FRANKLIN NEW YORK TAX FREE TRUST, 497, 1999-05-05

FRANKLIN NEW YORK TAX FREE TRUST
497, 1999-05-05

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PROSPECTUS

FRANKLIN
NEW YORK
TAX-FREE TRUST

INVESTMENT STRATEGY
TAX-FREE INCOME

FRANKLIN NEW YORK INSURED
TAX-FREE INCOME FUND - CLASS A & C

FRANKLIN NEW YORK INTERMEDIATE-TERM
TAX-FREE INCOME FUND - CLASS A

FRANKLIN NEW YORK TAX-EXEMPT MONEY FUND - CLASS A

MAY 1, 1999

[Insert Franklin Templeton Ben Head]
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

CONTENTS

THE FUND

[Begin callout]
Information about each fund you should know before investing
[End callout]

2 Franklin New York Insured Tax-Free Income Fund

15 Franklin New York Intermediate-Term Tax-Free Income
Fund

27 Franklin New York Tax-Exempt Money Fund

YOUR ACCOUNT

[Begin callout]
Information about sales charges, account transactions and services
[End callout]

39 Sales Charges

44 Buying Shares

46 Investor Services

49 Selling Shares

52 Account Policies

55 Questions

FOR MORE INFORMATION

[Begin callout]
Where to learn more about each fund
[End callout]

Back Cover

FRANKLIN NEW YORK INSURED TAX-FREE INCOME FUND

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

GOAL The fund's investment goal is to provide investors with as high a level
of income exempt from federal income taxes and New York state and New York
City personal income taxes as is consistent with prudent investment
management and the preservation of shareholders' capital.

PRINCIPAL INVESTMENTS The fund normally invests predominately in insured, New
York municipal securities whose interest is free from federal income taxes,
including the federal alternative minimum tax, and from New York state and
New York City personal income taxes. Although the fund tries to invest all of
its assets in tax-free securities, it is possible, although not anticipated,
that up to 20% of its assets may be in securities that pay taxable interest.

[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public and private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
[End callout]

The fund invests at least 65% of its total assets in insured municipal
securities, which are covered by insurance policies that guarantee the timely
payment of principal and interest. The fund buys insured municipal securities
only if they are covered by policies provided by AAA-rated municipal bond
insurers. Currently, there are four municipal bond insurers with a AAA
rating. The fund pays insurance premiums either directly or indirectly, which
increases the credit safety of its insured investments, but decreases its
yield.

The fund may invest the balance of its assets in the following types of
uninsured securities: (i) municipal securities secured by an escrow or trust
account containing direct U.S. government obligations; (ii) securities rated
in one of the top three ratings by U.S. nationally recognized rating services
(or comparable unrated securities); or (iii) short-term, tax-exempt
securities rated in the top rating, pending investment in longer-term
municipal securities. The fund may only invest up to 20% of its total assets
in the type of securities described in (ii) above.

The manager selects securities that it believes will provide the best balance
between risk and return within the fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal. The manager also may consider
the cost of insurance when selecting securities for the fund.

The fund may invest in top rated variable and floating rate securities, whose
interest rates change either at specific intervals or whenever a benchmark
rate changes. While this feature helps protect against a decline in the
security's market price when interest rates go up, it lowers the fund's
income when interest rates fall.

The fund also may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid.

TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in tax-free securities or in New York municipal securities.

IT IS IMPORTANT TO NOTE THAT INSURANCE DOES NOT GUARANTEE THE MARKET VALUE OF
AN INSURED SECURITY, OR THE FUND'S SHARE PRICE OR DISTRIBUTIONS, AND SHARES
OF THE FUND ARE NOT INSURED

[Insert graphic of chart with line going up and down] MAIN RISKS

INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.

CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.

Many of the fund's portfolio securities are supported by credit enhancements,
which may be provided by either U.S. or foreign entities. These securities
have the credit risk of the entity providing the credit support. A change in
the credit rating of any one or more of the municipal bond insurers that
insure securities in the fund's portfolio may affect the value of the
securities they insure and the fund's share price. Credit support provided by
a foreign entity may be less certain because of the possibility of adverse
foreign economic, political or legal developments that may affect the ability
of that entity to meet its obligations.

[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions and the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]

INTEREST RATE When interest rates go up, municipal security prices fall. The
opposite is also true: municipal security prices go up when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.

CALL There is the likelihood that a security will be prepaid (called) before
maturity. An issuer is more likely to call its securities when interest rates
are falling, because the issuer can issue new securities with lower interest
payments. If a security is called, the fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and its distributions to shareholders.

MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to go up.

The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
take place at a future date. Since the market price of the security may
fluctuate during the time before payment and delivery, the fund assumes the
risk that the value of the security at delivery may be more or less than the
purchase price.

DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the municipal securities of one issuer than a
diversified fund. The fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities, which may
result in greater fluctuation in the value of the fund's shares, and may
involve more risk than an investment in a fund that does not focus on
securities of a single state. The fund, however, intends to meet certain tax
diversification requirements.

NEW YORK Since the fund invests heavily in New York municipal securities,
events in New York are likely to affect the fund's investments and its
performance. These events may include economic or political policy changes,
tax base erosion, state constitutional limits on tax increases, budget
deficits and other financial difficulties, and changes in the ratings
assigned to New York's municipal issuers. New York's economy and finances may
be especially vulnerable to changes in the performance of the financial
services sector, which historically has been volatile.

A negative change in any one of these or other areas could affect the ability
of New York's municipal issuers to meet their obligations. Both New York
state and New York City have experienced financial difficulties in the past.
It is important to remember that economic, budget and other conditions within
New York are unpredictable and can change at any time.

U.S. TERRITORIES The fund may invest up to 35% of its assets in municipal
securities issued by U.S. territories. As with New York municipal securities,
events in any of these territories where the fund is invested may affect the
fund's investments and its performance.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.

Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making extensive efforts, however, to contact
the issuers of municipal securities held by the fund to try to assess their
Year 2000 readiness.

If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 10 for more information.

More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).

[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]

[Insert graphic of bull and bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past seven calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.

CLASS A ANNUAL TOTAL RETURNS 1

[Insert bar graph]

9.75% 14.02% -8.14% 18.46% 4.30% 8.75% 5.94%
92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '95
8.70%

WORST QUARTER:

Q1 '94
- -6.85%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

SINCE
INCEPTION
1 YEAR 5 YEARS (5/1/91)
- -------------------------------------------------------------------------------
Franklin New York Insured
Tax-Free Income Fund - Class A 2 1.42% 4.60% 6.95%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 7.87%

SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Franklin New York Insured
Tax-Free Income Fund - Class C 2 3.49% 6.93%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.81% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (fees paid directly from your investment)

CLASS A 1 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 1.99%

Load imposed on purchases 4.25% 1.00%

Maximum deferred sales charge (load) None 2 0.99% 3

Exchange fee None None

Please see "Sales Charges" on page 39 for an explanation of how and when these
sales charges apply.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)

CLASS A 1 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 0.54% 0.54%

Distribution and service (12b-1) fees4 0.09% 0.65%

Other expenses 0.09% 0.09%
---------------------------

Total annual fund operating expenses 0.72% 1.28%
===========================

1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page 39).
3. This is equivalent to a charge of 1% based on net asset value.
4. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------
CLASS A $495 1 $645 $809 $1,281

CLASS C $327 2 $502 $795 $1,630

1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $229 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.

The team responsible for the fund's management is:

THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1991. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.

SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the fund since 1991.
She joined the Franklin Templeton Group in 1986.

MARK ORSI, VICE PRESIDENT OF ADVISERS
Mr. Orsi has been an analyst or portfolio manager of the fund since 1991. He
joined the Franklin Templeton Group in 1990.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid 0.54% of its average net assets to the manager.

YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.

When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.

The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.

[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES

INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the 20th day of
the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed twice a year. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.

Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.

TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. The
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Any capital gains the fund distributes are
taxable to you as long-term capital gains no matter how long you have owned
your shares. Distributions of ordinary income or capital gains are taxable
whether you reinvest your distributions in additional fund shares or receive
them in cash.

[Begin callout]
BACKUP WITHHOLDING

By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]

Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.

When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.

Exempt-interest dividends are taken into account when determining
the taxable portion of your social security or railroad retirement benefits.
The fund may invest a portion of its assets in private activity bonds. The
income from these bonds is a preference item when determining your
alternative minimum tax.

Exempt-interest dividends from interest earned on municipal securities of the
state of New York, or its political subdivisions, generally are exempt from
New York's personal income tax. Investments in municipal securities of other
states generally do not qualify for tax-free treatment in New York.

Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in the fund.

[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.

<TABLE>
<CAPTION>
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------

PER SHARE DATA ($)

<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 11.66 11.29 11.41 10.16 11.68
----------------------------------------------------------

Net investment income .57 .58 .59 .59 .59

Net realized and unrealized gains (losses) .11 .38 (.12) 1.25 (1.52)
----------------------------------------------------------

Total from investment operations .68 .96 .47 1.84 (.93)
----------------------------------------------------------

Distributions from net investment income (.57) 1 (.59) (.59) (.59) (.59)

Distributions from net realized gains (.06) - - - -
----------------------------------------------------------

Total distributions (.63) (.59) (.59) (.59) (.59)
----------------------------------------------------------

Net asset value, end of year 11.71 11.66 11.29 11.41 10.16
==========================================================

Total return (%) 2 5.94 8.77 4.30 18.46 (8.19)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 270,435 260,990 261,068 256,171 225,061

Ratios to average net assets: (%)

Expenses .72 .71 .65 .65 .56

Expenses excluding waiver
and payments by affiliate .72 .71 .70 .73 .71

Net investment income 4.84 5.09 5.25 5.38 5.48

Portfolio turnover rate (%) 12.05 26.85 15.09 22.99 25.66
</TABLE>

<TABLE>
<CAPTION>
CLASS C
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 3 1995 3,4
- ----------------------------------------------------------------------------------------------------

PER SHARE DATA ($)

<S> <C> <C> <C> <C>
Net asset value, beginning of year 11.75 11.37 11.46 10.85
---------------------------------------------------

Net investment income .48 .52 .53 5 .36

Net realized and unrealized gains (losses) .16 .38 (.10) .59
---------------------------------------------------

Total from investment operations .64 .90 .43 .95
---------------------------------------------------

Distributions from net investment income (.51) 6 (.52) (.52) (.34)

Distributions from net realized gains (.06) - - -
---------------------------------------------------

Total distributions (.57) (.52) (.52) (.34)
---------------------------------------------------

Net asset value, end of year 11.82 11.75 11.37 11.46
===================================================

Total return (%) 2 5.55 8.17 3.87 8.92

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 9,450 5,601 4,137 696

Ratios to average net assets: (%)

Expenses 1.28 1.27 1.22 1.23 7

Expenses excluding waiver
and payments by affiliate 1.28 1.27 1.27 1.30 7

Net investment income 4.27 4.63 4.69 4.74 7

Portfolio turnover rate (%) 12.05 26.85 15.09 22.99
</TABLE>

1. Includes distributions in excess of net investment income in the amount of
$.003.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Ratio has been calculated using average daily net assets during the period.
4. For the period May 1, 1995 (effective date) to December 31, 1995.
5. Ratio has been calculated using average daily outstanding shares during
the period.
6. Includes distributions in excess of net investment income in the amount of
$.002.
7. Annualized.

