

</TABLE>
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 relation to changes in a designated rate (such as
the prime interest rate or U.S. Treasury bills rate).

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS 103.6%
<S> <C> <C>
$ 5,400,000 (c)Anaheim COP Project, Refunding, AMBAC Insured, Weekly VRDN and Put, 1.70%,
08/01/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,400,000
2,000,000 Anaheim Electric Revenue, TECP, 2.70%, 09/08/94 . . . . . . . . . . . . . . . . . . . . . 2,000,000
3,400,000 (c)Anaheim HFA, MFHR, Harbor Cliff Project, Series 1985-A, Weekly VRDN and Put,
1.75%, 07/01/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400,000
6,673,000 (c)Bay Area Government Association Revenue, Pooled Projects, Series 1987, Weekly
VRDN and Put, 1.77%, 04/01/97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,673,000
2,950,000 (c)Butte County Housing Authority MFR, Pine Tree Apartments Project, Weekly VRDN and
Put, 1.90%, 12/01/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950,000
4,000,000 California Educational Facilities Authority Revenue, Carnegie Washington Institute,
TECP, Series B, 3.05%, 07/06/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
(c)California Health Facilities Financing Authority Revenue,
5,200,000 Catholic Health Care, Series A, MBIA Insured, Weekly VRDN and Put, 1.65%,
07/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200,000
3,300,000 Granada Hills Community, Series C, Weekly VRDN and Put, 1.70%, 01/01/15 . . . . . . 3,300,000
3,200,000 Pool Program, Weekly VRDN and Put, 1.70%, 09/01/20 . . . . . . . . . . . . . . . . . 3,200,000
1,500,000 Santa Barbara Cottage Hospital, Series B, Weekly VRDN and Put, 1.65%, 09/01/05 . . . 1,500,000
1,500,000 Sutter Health, Series A, Daily VRDN and Put, 1.40%, 03/01/20 . . . . . . . . . . . . 1,500,000
California PCFA, PCR,
615,000 (c)Anaheim Citrus Products Co. Project, Weekly VRDN and Put, 2.00%, 12/01/95 . . . . . . 615,000
5,300,000 Dow Chemical Co. Project, TECP, 2.85%, 08/16/94 . . . . . . . . . . . . . . . . . . . 5,300,000
2,600,000 (c)Homestake Mining, Series 1984-A, Weekly VRDN and Put, 2.10%, 05/01/04 . . . . . . . . 2,600,000
4,700,000 (c)Occidental Geo/Santa Fe Geothermal, Monthly VRDN, Weekly Put, 2.75%, 09/01/13 . . . . 4,700,000
9,000,000 Pacific Gas and Electric Co., TECP, 2.80%, 08/02/94 . . . . . . . . . . . . . . . . . 9,000,000
15,000,000 Refunding, Pacific Gas and Electric Co., Series C, TECP, 2.80%, 09/06/94 . . . . . . 15,000,000
6,400,000 Refunding, Pacific Gas and Electric Co., Series C, TECP, 2.60%, 09/02/94 . . . . . . 6,400,000
3,000,000 Refunding, Pacific Gas and Electric Co., Series D, TECP, 2.90%, 07/27/94 . . . . . . 3,000,000
1,500,000 (c)Refunding, Shell Oil Co. Project, Series A, Daily VRDN and Put, 1.25%, 10/01/07 . . . 1,500,000
2,000,000 (c)Refunding, Shell Oil Co. Project, Series A, Daily VRDN and Put, 1.25%, 10/01/09 . . . 2,000,000
3,700,000 (c)Refunding, Shell Oil Co. Project, Series B, Daily VRDN and Put, 1.25%, 10/01/11 . . . 3,700,000
3,100,000 (c)Refunding, Shell Oil Co. Project, Series C, Daily VRDN and Put, 1.25%, 11/01/00 . . . 3,100,000
8,500,000 (c)Southern California Edison Co., Series A, Daily VRDN and Put, 1.50%, 02/28/08 . . . . 8,500,000
2,200,000 Southern California Edison Co., Series A, TECP, 2.85%, 08/17/94 . . . . . . . . . . 2,200,000
6,200,000 (c)Southern California Edison Co., Series B, Daily VRDN and Put, 1.50%, 02/28/08 . . . . 6,200,000
300,000 (c)Southern California Edison Co., Series C, Daily VRDN and Put, 1.50%, 02/28/08 . . . . 300,000
1,300,000 Southern California Edison Co., Series C, TECP, 2.40%, 08/10/94 . . . . . . . . . . . 1,300,000
4,000,000 (c)Southern California Edison Co., Series D, Daily VRDN and Put, 1.50%, 02/28/08 . . . . 4,000,000
2,000,000 (c)California PCFA, Resource Recovery Revenue, Burney Forest Products Project,
Series A, Daily VRDN and Put, 1.50%, 09/01/20 . . . . . . . . . . . . . . . . . . . . . . 2,000,000
9,500,000 (c)California Public Capital Improvements Financing Authority Revenue, Pooled Project,
Series 1988-C, Quarterly VRDN, Put Option 09/15/94, 3.15%, 06/01/28 . . . . . . . . . . . 9,500,000
</TABLE>