FRANKLIN NEW YORK INTERMEDIATE-TERM TAX-FREE INCOME FUND

[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES

PRINCIPAL INVESTMENTS The fund normally invests predominately in investment
grade, New York municipal securities whose interest is free from federal
income taxes, including the federal alternative minimum tax, and from New
York state and New York City personal income taxes. Although the fund tries
to invest all of its assets in tax-free securities, it is possible, although
not anticipated, that up to 20% of its assets may be in securities that pay
taxable interest.

The fund maintains a dollar-weighted average portfolio maturity of three to
10 years and only buys securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within the fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal.

The fund may invest in variable and floating rate securities, whose interest
rates change either at specific intervals or whenever a benchmark rate
changes. While this feature helps protect against a decline in the security's
market price when interest rates go up, it lowers the fund's income when
interest rates fall.

The fund also may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease may be cancelled without penalty. If this happens, investors who
own the obligations may not be paid.

[Insert graphic of chart with line going up and down] MAIN RISKS

INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.

Many of the fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent the fund holds insured securities, a change in the credit
rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities
they insure and the fund's share price. Credit support provided by a foreign
entity may be less certain because of the possibility of adverse foreign
economic, political or legal developments that may affect the ability of that
entity to meet its obligations.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.

More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).

[Insert graphic of bull and bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past six calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.

ANNUAL TOTAL RETURNS 1

[Insert bar graph]

10.18% -5.29% 14.31% 4.38% 8.89% 6.63%
93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '95
5.16%

WORST QUARTER:

Q1 '94
- -4.90%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin New York Intermediate-Term
Tax-Free Income Fund 2 4.27% 5.09% 6.04%
Lehman Brothers Municipal 10-Year Bond Index 3 6.76% 6.35% 7.53%
</TABLE>

1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.86%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal 10-Year Bond Index includes investment grade bonds issued within
the last five years as part of a deal of over $50 million and with a maturity
of at least 10 years. It includes reinvested interest. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (fees paid directly from your investment)

Maximum sales charge (load) as a percentage of offering price 2.25%
Load imposed on purchases 2.25%
Maximum deferred sales charge (load) None 1
Exchange fee None

Please see "Sales Charges" on page 39 for an explanation of how and when these
sales charges apply.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)

Management fees 2 0.63%
Distribution and service (12b-1) fees 3 0.10%
Other expenses 0.10%
-----

Total annual fund operating expenses 2 0.83%
=====

1. Except for investments of $1 million or more (see page 39).
2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.25% and total annual fund operating expenses were 0.45%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
3. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------
$3081 $484 $675 $1,227

1. Assumes a contingent deferred sales charge (CDSC) will not apply.

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.

The team responsible for the fund's management is:

THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1992. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.

SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the fund since 1992.
She joined the Franklin Templeton Group in 1986.

MARK ORSI, VICE PRESIDENT OF ADVISERS
Mr. Orsi has been an analyst or portfolio manager of the fund since 1992. He
joined the Franklin Templeton Group in 1990.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, management
fees, before any advance waiver, were 0.63% of the fund's average net assets.
Under an agreement by the manager to limit its fees, the fund paid 0.25% of
its average net assets to the manager. The manager may end this arrangement
at any time upon notice to the fund's Board of Trustees.

[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES

[Begin callout]
BACKUP WITHHOLDING

Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.

[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.

<TABLE>
<CAPTION>
CLASS A YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
PER SHARE DATA ($)

<S> <C> <C> <C> <C> <C>
Net asset value,beginning of year 10.62 10.28 10.40 9.60 10.68
-------------------------------------------------

Net investment income .51 .54 .56 .55 .55

Net realized and unrealized gains (losses) .18 .35 (.12) .80 (1.10)
-------------------------------------------------

Total from investment operations .69 .89 .44 1.35 (.55)
-------------------------------------------------

Distributions from net investment income (.54) (.55) (.56) (.55) (.53)
-------------------------------------------------

Net asset value, end of year 10.77 10.62 10.28 10.40 9.60
=================================================

Total return (%) 1 6.63 8.89 4.38 14.31 (5.42)

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 80,689 58,916 44,822 43,229 35,166

Ratios to average net assets: (%)

Expenses .45 .45 .37 .33 .05

Expenses excluding waiver and
payments by affiliate .83 .82 .83 .83 .80

Net investment income 4.81 5.26 5.47 5.51 5.57

Portfolio turnover rate (%) 10.46 6.87 24.67 24.68 188.38
</TABLE>

1. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.

FRANKLIN NEW YORK
TAX-EXEMPT MONEY FUND

[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES

GOALS The fund's investment goal is to provide investors with as high a level
of income exempt from federal income taxes and New York state and New York
City personal income taxes as is consistent with prudent investment
management, the preservation of shareholders' capital, and liquidity in its
investments. The fund also tries to maintain a stable $1 share price.

PRINCIPAL INVESTMENTS The fund normally invests predominately in
high-quality, short-term, New York municipal securities whose interest is
free from federal income taxes, including the federal alternative minimum
tax, and from New York state and New York City personal income taxes.
Although the fund tries to invest all of its assets in tax-free securities,
it is possible, although not anticipated, that up to 20% of its assets may be
in securities that pay taxable interest.

The fund maintains a dollar-weighted average portfolio maturity of 90 days or
less and only buys securities:

o with remaining maturities of 397 days or less, and

o that the manager determines present minimal credit risks and are rated in
the top two ratings by U.S. nationally recognized rating services (or
comparable unrated securities).

TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goals, because it may not invest or may invest
substantially less in tax-free securities or in New York municipal securities.

[Insert graphic of chart with line going up and down] MAIN RISKS

INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall. Because
the fund limits its investments to high-quality, short-term securities, its
portfolio generally will earn lower yields than a portfolio with
lower-quality, longer-term securities subject to more risk.

Many of the fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent the fund holds insured securities, a change in the credit
rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities
they insure. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that entity to meet its
obligations. The fund's ability to maintain a stable share price may depend
on these credit supports, which are not backed by federal deposit insurance.

DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the municipal securities of one issuer than a
diversified fund. The fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities and may
involve more risk than an investment in a fund that does not focus on
securities of a single state. The fund, however, intends to meet certain tax
and federal securities law diversification requirements.

YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the manager considers.

More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).

[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Although the fund tries to maintain a
$1 share price, it is possible to lose money by investing in the fund.
[End callout]

[Insert graphic of bull and bear] PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows the fund's average annual total returns. Of course,
past performance cannot predict or guarantee future results.

ANNUAL TOTAL RETURNS 1

[Insert bar graph]

5.75% 5.13% 3.63% 2.10% 1.68% 2.12% 3.15% 2.79% 3.02% 2.79%
89 90 91 92 93 94 95 96 97 98

YEAR

[Begin callout]
BEST
QUARTER:

Q1 '89
1.47%

WORST QUARTER:

Q1 '93
0.38%
[End callout]

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998

1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------

Franklin New York Tax-Exempt Money Fund 2.79% 2.77% 3.21%

1. As of March 31, 1999, the fund's year-to-date return was 0.56%.
All fund performance assumes reinvestment of dividends.

To obtain the fund's current yield information, please call 1-800/DIAL BEN(R).

[Insert graphic of percentage sign] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (fees paid directly from your investment)

Maximum sales charge (load) on purchases None
Exchange fee None

ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)

Management fees 1 0.63%
Other expenses 0.20%
-----
Total annual fund operating expenses 1 0.83%
=====

1. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.40% and total annual fund operating expenses were 0.60%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.

EXAMPLE

This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------

$85 $265 $460 $1,025

[Insert graphic of briefcase] MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.

The team responsible for the fund's management is:

THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1987. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.

JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the fund since 1989.
He joined the Franklin Templeton Group in 1986.

CARRIE HIGGINS, PORTFOLIO MANAGER OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the fund since 1992.
She joined the Franklin Templeton Group in 1990.

The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended December 31, 1998, management
fees, before any advance waiver, were 0.63% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.40% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.

[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES

INCOME DISTRIBUTIONS The fund typically pays income dividends each day that
its net asset value is calculated. Your account may begin to receive
dividends on the day after we receive your investment and will continue to
receive dividends through the day we receive a request to sell your shares.
The amount of these dividends will vary and there is no guarantee the fund
will pay dividends.

TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. The
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Distributions of ordinary income are
taxable whether you reinvest your distributions in additional fund shares or
receive them in cash.

[Begin callout]
BACKUP WITHHOLDING

For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. Because the fund expects to
maintain a stable $1 share price, you should not have any gain or loss if you
sell your fund shares.

Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.

Distributions of ordinary income generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in the fund.

[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS

This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.

<TABLE>
<CAPTION>
CLASS A YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
PER SHARE DATA ($)

<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 1.00 1.00 1.00 1.00 1.00
--------------------------------------------------

Net investment income .03 .03 .03 .03 .02

Distributions from net investment income (.03) (.03) (.03) (.03) (.02)
--------------------------------------------------
Net asset value, end of year 1.00 1.00 1.00 1.00 1.00
==================================================

Total return (%) 2.79 3.01 2.79 3.11 2.11

RATIOS/SUPPLEMENTAL DATA

Net assets, end of year ($ x 1,000) 57,878 63,720 59,178 61,079 64,835

Ratios to average net assets: (%)

Expenses .60 .60 .60 .60 .60

Expenses excluding waiver and
payments by affiliate .83 .81 .86 .85 .93

Net investment income 2.75 2.97 2.75 3.06 2.12
</TABLE>

YOUR ACCOUNT

[Insert graphic of percentage sign] SALES CHARGES

You may buy shares of the Money Fund without a sales charge. Shares of the
Insured and Intermediate Funds are sold with a sales charge. The rest of this
section describes the sales charges that apply to the Insured and
Intermediate Funds and does not apply to the Money Fund.

Each class of the Insured Fund has its own sales charge and expense
structure, allowing you to choose the class that best meets your situation.
Your investment representative can help you decide. The Intermediate Fund
only offers Class A shares.

CLASS A CLASS C (Insured Fund only)
- ----------------------------------------------------------------------

o Initial sales charge of 4.25% o Initial sales charge of 1%
or less (Insured Fund) or 2.25%
or less (Intermediate Fund)

o Deferred sales charge of 1% on o Deferred sales charge of 1%
purchases of $1 million or more on shares you sell within 18
sold within 12 months months

o Lower annual expenses than o Higher annual expenses than
Class C due to lower Class A due to higher
distribution fees distribution fees.

BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I
AND CLASS C SHARES WERE DESIGNATED CLASS II

SALES CHARGES - CLASS A

THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- --------------------------------------------------------------------------------

INSURED FUND

Under $100,000 4.25 4.44

$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04

INTERMEDIATE FUND

Under $100,000 2.25 2.30

$100,000 but under $250,000 1.75 1.78

$250,000 but under $500,000 1.25 1.26

$500,000 but under $1 million 1.00 1.01

INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as
a lump sum or through our cumulative quantity discount or letter of intent
programs (see pages 41 and 42), you can buy Class A shares without an initial
sales charge. However, there is a 1% contingent deferred sales charge (CDSC)
on any shares you sell within 12 months of purchase. The way we calculate the
CDSC is the same for each class (please see page 41).

DISTRIBUTION AND SERVICE (12B-1) FEES Class A of both the Insured and
Intermediate Funds has a distribution plan, sometimes known as a Rule 12b-1
plan, that allows each fund to pay distribution fees of up to 0.10% per year
to those who sell and distribute Class A shares and provide other services to
shareholders. Because these fees are paid out of Class A's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.