The accompanying notes are an integral part of these financial statements

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS (CONT.)
<S> <C> <C>
$ 36,000,000 California School Reserve Program Authority, Series A, 3.40%, 07/15/94 . . . . . . . . $ 36,000,862
California State RAN,
43,150,000 Series A, 3.75%, 12/21/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,291,536
40,200,000 Series B, 3.50%, 07/26/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,217,187
(c)California Statewide Communities Development Authority Revenue, COP, Refunding,
4,300,000 House Ear Institution, Daily VRDN and Put, 1.25%, 12/01/18 . . . . . . . . . . . . 4,300,000
25,100,000 St. Joseph Health System, Weekly VRDN and Put, 1.85%, 07/01/08 . . . . . . . . . . 25,100,000
2,645,000 (c)Chico MFMR, Webb Homes Project, Monthly VRDN, Weekly Put, 3.00%, 01/01/10 . . . . . . 2,645,000
1,700,000 (c)Chino USD, COP, Refunding, Capital Project, Series B, Weekly VRDN and Put,
1.75%, 09/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700,000
500,000 (c)Concord MFMR, Bel Air Apartments, Issue A, Weekly VRDN and Put, 1.90%, 12/01/16 . . . 500,000
10,000,000 (c)Contra Costa County, TRAN, MFHR, Park Regency, Series A, Weekly VRDN and Put,
2.00%, 08/01/32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000
8,000,000 (c)Contra Costa Transportation Authority, Sales Tax Revenue, Series A, Weekly VRDN
and Put, 1.65%, 03/01/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000
5,900,000 (c)Daly City Housing Development Finance Agency, MFHR, Serramonte del Rey
Apartments, Series 1985-A, Weekly VRDN and Put, 1.90%, 12/01/07 . . . . . . . . . . . 5,900,000
(c)Duarte RDA, COP,
1,000,000 Johnson Duarte Project, Series B, Weekly VRDN and Put, 1.75%, 12/01/14 . . . . . . 1,000,000
1,700,000 Piken Duarte Partnership, Series A, Weekly VRDN and Put, 1.75%, 12/01/14 . . . . . 1,700,000
1,000,000 (c)Eastern Municipal Water District, Water and Sewer Revenue, Refunding, COP, Series B,
FGIC Insured, Weekly VRDN and Put, 1.60%, 07/01/20 . . . . . . . . . . . . . . . . . 1,000,000
1,700,000 (c)Escondido MFHR, Morning View Terrace, Series A, Weekly VRDN and Put, 1.75%,
02/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700,000
12,200,000 (c)Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Weekly VRDN and
Put, 1.55%, 07/01/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,200,000
(c)Fremont MFHR,
8,400,000 Creekside Village Apartments, Series D, Weekly VRDN and Put, 1.80%, 09/01/07 . . . 8,400,000
400,000 Mission Wells Project, Series E, Weekly VRDN and Put, 1.75%, 09/01/07 . . . . . . 400,000
1,000,000 (c)Golden Empire Schools Financing Authority, Kern High School District Project, Weekly
VRDN and Put, 2.05%, 12/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
3,500,000 (c)Hayward Housing Authority, MFHR, Foothills Garden Apartments, Series A, Weekly
VRDN and Put, 2.05%, 12/01/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000
5,000,000 Huntington Beach Union High School District, TRAN, 3.25%, 07/29/94 . . . . . . . . . 5,000,677
1,830,000 (c)Independent Cities Lease Finance Authority Revenue, Pooled Projects, Weekly VRDN
and Put, 1.75%, 06/01/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,830,000
600,000 (c)Irvine 1915 ACT, AD No. 89-10, Daily VRDN and Put 1.25%, 09/02/15 . . . . . . . . . . 600,000
900,000 (c)Irvine Apartment Development Revenue, San Rafael Apartments Project, Series A,
Daily VRDN and Put, 1.50%, 04/01/22 . . . . . . . . . . . . . . . . . . . . . . . . 900,000
8,500,000 (c)Irvine MFHR, Series 1983-A, Weekly VRDN and Put, 2.05%, 12/01/95 . . . . . . . . . . 8,500,000
11,500,000 (c)Irvine Public Facilities and Infrastructure Authority, Lease Revenue, Capital
Improvement Project, Weekly VRDN and Put, 1.80%, 11/01/10 . . . . . . . . . . . . . 11,500,000
</TABLE>