SALES CHARGES - CLASS C

Under $1 million 1.00 1.01

WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER

CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).

DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.

CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C

The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.

[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.

For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]

To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 47 for exchange information).

SALES CHARGE REDUCTIONS AND WAIVERS

If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.

QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.

[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]

o Cumulative Quantity Discount - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.

o Letter of Intent (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.

TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION
OF YOUR ACCOUNT APPLICATION

REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.

If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.

Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.

This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.

WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be purchased
without an initial sales charge or CDSC by investors who reinvest within 365
days:

o certain payments received under an annuity contract that offers a Franklin
Templeton insurance fund option

o distributions from an existing retirement plan invested in the Franklin
Templeton Funds

o dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.

o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months

o redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.

WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions, including:

o certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion

o government entities that are prohibited from paying mutual fund sales
charges

o certain unit investment trusts and their holders reinvesting trust
distributions

o employees and other associated persons or entities of Franklin Templeton or
of certain dealers

ADDITIONAL SALES CHARGE WAIVERS MAY APPLY.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION

CDSC WAIVERS The CDSC for each class generally will be waived:

o to pay account fees

o to make payments through systematic withdrawal plans, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually depending on the frequency of
your plan

o for redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase

GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.

[Insert graphic of paper with lines and someone writing]
BUYING SHARES

<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
- ------------------------------------------------------------------------------------------

INITIAL ADDITIONAL
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $1,000 $50
- ------------------------------------------------------------------------------------------

UGMA/UTMA accounts $100 $50
- ------------------------------------------------------------------------------------------

Broker-dealer sponsored wrap account programs $250 $50
- ------------------------------------------------------------------------------------------

Full-time employees, officers, trustees and directors of
Franklin Templeton entities, and their immediate family members $100 $50
- ------------------------------------------------------------------------------------------
</TABLE>

Certain Franklin Templeton Funds, like the Insured Fund, offer multiple share
classes not offered by the Intermediate Fund or Money Fund. Please note that
for selling or exchanging your shares, or for other purposes, the
Intermediate and Money Funds' shares are considered Class A shares. Before
January 1, 1999, these funds' shares were considered Class I shares.

Many of the Money Fund's investments must be paid for in federal funds, which
are monies held by the fund's custodian on deposit at the Federal Reserve
Bank of San Francisco and elsewhere. The fund generally cannot invest money
it receives from you until it is available to the fund in federal funds,
which may take up to two days. Until then, your purchase may not be
considered in proper form. If the fund is able to make investments within one
business day, it may accept your order with payment in other than federal
funds.

ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. For the Insured Fund, make sure you
indicate the share class you have chosen. If you do not indicate a class, we
will place your purchase in Class A shares. To save time, you can sign up now
for services you may want on your account by completing the appropriate
sections of the application (see the next page).

BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------

[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------

[Insert graphic of Make your check Make your check
envelope] payable to the fund. payable to the fund.
For the Money Fund, Include your account
BY MAIL you may also send a number on the check.
Federal Reserve Draft
or negotiable bank Fill out the deposit
draft. Instruments slip from your
drawn on other mutual account statement.
funds may not be For the Money Fund,
accepted. you may also use the
deposit slip from
Mail the check or your checkbook. If
draft and your signed you do not have a
application to slip, include a note
Investor Services. with your name, the
fund name, and your
account number.

Mail the check and
deposit slip or note
to Investor Services.
- -------------------------------------------------------------------------------

[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions
BY WIRE
For the Insured and For the Money Fund,
1-800/632-2301 Intermediate Funds, wire the funds to
(or 1-650/312-2000 wire the funds and Bank of America, ABA
collect) mail your signed routing number
application to 121000358, for credit
To make a same day Investor Services. to Franklin New York
wire investment in the Please include the Tax-Exempt Money
Insured or wire control number Fund, A/C
Intermediate Fund, or your new account 1493-3-04779. Your
please call us by 1:00 number on the name and wire control
p.m. pacific time and application. number must be
make sure your wire included.
arrives by 3:00 p.m. For the Money Fund,
To make a same day wire the funds to
wire investment in the Bank of America, ABA
Money Fund, please routing number
make sure we receive 121000358, for credit
your order by 3:00 to Franklin New York
p.m. pacific time. Tax-Exempt Money
Fund, A/C
1493-3-04779. Your
name and wire control
number must be
included. Also
remember to mail your
signed application to
Investor Services.
Please include the
wire control number
or your new account
number on the
application..
- -------------------------------------------------------------------------------

[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
signed written automated TeleFACTS
BY EXCHANGE instructions. The system, or send
TeleFACTS system signed written
TeleFACTS(R) cannot be used to instructions.
1-800/247-1753 open a new account.
(around-the-clock (Please see page 47
access) (Please see page 47 for information on
for information on exchanges.)
exchanges.)
- -------------------------------------------------------------------------------

FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)

[Insert graphic of person with handset] INVESTOR SERVICES

AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account
with an automatic investment plan is $50. To sign up, complete the
appropriate section of your account application.

AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.

DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.

Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund. For Money Fund shareholders who choose not to reinvest their
distributions, the Money Fund will distribute distributions paid during the
month as directed on the last business day of each month.

*Class C shareholders may reinvest their distributions in Class A shares of
any Franklin Templeton money fund.

TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.

CHECK WRITING PRIVILEGES - MONEY FUND You may request redemption drafts
(checks) free of charge on your account application or, for an existing
account, by calling our TeleFACTS system. Check writing privileges allow you
to write checks against your account and are available unless you hold share
certificates.

For security reasons and reasons related to the requirements of check
processing systems, the fund can only accept checks ordered from the fund.
The fund cannot be responsible for any check not ordered from the fund that
is returned unpaid to the payee.

TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to
sell or exchange your shares and make certain other changes to your account
by phone.

For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.

As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*. For the Insured and Intermediate Funds, you can
exchange shares generally without paying any additional sales charges. If you
exchange shares held for less than six months, however, you may be charged
the difference between the initial sales charge of the two funds you are
exchanging between if the difference is more than 0.25%. If you exchange
shares from a money fund, a sales charge may apply no matter how long you
have held the shares, unless you acquired your money fund shares by exchange
or through the reinvestment of dividends, or you otherwise qualify to buy
shares without an initial sales charge.

[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]

Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.

Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 53).

*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.

SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.

[Insert graphic of certificate] SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:

[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
[End callout]

A notary public CANNOT provide a signature guarantee.

o you are selling more than $100,000 worth of shares

o you want your proceeds paid to someone who is not a registered owner

o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account

We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.

SELLING SHARES BY CHECK - MONEY FUND For accounts with check writing
privileges, you may make checks payable to any person and for any amount of
$100 or more. Since you will not know the exact amount in your account on the
day a check clears, a check should not be used to close your account.

When a check is presented for payment, we will redeem an equivalent number of
shares in your account to cover the amount of the check. The shares will be
redeemed at the net asset value next determined after we receive the check,
as long as the check does not exceed the collected balance in your account.
If a check is presented for payment that exceeds the collected balance in
your account, the bank may return the check unpaid.

The checks are drawn through Bank of America NT & SA. Bank of America may end
this service at any time upon notice to you. You generally will not be able
to convert a check drawn on your fund account into a certified or cashier's
check by presenting it at the bank. Since the fund is not a bank, the fund
cannot assure that a stop payment order you write will be effective. The fund
will use its best efforts, however, to see that these orders are carried out.

SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.

REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.

CONTINGENT DEFERRED SALES CHARGE (CDSC) Most Franklin Templeton Funds impose
a 1% CDSC on certain investments of Class A shares sold within 12 months of
purchase. While the Money Fund generally does not have a CDSC, it will impose
one if you sell shares exchanged into the Money Fund from another Franklin
Templeton Fund and those shares would have been assessed a CDSC in the other
fund. Please keep in mind that the time the shares are held in the Money Fund
does not count towards the CDSC holding period.

The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. To keep your CDSC as low as
possible, each time you place a request to sell shares we will first sell any
shares in your account that are not subject to a CDSC. If there are not
enough of these to meet your request, we will sell the shares in the order
they were purchased.

For information on the CDSC that may apply when you sell shares of the
Insured or Intermediate Funds, please see "Sales Charges" on page 39.

SELLING SHARES
- --------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR
SHARES
- --------------------------------------------------------------------------

[Insert graphic of hands shaking] Contact your investment
representative
THROUGH YOUR
INVESTMENT REPRESENTATIVE
- --------------------------------------------------------------------------

[Insert graphic of envelope] Send written instructions and
endorsed share certificates (if
BY MAIL you hold share certificates) to
Investor Services. Corporate,
partnership or trust accounts
may need to send additional
documents.

Specify the fund, the account
number and the dollar value or
number of shares you wish to
sell. Be sure to include all
necessary signatures and any
additional documents, as well as
signature guarantees if required.

A check will be mailed to the
name(s) and address on the
account, or otherwise according
to your written instructions.
- --------------------------------------------------------------------------

[Insert graphic of phone] As long as your transaction is
for $100,000 or less, you do not
BY PHONE hold share certificates and you
have not changed your address by
1-800/632-2301 phone within the last 15 days,
you can sell your shares by
phone.

A check will be mailed to the
name(s) and address on the
account. Written instructions,
with a signature guarantee, are
required to send the check to
another address or to make it
payable to another person.
- --------------------------------------------------------------------------

[Insert graphic of three lightning You can call or write to have
bolts] redemption proceeds of $1,000 or
more wired to a bank or escrow
BY WIRE account. See the policies above
for selling shares by mail or
phone.

Before requesting a bank wire,
please make sure we have your
bank account information on
file. If we do not have this
information, you will need to
send written instructions with
your bank's name and address,
your bank account number, the
ABA routing number, and a
signature guarantee.

For the Insured and Intermediate
Funds, requests received in
proper form by 1:00 p.m. pacific
time will be wired the next
business day. For the Money
Fund, requests received in
proper form by 3:00 p.m. pacific
time will be wired the next
business day. Requests received
by the Money Fund in proper form
by 9:00 a.m. pacific time may be
wired to an escrow account the
same day.
- --------------------------------------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for
pointing in opposite directions] the fund you are considering.

BY EXCHANGE Call Shareholder Services at the
number below or our automated
TeleFACTS(R) TeleFACTS system, or send signed
1-800/247-1753 written instructions. See the
(around-the-clock access) policies above for selling
shares by mail or phone.

If you hold share certificates,
you will need to return them to
the fund before your exchange
can be processed.
- --------------------------------------------------------------------------

[Insert graphic of paper and pen] ACCOUNT POLICIES

CALCULATING SHARE PRICE The Money Fund calculates its net asset value per
shares (NAV) at 3:00 p.m. pacific time, each day the New York Stock Exchange
is open, by dividing its net assets by the number of shares outstanding. The
fund's assets are generally valued at their amortized cost.

[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.

When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]

The Insured and Intermediate Funds calculate their NAV each business day at
the close of trading on the New York Stock Exchange (normally 1:00 p.m.
pacific time). Each class's NAV is calculated by dividing its net assets by
the number of its shares outstanding.

The assets of the Insured and Intermediate Funds are generally valued at
their market value. If market prices are unavailable, or if an event occurs
after the close of the trading market that materially affects the values,
assets may be valued at their fair value.

Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.

ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its
applicable minimum investment amount. If you choose not to do so within 30
days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.

STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.

If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.

STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.