The accompanying notes are integral part of these financial statements.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS (CONT.)
<S> <C> <C>
(c)Irvine Ranch Water District,
$ 1,700,000 Consolidated Bonds, Refunding, Series A, Daily VRDN and Put, 1.30%, 05/01/09 . . . $ 1,700,000
2,900,000 Consolidated Bonds, Refunding, Series B, Daily VRDN and Put, 1.30%, 10/01/99 . . . 2,900,000
4,000,000 Consolidated Bonds, Refunding, Series B, Daily VRDN and Put, 1.25%, 08/01/09 . . . 4,000,000
2,475,000 Consolidated Bonds, Refunding, Series B, Daily VRDN and Put, 1.30%, 10/01/09 . . . 2,475,000
700,000 Consolidated Bonds, Series A, Daily VRDN and Put, 1.35%, 10/01/00 . . . . . . . . 700,000
200,000 Consolidated Bonds, Series B, Daily VRDN and Put, 1.30%, 10/01/04 . . . . . . . . 200,000
1,000,000 Consolidated Bonds, Series B, Daily VRDN and Put, 1.35%, 10/01/05 . . . . . . . . 1,000,000
10,500,000 Consolidated Bonds, Series C, Daily VRDN and Put, 1.35%, 10/01/10 . . . . . . . . 10,500,000
4,600,000 Consolidated ID No. 140, Daily VRDN and Put, 1.30%, 06/01/15 . . . . . . . . . . . 4,600,000
410,000 COP, Capital Improvement Project, Daily VRDN and Put, 1.25%, 08/01/16 . . . . . . 410,000
2,700,000 ID No. 282, Series A, Daily VRDN and Put, 1.30%, 11/15/13 . . . . . . . . . . . . 2,700,000
100,000 ID No. 284, Series A, Daily VRDN and Put, 1.30%, 11/15/13 . . . . . . . . . . . . 100,000
900,000 (c)Lancaster RDA, MFHR, Westwood Park Apartments, Series 1985-K, Weekly VRDN
and Put, 1.75%, 12/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000
(c)Los Angeles County Housing Authority, MFHR,
3,100,000 Canyon Country Villas Project, Series H, Weekly VRDN and Put, 2.00%, 12/01/07 . . . 3,100,000
2,000,000 Harbor Cove Project, Series E, Weekly VRDN and Put, 2.05%, 10/01/06 . . . . . . . 2,000,000
4,500,000 Sand Canyon Ranch Project, Series F, Weekly VRDN and Put, 2.05%, 11/01/06 . . . . 4,500,000
100,000 (c)Los Angeles County IDA, IDR, Weekly VRDN and Put, 1.65%, 10/01/04 . . . . . . . . . . 100,000
3,000,000 (b)Los Angeles County Local Educational Agencies, COP, TRAN, Series A, 4.50%,
07/06/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,021,600
6,700,000 (c)Los Angeles County MFMR, Valencia Village Project, Series 1984-C, Weekly VRDN
and Put, 2.00%, 10/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,700,000
1,300,000 (c)Los Angeles County Metropolitan Transportation Authority, Sales Tax Revenue,
Refunding, Series A, MBIA Insured, Weekly VRDN and Put, 1.55%, 07/01/20 . . . . . . . 1,300,000
15,000,000 Los Angeles County TRAN, Series 1994, 4.50%, 06/30/95 . . . . . . . . . . . . . . . . 15,093,600
6,750,000 (c)Los Angeles County Transport Commission, Sale Tax Revenue, Refunding, Series A,
FGIC Insured, Weekly VRDN and Put, 1.70%, 07/01/12 . . . . . . . . . . . . . . . . . 6,750,000
(c)Los Angeles CRDA, COP,
1,000,000 Baldwin Hill Park, Weekly VRDN and Put, 1.95%, 12/01/14 . . . . . . . . . . . . . 1,000,000
400,000 Broading Spring Center Program, Weekly VRDN and Put, 2.00%, 07/01/12 . . . . . . . 400,000
(c)Los Angeles MFHR,
4,500,000 Lucas Studios Project, Series D, Weekly VRDN and Put, 2.10%, 12/01/21 . . . . . . 4,500,000
5,650,000 Poinsettia Apartment Project, Series A, Weekly VRDN and Put, 2.00%, 07/01/19 . . . 5,650,000
2,005,000 (c)MidPeninsula Regional Open Space District, Series A, Weekly VRDN and Put, 2.05%,
02/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,005,000
100,000 (c)Oakland Health Facilities Revenue, Children Medical Hospital, Weekly VRDN and Put,
1.80%, 07/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
2,800,000 (c)Oceanside MFMR, Riverview Springs Apartments, Series A, Weekly VRDN and Put,
1.95%, 07/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,000
</TABLE>

The accompanying notes are integral part of these financial statements.

<PAGE>
FRANKLIN CALIFORNIA TAX-TREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS (CONT.)
<S> <C> <C>
$ 8,500,000 Olcese Water District, COP, Rio Bravo Water Delivery, TECP, Series A, 2.60%, 08/01/94 . $ 8,500,000
(c)Ontario MFR,
1,900,000 Park Centre Partners Project, Series A, Weekly VRDN and Put, 1.93%, 08/01/07 . . . 1,900,000
6,700,000 Refunding, Rental Housing, Series A, Weekly VRDN and Put, 1.97%, 03/01/18 . . . . 6,700,000
1,830,000 Refunding, Rental Housing, Series B, Weekly VRDN and Put, 1.97%, 03/01/18 . . . . 1,830,000
1,190,000 (c)Ontario RDA, MFHR, Daisy XX Association, Ltd. Project, Weekly VRDN and Put,
1.75%, 11/01/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190,000
12,200,000 (c)Orange County 1915 ACT, Irvine Coast, AD No. 88-1, Daily VRDN and Put, 1.50%,
09/02/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,200,000
(c)Orange County Apartment Development Revenue,
1,600,000 Bear Brand Apartments, Series 1985-Z, Weekly VRDN and Put, 1.80%, 11/01/07 . . . . 1,600,000
1,600,000 Issue I, Park Ridge, Weekly VRDN and Put, 1.75%, 11/01/08 . . . . . . . . . . . . 1,600,000
100,000 Jessy L. Frost Project, Issue B, Weekly VRDN and Put, 1.85%, 03/01/09 . . . . . . 100,000
4,700,000 Monarch Bay Apartments Project, Issue T, Weekly VRDN and Put, 2.15%, 10/01/07 . . . 4,700,000
9,500,000 Riverbend Apartments Project, Weekly VRDN and Put, 1.80%, 04/01/06 . . . . . . . . 9,500,000
1,000,000 Robinson Ranch Apartments Project, Series 1985-Y, Weekly VRDN and Put, 2.10%,
11/01/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
3,400,000 Vintage Woods, Series E, Weekly VRDN and Put, 1.80%, 11/01/08 . . . . . . . . . . 3,400,000
3,000,000 Vista Verde Apartments, Weekly VRDN and Put, 1.90%, 08/01/18 . . . . . . . . . . . 3,000,000
3,600,000 (c)Orange County COP, Office and Courthouse Projects, Daily VRDN and Put, 1.35%,
12/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600,000
24,000,000 Orange County Local Transportation, TECP, 2.75%, 07/06/94 . . . . . . . . . . . . . 24,000,000
1,000,000 (c)Orange County Municipal Water District, COP, Water Facilities Corp., Series B, Weekly
VRDN and Put, 1.75%, 07/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
(c)Orange County Sanitation Districts,
5,700,000 COP Nos. 1-3, 5-7, 11, 13 & 14, Daily VRDN and Put, 1.25%, 08/01/15 . . . . . . . 5,700,000
4,200,000 COP Nos. 1-2-3-6-7 & 11, Series C, FGIC Insured, Daily VRDN and Put, 1.25%,
08/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
1,000,000 Refunding, COP Nos. 1-7 & 11, AMBAC Insured, Daily VRDN and Put, 1.25%,
08/01/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
1,600,000 (c)Orange County Water District COP, Project B, Daily VRDN and Put, 1.25%, 08/15/15 . . . 1,600,000
390,000 (c)Oxnard RDA, COP, Channel Islands Business Center, Weekly VRDN and Put,
2.21%, 07/01/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390,000
(c)Palm Springs CRDA, COP,
1,100,000 Hotel No. 2, Weekly VRDN and Put, 2.00%, 12/01/14 . . . . . . . . . . . . . . . . . 1,100,000
1,000,000 Hotel No. 3, Weekly VRDN and Put, 2.00%, 12/01/14 . . . . . . . . . . . . . . . . . 1,000,000
,000,000 (c)Pasadena COP, Rose Bowl Improvement Project, Weekly VRDN and Put, 2.15%,
12/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
1,500,000 (c)Pico Rivera RDA, COP, Crossroad Plaza Project, Weekly VRDN and Put, 2.05%, 12/01/10 . . 1,500,000
1,500,000 (c)Riverside County IDA, IDR, Calavo Growers, Weekly VRDN and Put, 2.00%, 09/01/05 . . . . 1,500,000
1,800,000 Sacramento City USD, TRAN, 3.50%, 08/11/94 . . . . . . . . . . . . . . . . . . . . . . 1,801,314
</TABLE>