JOINT ACCOUNTS Unless you specify a different registration, accounts with two
or more owners are registered as "joint tenants with rights of survivorship"
(shown as "Jt Ten" on your account statement). To make any ownership changes
to a joint account, all owners must agree in writing, regardless of the law
in your state.

MARKET TIMERS The funds do not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.

ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:

o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.

o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.

o The fund may modify or discontinue the exchange privilege on 60 days'
notice.

o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.

o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.

o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.

o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.

o If you buy shares with a check or draft that is returned to the fund
unpaid, the fund may impose a $10 charge against your account for each
returned item.

o When you buy shares of the Money Fund, it does not create a checking or
other bank account relationship with the fund or any bank.

DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.

INSURED FUND CLASS A CLASS C
- -------------------------------------------------------------------------------

COMMISSION (%) - 2.00

Investment under $100,000 4.00 -

$100,000 but under $250,000 3.25 -

$250,000 but under $500,000 2.25 -

$500,000 but under $1 million 1.85 -

$1 million or more up to 0.75 1 -

12B-1 FEE TO DEALER 0.10 0.65 2

INTERMEDIATE FUND
- -------------------------------------------------------------------------------

COMMISSION (%) -

Investment under $100,000 2.00

$100,000 but under $250,000 1.50

$250,000 but under $500,000 1.00

$500,000 but under $1 million 0.85

$1 million or more up to 0.75 1

12B-1 FEE TO DEALER 0.10

A dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.

1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.

[Insert graphic of question mark] QUESTIONS

If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.

HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

FOR MORE INFORMATION

You can learn more about each fund in the following documents:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).

For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.

FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com

You can also obtain information about each fund by visiting
the SEC's Public Reference Room in Washington D.C. (phone
1-800/SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. You can also visit the
SEC's Internet site at http://www.sec.gov.

Investment Company Act file #811-4787 NYT P 05/99

FRANKLIN NEW YORK
TAX-FREE TRUST

FRANKLIN NEW YORK INSURED TAX-FREE INCOME FUND - CLASS A & C
FRANKLIN NEW YORK INTERMEDIATE-TERM TAX-FREE INCOME FUND - CLASS A
FRANKLIN NEW YORK TAX-EXEMPT MONEY FUND - CLASS A

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1999

P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
- --------------------------------------------------------------------------------

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated May 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the funds. You should
read this SAI together with the funds' prospectus.

The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).

For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).

CONTENTS

Goals and Strategies ............................................. 2
Risks ............................................................ 8
Officers and Trustees ............................................ 11
Management and Other Services .................................... 13
Portfolio Transactions ........................................... 15
Distributions and Taxes .......................................... 15
Organization, Voting Rights and Principal Holders ................ 17
Buying and Selling Shares ........................................ 18
Pricing Shares ................................................... 23
The Underwriter .................................................. 24
Performance ...................................................... 26
Miscellaneous Information ........................................ 30
Description of Ratings ........................................... 31

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- --------------------------------------------------------------------------------

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

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

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

NYT SAI 05/99

GOALS AND STRATEGIES
- --------------------------------------------------------------------------------

Each fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes and New York state and New York City
personal income taxes as is consistent with prudent investment management and
the preservation of shareholders' capital, and, in the case of the Money Fund,
liquidity in its investments. This goal is fundamental, which means it may not
be changed without shareholder approval. Of course, there is no assurance that
any fund will meet its goal. The Money Fund also tries to maintain a stable $1
share price.

As a fundamental policy, each fund normally invests at least 80% of its total
assets in securities that pay interest free from federal income taxes, including
the federal alternative minimum tax. As nonfundamental policies, each fund also
normally invests at least 80% of its total assets in securities that pay
interest free from the personal income taxes of New York state and New York City
and at least 65% of its total assets in New York municipal securities.

Municipal securities issued by New York state or its counties, municipalities,
authorities, agencies, or other subdivisions (New York municipal securities), as
well as municipal securities issued by U.S. territories such as Guam, Puerto
Rico, or the Mariana Islands, generally pay interest free from federal income
tax and from New York state and New York City personal income taxes for New York
residents.

Each fund tries to invest all of its assets in tax-free municipal securities.
The issuer's bond counsel generally gives the issuer an opinion on the
tax-exempt status of a municipal security when the security is issued.

Below is a description of various types of municipal and other securities that
each fund may buy. Other types of municipal securities may become available that
are similar to those described below and in which each fund may also invest, if
consistent with its investment goals and policies.

TAX ANTICIPATION NOTES are issued to finance short-term working capital needs of
municipalities 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 similar to tax anticipation notes except they are
issued in expectation of the receipt of other kinds of revenue, such as federal
revenues available under the Federal Revenue Sharing Program.

BOND ANTICIPATION NOTES are normally issued to provide interim financing until
long-term financing can be arranged. Proceeds from long-term bond issues then
provide the money for the repayment of the notes.

CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.

TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.

MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.

GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. 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.

REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. For example,
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 that may
be used to make principal and interest payments. Some authorities have further
security in the form of state assurances (although without obligation) to make
up deficiencies in the debt service reserve fund.

TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking. The
payment of principal and interest is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
facility or other property as security for payment.

VARIABLE OR FLOATING RATE SECURITIES Each fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate). The
interest rate adjustments are designed to help stabilize the security's price.
Variable or floating rate securities may include a demand feature, which may be
unconditional. The demand feature allows the holder to demand prepayment of the
principal amount before maturity, generally on no more than 30 days' notice. The
holder receives the principal amount plus any accrued interest either from the
issuer or by drawing on a bank letter of credit, a guarantee or insurance issued
with respect to the security.

The Money Fund's investment in variable or floating rate securities is subject
to certain rules under federal securities laws on the quality and maturity of
the securities and to procedures adopted by the fund's board of trustees and
designed to minimize credit risks. The fund may invest in variable or floating
rate securities with stated maturities of more than one year, if the securities
carry demand features that comply with certain conditions and rules.