The accompanying notes are integral part of these financial statements.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS (CONT.)
<S> <C> <C>
$ 4,000,000 (c)Sacramento County COP, Administration Center and Court House Project, Weekly
VRDN and Put, 1.65%, 06/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000,000
2,200,000 (c)Sacramento County COP, Telecommunications Project, Weekly VRDN and Put,
1.75%, 06/01/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000
(c)Sacramento County MFHR,
1,500,000 Series A, Weekly VRDN and Put, 1.95%, 04/15/07 . . . . . . . . . . . . . . . . . . . 1,500,000
1,300,000 Series B, Weekly VRDN and Put, 1.95%, 04/15/07 . . . . . . . . . . . . . . . . . . . 1,300,000
2,900,000 Series C, Weekly VRDN and Put, 1.95%, 04/15/07 . . . . . . . . . . . . . . . . . . . 2,900,000
13,500,000 Sacramento County TRAN, 3.00%, 07/29/94 . . . . . . . . . . . . . . . . . . . . . . . 13,502,830
Sacramento MUD,
4,500,000 TECP, 2.90%, 07/06/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000
4,267,000 TECP, 2.40%, 08/10/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,267,000
4,707,000 TECP, 2.85%, 09/01/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,707,000
8,000,000 TECP, 2.85%, 10/04/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000
(c)Salinas City Apartment Development Revenue,
2,000,000 Brentwood Gardens, Series 1985-A, Weekly VRDN and Put, 1.75%, 03/01/05 . . . . . . 2,000,000
3,000,000 Mariner Village, Series 1985-B, Weekly VRDN and Put, 1.75%, 04/01/05 . . . . . . . 3,000,000
(c)San Bernardino,
2,250,000 Western Properties Project I, Weekly VRDN and Put, 1.75%, 02/01/05 . . . . . . . . 2,250,000
2,000,000 Western Properties Project II, Weekly VRDN and Put, 1.75%, 05/01/05 . . . . . . . 2,000,000
900,000 Western Properties Project III, Weekly VRDN and Put, 1.75%, 08/01/05 . . . . . . . 900,000
1,600,000 Western Properties Project IV, Weekly VRDN and Put, 1.75%, 08/01/05 . . . . . . . 1,600,000
2,550,000 Western Properties Project V, Weekly VRDN and Put, 1.75%, 08/01/05 . . . . . . . . 2,550,000
2,300,000 Woodview Apartments Project, Series I, Weekly VRDN and Put, 1.75%, 04/01/07 . . . 2,300,000
11,000,000 San Bernardino County, TRAN, 3.25%, 07/29/94 . . . . . . . . . . . . . . . . . . . . 11,008,515
3,500,000 (c)San Diego County Regional Transportation Commission, Sales Tax Revenue, Second
Senior, Series A, FGIC Insured, Weekly VRDN and Put, 1.65%, 04/01/08 . . . . . . . 3,500,000
4,000,000 San Diego County TRAN, 3.25%, 07/29/94 . . . . . . . . . . . . . . . . . . . . . . . 4,000,662
4,500,000 (c)San Diego MFHR, Lusk Mira Mesa Apartments, Series E, Weekly VRDN and Put,
1.25%, 04/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000
25,000,000 (b)San Diego USD, TRAN, 4.25%, 06/30/95 . . . . . . . . . . . . . . . . . . . . . . . . 25,126,400
7,200,000 (c)San Dimas RDA, COP, San Dimas Station I Project, Weekly VRDN and Put, 1.85%,
12/01/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200,000
900,000 (c)San Dimas RDA, Commercial Development Revenue, San Dimas Commercial Center,
Monthly VRDN and Put, 2.60%, 12/01/13 . . . . . . . . . . . . . . . . . . . . . . . 900,000
(c)San Francisco City and County MFHR,
4,415,000 Sutter/Post Apartments Projects, Series A, Weekly VRDN and Put, 2.25%, 03/01/18 . 4,415,000
3,300,000 Winterland Project, Series C, Weekly VRDN and Put, 2.05%, 06/01/06 . . . . . . . . 3,300,000
(c)San Francisco City and County RDA, MFR,
5,400,000 Bayside Village, Series B, Weekly VRDN and Put, 1.72%, 12/01/05 . . . . . . . . . 5,400,000
2,660,000 Rincon Center Project No. 8, Weekly VRDN and Put, 2.05%, 12/01/06 . . . . . . . . 2,660,000
</TABLE>

The accompanying notes are integral part of these financial statements.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS (CONT.)
<S> <C> <C>
$ 1,000,000 (c)San Francisco City and County Revenue, San Francisco Symphony, Weekly VRDN and
Put, 3.25%, 11/01/06 $ 1,000,000
5,500,000 San Francisco City and County TRAN, 3.25%, 07/15/94 . . . . . . . . . . . . . . . . . 5,500,645
3,000,000 (c)San Joaquin County Transportation Authority, Sales Tax Revenue, Weekly VRDN and
Put, 1.15%, 04/01/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
1,000,000 (c)San Jose MFMR, Somerset Park Apartment Project, Weekly VRDN and Put, 1.90%,
11/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
1,265,000 (c)San Mateo County COP, Capital Projects, Series B, Weekly VRDN and Put, 1.90%,
07/01/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265,000
100,000 (c)San Mateo County Housing Authority, MFHR, Pacific Oaks Apartment Project, Weekly
VRDN and Put, 2.00%, 07/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
700,000 (c)Santa Ana Health Facility Revenue, Multi-Model, Town and Country, Daily VRDN and
Put, 1.25%, 10/01/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
7,500,000 (c)Santa Clara County Apartment Development Revenue, Lincoln-Pajaro Apartment
Project, Series 1985-A, Weekly VRDN and Put, 1.95%, 01/01/97 . . . . . . . . . . . 7,500,000
1,000,000 (c)Santa Clara County, MFHR, Grove Garden Apartments, Series A, Weekly VRDN and
Put, 1.85%, 03/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
100,000 (c)Santa Clara Electric Revenue, Series A, Weekly VRDN and Put, 1.75%, 07/01/10 . . . . 100,000
100,000 (c)Santa Margarita Water District, ID No 1-F, Weekly VRDN and Put, 1.70%, 11/01/15 . . . 100,000
2,600,000 (c)Simi Valley IDA, EDR, Wambold Furniture Project, Series 1984, Monthly VRDN and
Put, 3.50%, 12/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
8,500,000 (c)Simi Valley MFHR, Lincoln Wood Ranch, Weekly VRDN and Put, 1.95%, 06/01/10 . . . . . 8,500,000
500,000 (c)South San Francisco MFR, Magnolia Plaza Apartments, Series A, Weekly VRDN and
Put, 2.00% 05/01/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
2,585,000 Southern California Public Power Authority Revenue, Refunding, Palo Verde Project,
Series A, 5.90%, 07/01/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,640,322
32,200,000 (c)Southern Public Power Authority Revenue, Refunding, Transmission Project, AMBAC
Insured, Weekly VRDN and Put, 1.70%, 07/01/19 . . . . . . . . . . . . . . . . . . 32,200,000
3,500,000 Stanislaus County TRAN, 3.50%, 08/02/94 . . . . . . . . . . . . . . . . . . . . . . . 3,501,358
1,000,000 (c)Union City MFHR, Refunding, Skylark Apartments Project B, Weekly VRDN and Put,
2.30%, 11/01/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
1,500,000 (c)Upland Community RDA, MFHR, Pebble Grove, Series C, Weekly VRDN and Put,
1.95%, 03/01/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
7,275,000 (c)Visalia COP, Partner Visalia Convention Center Expansion, Weekly VRDN and Put,
1.90%, 12/01/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,275,000
------------
TOTAL INVESTMENTS (COST $781,209,508) 103.6% . . . . . . . . . . . . . . . . . 781,209,508
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (3.6)% . . . . . . . . . . . . . . (27,088,081)
------------
NET ASSETS 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $754,121,427
============
</TABLE>

At June 30, 1994, there was no unrealized appreciation or depreciation for
financial statement or income tax purposes .

The accompanying notes are integral part of these financial statements.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, JUNE 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND
- -----------------------------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
<S> <C> <C> <C>
1915 ACT - Improvement Bond Act of 1915 MFHR - Multi-Family Housing Revenue
AD - Assessment District MFMR - Multi-Family Mortgage Revenue
AMBAC - American Municipal Bond Assurance Corp. MFR - Mulit-Family Revenue
COP - Certificate of Participation MUD - Municipal Utility District
CRDA - Community Redevelopment Agency PCFA - Pollution Control Financing Authority
EDR - Economic Development Revenue PCR - Pollution Control Revenue
FGIC - Financial Guaranty Insurance Co. RAN - Revenue Anticipation Notes
HFA - Housing Finance Agency RDA - Redevelopment Agency
ID - Improvement District TECP - Tax-Exempt Commercial Paper
IDA - Industrial Development Agency TRAN - Tax and Revenue Anticipation Notes
IDR - Industrial Development Revenue USD - Unified School District
MBIA - Municipal Bond Investors Assurance Corp.
</TABLE>

(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 relation to changes in a
designated rate (such as the prime interest rate or U.S. Treasury bills
rate).

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS

STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1994

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN CALIFORNIA FRANKLIN
CALIFORNIA INTERMEDIATE-TERM CALIFORNIA
INSURED TAX-FREE TAX-FREE TAX-EXEMPT
INCOME FUND INCOME FUND MONEY FUND
-------------- ----------- ------------
<S> <C> <C> <C>
Assets:
Investments in securities:
At identified cost . . . . . . . . . . . . . . . . . . . . . . $1,403,795,548 $95,551,403 $781,209,508
============== =========== ============
At value . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,440,745,603 92,297,364 781,209,508
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,822 34,725 10,841,499
Receivables:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,382,187 1,594,954 5,603,946
Investment securities sold . . . . . . . . . . . . . . . . . . -- 122,700 --
Capital shares sold . . . . . . . . . . . . . . . . . . . . . 2,624,785 294,281 --
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . -- -- 129,769
-------------- ----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 1,471,001,397 94,344,024 797,784,722
-------------- ----------- ------------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery . . . . . . . . . . . . . . . . . . . . . . -- -- 30,164,583
When-issued basis (Note 1) . . . . . . . . . . . . . . . . . 14,998,015 -- 13,084,100
Distributions payable to shareholders . . . . . . . . . . . . 2,153,152 126,147 52,232
Capital shares repurchased . . . . . . . . . . . . . . . . . . 2,140,433 125,944 --
Management fees . . . . . . . . . . . . . . . . . . . . . . . 566,666 56,836 286,743
Shareholder servicing costs . . . . . . . . . . . . . . . . . 13,431 1,126 41,100
Distribution fees . . . . . . . . . . . . . . . . . . . . . . 220,916 11,878 --
Accrued expenses and other liabilities . . . . . . . . . . . . 87,619 6,711 34,537
-------------- ----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . 20,180,232 328,642 43,663,295
-------------- ----------- ------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . $1,450,821,165 $94,015,382 $754,121,427
============== =========== ============
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . $ 710,138 $ 39,758 $ --
Unrealized appreciation/(depreciation) on investments . . . . . 36,950,055 (3,254,039) --
Accumulated net realized loss . . . . . . . . . . . . . . . . . (14,314,754) (331,796) --
Capital shares . . . . . . . . . . . . . . . . . . . . . . . . 1,427,475,726 97,561,459 754,121,427
-------------- ----------- ------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . $1,450,821,165 $94,015,382 $754,121,427
============== =========== ============
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 123,573,139 9,217,603 754,121,427
============== =========== ============
Net asset value and redemption price per share . . . . . . . . . $ 11.74 $ 10.20 $ 1.00
============== =========== ============
Maximum offering price
(100/96,* 100/97.75 and 100/100
of net asset value per share, respectively) . . . . . . . . . . $ 12.23 $ 10.43 $ 1.00
============== =========== ============
</TABLE>

*Effective July 1, 1994, the maximum initial sales charge on the Insured Fund
will be 4.25% (100/95.75). On sales of $100,000 or more, the offering price is
reduced as stated in the section of the Prospectus entitled How to Buy Shares
of the Fund for the Insured Fund and the Intermediate Fund.

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993 (EXCEPT AS NOTED)

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA INSURED FRANKLIN CALIFORNIA INTERMEDIATE- FRANKLIN CALIFORNIA
TAX-FREE INCOME FUND TERM TAX-FREE INCOME FUND TAX-EXEMPT MONEY FUND
---------------------------- -------------------------------- -----------------------
1994 1993 1994 1993+ 1994 1993
----------- ----------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
Operations:
Net investment income $ 81,945,583 $ 66,920,043 $ 3,974,168 $ 485,352 $ 13,258,958 $ 15,187,532
Net realized loss from
security transactions (5,270,661) (1,191,110) (331,796) -- -- --
Net unrealized appre-
ciation (depreciation)
during the year................. (66,587,573) 62,386,038 (3,691,378) 437,339 -- --
-------------- -------------- ----------- ----------- ------------ -------------
Net increase
(decrease) in net
assets resulting
from operations ............. 10,087,349 128,114,971 (49,006) 922,691 13,258,958 15,187,532
Distributions to
shareholders:
From undistributed
net investment
income........................ (81,772,341) (66,884,154) (3,928,197) (485,352) (13,258,958) (15,187,532)
Distributions in excess
of net investment
income.......................... -- -- -- (6,213)* -- --
Increase (decrease) in
net assets from capital
share transactions
(Note 3)........................ 158,883,262 334,647,541 55,161,269 42,400,190 101,257,180 (106,339,910)
-------------- -------------- ----------- ----------- ------------ -------------
Net increase
(decrease) in
net assets................... 87,198,270 395,878,358 51,184,066 42,831,316 101,257,180 (106,339,910)
Net assets:
Beginning of year.................. 1,363,622,895 967,744,537 42,831,316 -- 652,864,247 759,204,157
-------------- -------------- ----------- ----------- ------------ -------------
End of year........................ $1,450,821,165 $1,363,622,895 $94,015,382 $42,831,316 $754,121,427 $ 652,864,247
============== ============== =========== =========== ============ =============
Undistributed net invest-
ment income included
in net assets:
Beginning of year................. $ 536,896 $ 501,007 $ -- $ -- $ -- $ --
============== ============== =========== =========== ============ =============
End of year....................... $ 710,138 $ 536,896 $ 39,758 $ -- $ -- $ --
============== ============== =========== =========== ============ =============

</TABLE>

*On a tax basis, there was no return of capital.
+For the period September 21, 1992 (effective date of registration)
to June 30, 1993.

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

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company (mutual fund), registered under the Investment Company Act
of 1940 as amended. The Trust currently consists of three separate Funds:
Franklin California Insured Tax-Free Income Fund (the "Insured Fund"),
Franklin California Intermediate-Term Tax-Free Income Fund (the "Intermediate
Fund") and Franklin California Tax-Exempt Money Fund (the "Money Fund"). Each
of the Funds issues a separate series of the Trust's shares and maintains a
totally separate investment portfolio. The Trust's Intermediate Fund is
non-diversified, although the other Funds are diversified.

The following is a summary of significant accounting policies consistently
followed by the Trust 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 Trust 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 Trustees.
Short-term securities and similar investments with remaining maturities of 60
days or less are valued at amortized cost, which approximates value.

Portfolio securities in the Money Fund are valued at amortized cost, which
approximates value. The Money Fund must maintain a dollar weighted average
maturity of 90 days or less and only purchase instruments having remaining
maturities of 397 days or less. If the Fund's portfolio has a remaining
weighted average maturity of greater than 90 days, the portfolio will be stated
at value based on recorded closing sales on a national securities exchange or,
in the absence of a recorded sale, within the range of the most recent quoted
bid and asked prices. The Trustees have established procedures designed to
stabilize, to the extent reasonably possible, the Fund's price per share as
computed for the purpose of sales and redemptions at $1.00.

b. MUNICIPAL BONDS OR NOTES WITH "PUTS": The Trust has purchased municipal
bonds or notes with the right to resell the bonds or notes to the seller at an
agreed upon price or yield on a specified date or within a specified period
(which will be prior to the maturity date of the bonds or notes). Such a right
to resell is commonly known as a "put". In determining the weighted average
maturity of the Fund's portfolio, municipal bonds and notes as to which the
Fund holds a put will be deemed to mature on the last day on which the put may
be exercisable.

c. VARIABLE RATE DEMAND NOTES: The Trust has invested in certain variable
interest rate demand notes with maturities greater than 397 days but which are
redeemable at specified intervals upon demand. The maturity of these
instruments for the purpose of calculating the portfolio's weighted average
maturity is considered to be the lesser of the period until the interest rate
is adjusted or until the principal can be recovered by demand.

d. INCOME TAXES: The Trust intends to continue to qualify for the tax
treatment applicable to regulated investment companies under the Internal
Revenue Code and to make the requisite distributions to its shareholders which
will be sufficient to relieve it from income and excise taxes. Therefore, no
income tax provision is required. Each Fund is treated as a separate entity in
the determination of compliance with the Internal Revenue Code.

e. 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.

f. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: For the Insured and the
Intermediate Funds, distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Bond discount and premium, if any, are amortized as required by the Internal
Revenue Code. The Funds normally declare

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

f. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)

dividends from their net investment income daily and distribute monthly. Daily
allocations of net investment income will commence on the date of receipt of
an investor's funds. Dividends are normally declared each day the New York
Stock Exchange is open for business equal to an amount per day set from time to
time by the Board of Trustees, and are payable to shareholders of record at the
beginning of business on the ex-date. Once each month, dividends are reinvested
in additional shares of the Funds or paid in cash as requested by the
shareholders.

For the Money Fund, net investment income includes income, calculated on an
accrual basis, and amortization of original issue and market discount or
premium, if any, and expenses as incurred on an accrual basis. The total
available for dividends is computed daily and includes net investment income,
plus or minus any gains or losses on securities transactions and changes in
unrealized portfolio appreciation or depreciation, if any.

g. INSURANCE: Each long-term municipal security in the Insured Fund is insured
as to the scheduled payments of interest and principal by either a mutual fund
Portfolio Insurance Policy, a Secondary Market Insurance Policy, a New Issue
Insurance Policy or has collateral guaranteed by an agency of the U.S.
government. The providers of secondary market and new issue insurance are rated
"AAA" by Standard & Poor's.

Premiums for a mutual fund Portfolio Insurance Policy or a Secondary Market
Insurance Policy are paid from the Insured Fund's assets. Premiums for a mutual
fund Portfolio Insurance Policy [effective only so long as the Insured Fund is
in existence, Financial Guaranty (the insurer) remains in business and the
municipal security insured under the policy continues to be held by the Insured
Fund] will reduce the current income on the portfolio by the amount thereof.
Premiums paid by the Insured Fund for a Secondary Market Insurance Policy
(effective so long as the security so insured is outstanding and the insurer
remains in business) are added to the cost basis of the municipal security
insured and are not considered an expense of the Insured Fund. Premiums for a
New Issue Insurance Policy (effective so long as the security so insured is
outstanding and the insurer remains in business) are paid in advance by the
insured security issuer or by another third party prior to acquisition of the
security by the Insured Fund and are not considered an expense of the Insured
Fund.

h. EXPENSE ALLOCATION: Common expenses incurred by the Trust are allocated
among the Funds based on the ratio of net assets of each Fund to their combined
net assets. In all other respects, expenses are charged to each Fund as
incurred on a specific identification basis.

i. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS OR DELAYED DELIVERY BASIS: The
Trust 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
Trust 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 Trust has set aside sufficient investment
securities as collateral for these purchase commitments.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)

2.CAPITAL LOSS CARRYOVERS

At June 30, 1994, for tax purposes, the Insured and the Intermediate Funds had
capital loss carryovers as follows:

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN CALIFORNIA
INSURED TAX-FREE INTERMEDIATE-TERM
INCOME FUND TAX-FREE INCOME FUND
------------------- --------------------
<S> <C> <C>
1995....... $ 1,257,463 $ --
1996....... 3,058,598 --
1997....... 3,123,675 --
1998....... 302,438 --
1999....... 319 --
2001....... 1,301,600 --
2002....... 5,270,661 331,796
----------- --------
$14,314,754 $331,796
=========== ========
</TABLE>

For tax purposes, the aggregate cost of securities and unrealized appreciation
(depreciation) of the Trust are the same as for financial statement purposes at
June 30, 1994.

3.TRUST SHARES

At June 30, 1994, there was an unlimited number of no par value shares of
beneficial interest authorized. Transactions in the Trust shares were as
follows:

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND
--------------------------------------------------------------
YEARS ENDED JUNE 30,
--------------------------------------------------------------
1994 1993
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold....................................... 23,548,766 $ 290,660,914 28,808,820 $ 344,366,229
Shares issued in reinvestment of distributions.... 2,454,027 30,148,474 1,968,763 23,526,050
Shares redeemed................................... (12,217,008) (149,116,324) (8,625,299) (103,059,037)
Changes from exercise of the exchange privilege:
Shares sold..................................... 10,634,887 130,590,567 10,711,927 128,205,539
Shares redeemed................................. (11,740,527) (143,400,369) (4,921,881) (58,391,240)
----------- ------------- ---------- -------------
Net increase...................................... 12,680,145 $ 158,883,262 27,942,330 $ 334,647,541
=========== ============= ========== =============
</TABLE>

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND
--------------------------------------------------------------
YEAR ENDED PERIOD ENDED
JUNE 30, 1994 JUNE 30, 1993*
------------------------------ -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold....................................... 4,120,511 $ 43,780,014 3,174,398 $ 33,143,810
Shares issued in reinvestment of distributions.... 208,209 2,193,337 26,596 279,158
Shares redeemed................................... (935,219) (9,787,277) (28,029) (294,500)
Changes from exercise of the exchange privilege:
Shares sold..................................... 3,485,516 36,969,564 1,032,833 10,795,275
Shares redeemed................................. (1,721,610) (17,994,369) (145,602) (1,523,553)
----------- ------------- ---------- -------------
Net increase...................................... 5,157,407 $ 55,161,269 4,060,196 $ 42,400,190
=========== ============= ========== =============
</TABLE>
*For the period September 21, 1992 (effective date of registration) to June 30,
1993.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)

3.TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA
TAX-EXEMPT MONEY FUND
-------------------------------
YEARS ENDED JUNE 30,
-------------------------------
1994 1993
------------- -------------
AMOUNT AMOUNT
------------- -------------
<S> <C> <C>
Transactions in capital stock at $1.00 per share were as follows:
Shares sold.................................................................. $ 664,176,200 $ 714,713,669
Shares issued in reinvestment of distributions............................... 13,220,211 15,117,232
Shares redeemed.............................................................. (805,971,559) (877,871,557)
Changes from exercise of the exchange privilege:
Shares sold................................................................ 667,038,282 413,563,953
Shares redeemed............................................................ (437,205,954) (371,863,207)
------------- -------------
Net increase (decrease)...................................................... $ 101,257,180 $(106,339,910)
============= =============
</TABLE>

4.PURCHASES AND SALES OF SECURITIES

Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended June 30, 1994, were as follows:

5.TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to each
Fund, and receives fees computed monthly based on the net assets of the Insured
Fund and the Intermediate Fund on the last day of the month at an annualized
rate of 5/8 of 1% of the net assets, and receives fees computed daily based on
the net assets of the Money Fund at 1/584 of 1% (approximately 5/8 of 1% per
year) of the net assets. The annual rate of fees for all Funds is reduced on
net assets over $100 million, as follows: 1/2 of 1% per year of net assets in
excess of $100 million up to and including $250 million; and 45/100 of 1% per
year of net assets in excess of $250 million. Fees incurred by the Insured
Fund, the Intermediate Fund and the Money Fund under the agreement aggregated
$6,959,870, $504,656 and $3,529,248, respectively, for the year ended June 30,
1994. The terms of the management agreement provide that aggregate annual
expenses of the Funds 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 Funds' shares are registered. The
Funds' expenses did not exceed these limitations; however, for the year ended
June 30, 1994, Franklin Advisers, Inc. reduced its management fees by $421,594
for the Intermediate Fund.

In its capacity as underwriter for the shares of the Insured Fund and the
Intermediate Fund, Franklin/Templeton Distributors, Inc. received commissions on
sales of the Funds' shares for the year ended June 30, 1994 totaling $9,120,224
and $623,133, respectively, of which $8,756,584 and $541,154, respectively, were
subsequently paid to other dealers. Commissions are deducted from the gross
proceeds received from the sale of the Insured Fund's and Intermediate Fund's
shares, and as such are not expenses of the Funds.

<PAGE>
FRANKLIN CALIFORNIA TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)

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

Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., the Trust pays costs on a per shareholder account
basis. Shareholder servicing costs incurred by the Insured Fund, the
Intermediate Fund and the Money Fund for the year ended June 30, 1994 were
$177,140, $10,502 and $501,085, respectively, of which $146,821, $9,529 and
$487,109, respectively, were paid to Franklin/Templeton Investor Services, Inc.

Under the terms of a Distribution Plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940, the Intermediate Fund reimburses 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 Intermediate Fund under the agreement
aggregated $39,063 for the year ended June 30, 1994. The Money Fund did not
incur any such distribution expenses during the year ended June 30, 1994.

Effective May 1, 1994, the Insured Fund implemented a plan of distribution
under Rule 12b-1 of the Investment Company Act of 1940, pursuant to which the
Insured Fund will reimburse Franklin/Templeton Distributors, Inc. in an amount
up to a maximum of 0.10% 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 $220,916 for the year
ended June 30, 1994.

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

6.CREDIT RISK

Although the Insured Fund and the Money Fund are diversified, the Intermediate
Fund is non-diversified. Furthermore, there are certain credit risks due to the
manner in which the Funds are invested, which may subject the Funds more
significantly to economic changes occurring in California.

The Portfolio Insurance Policy covering securities held by the Insured Fund is
issued by an issuer rated "AAA" by Standard & Poor's. Only one issuer provides
coverage to the Fund. As a result the Fund may face the risk of a loss if a
change in the solvency of the issuer occurs.

7.FINANCIAL HIGHLIGHTS

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

During the fiscal year ended June 30, 1994, the Funds paid distributions from
undistributed net investment income in the amounts shown in the Statement of
Changes in Net Assets. The Funds hereby designate the total amount of these
distributions as exempt-interest dividends under Sec. 852(b)(5) of the
Internal Revenue Code.

<PAGE>