MUNICIPAL LEASE OBLIGATIONS Each fund may invest in municipal lease obligations,
including certificates of participation. Municipal lease obligations generally
finance the purchase of public property. The property is leased to the state or
a local government, and the lease payments are used to pay the interest on the
obligations. Municipal lease obligations differ from other municipal securities
because the lessee's governing body must appropriate the money to make the lease
payments each year. If the money is not appropriated, the issuer or the lessee
can end the lease without penalty. If the lease is cancelled, investors who own
the municipal lease obligations may not be paid.

The board of trustees reviews the fund's municipal lease obligations to try to
assure that they are liquid investments based on various factors reviewed by the
fund's manager and monitored by the board. These factors may include (a) the
credit quality of the obligations and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are comparable in quality to the ratings required for the fund to invest,
including an assessment of the likelihood of the lease being canceled, taking
into account how essential the leased property is and the term of the lease
compared to the useful life of the leased property; (b) the size of the
municipal securities market, both in general and with respect to municipal lease
obligations; and (c) the extent to which the type of municipal lease obligations
held by the fund trade on the same basis and with the same degree of dealer
participation as other municipal securities of comparable credit rating or
quality.

Since annual appropriations are required to make lease payments, municipal lease
obligations generally are not subject to constitutional limitations on the
issuance of debt and may allow an issuer to increase government liabilities
beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a
municipal lease obligation than they do to curtail payments on other municipal
securities. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligations. If this happens, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligations or that the payments will continue
to be tax-free.

While cancellation risk is inherent to municipal lease obligations, each fund
believes that this risk may be reduced, although not eliminated, by its policies
on the quality of securities in which it may invest.

CALLABLE BONDS Each fund may invest in callable bonds, which allow the issuer to
repay some or all of the bonds ahead of schedule. If a bond is called, the fund
will receive the principal amount, the accrued interest, and may receive a small
additional payment as a call premium. The manager may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.

An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a bond
is called, the fund may have to replace it with a lower-yielding security. A
call of some or all of these securities may lower a fund's income and its
distributions to shareholders. If the fund originally paid a premium for the
bond because it had appreciated in value from its original issue price, the fund
also may not be able to recover the full amount it paid for the bond. One way
for the fund to protect itself from call risk is to buy bonds with call
protection. Call protection is an assurance that the bond will not be called for
a specific time period, typically five to 10 years from when the bond is issued.

ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future date.
The issuer uses the proceeds from a new bond issue to buy high grade, interest
bearing debt securities, generally direct obligations of the U.S. government.
These securities are then deposited in an irrevocable escrow account held by a
trustee bank to secure all future payments of principal and interest on the
pre-refunded bond. Escrow-secured bonds often receive a triple A or equivalent
rating.

STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.

ZERO-COUPON SECURITIES The Insured and Intermediate Funds may each invest in
zero-coupon and delayed interest securities. Zero-coupon securities make no
periodic interest payments, but are sold at a deep discount from their face
value. The buyer recognizes a rate of return determined by the gradual
appreciation of the security, which is redeemed at face value on a specified
maturity date. The discount varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the
issuer's perceived credit quality. The discount, in the absence of financial
difficulties of the issuer, typically decreases as the final maturity date
approaches. If the issuer defaults, the fund may not receive any return on its
investment.

Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value is generally more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, zero-coupon securities fall more dramatically than
bonds paying interest on a current basis when interest rates rise. When interest
rates fall, zero-coupon securities rise more rapidly in value, because the bonds
reflect a fixed rate of return.

An investment in zero-coupon and delayed interest securities may cause a fund to
recognize income and make distributions to shareholders before it receives any
cash payments on its investment. To generate cash to satisfy distribution
requirements, a fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of fund shares.

CONVERTIBLE AND STEP COUPON BONDS The Insured and Intermediate Funds may each
invest a portion of their assets in convertible and step coupon bonds.
Convertible bonds are zero-coupon securities until a predetermined date, at
which time they convert to a specified coupon security. The coupon on step
coupon bonds changes periodically during the life of the security based on
predetermined dates chosen when the security is issued.

U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies and
instrumentalities of the U.S. government and are backed by the full faith and
credit of the U.S. government. They include Treasury bills, notes and bonds.

COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. Each fund may invest in taxable commercial paper only
for temporary defensive purposes.

WHEN-ISSUED TRANSACTIONS Municipal securities 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 buy is made, but delivery
and payment take place at a later date. During the time between purchase and
settlement, no payment is made by the fund to the issuer and no interest accrues
to the fund. If the other party to the transaction fails to deliver or pay for
the security, the fund could miss a favorable price or yield opportunity, or
could experience a loss.

When the fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and reflects the value of the security in the
determination of its net asset value. The funds believe their net asset value or
income will not be negatively affected by their purchase of municipal securities
on a when-issued basis. The funds will not engage in when-issued transactions
for investment leverage purposes.

Although a fund will generally buy municipal securities on a when-issued basis
with the intention of acquiring the securities, it may sell the securities
before the settlement date if it is considered advisable. When a fund is the
buyer, it will maintain cash or liquid securities, with an aggregate value equal
to the amount of its purchase commitments, in a segregated account with its
custodian bank until payment is made. If assets of a fund are held in cash
pending the settlement of a purchase of securities, the fund will not earn
income on those assets.

ILLIQUID INVESTMENTS Each fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are generally securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which the fund has valued them.

REPURCHASE AGREEMENTS The Money Fund may enter into repurchase agreements for
temporary defensive purposes. Under a repurchase agreement, the fund agrees to
buy U.S. government securities from a bank or broker-dealer (the seller) and
then to sell the securities back to the bank or broker-dealer after a short
period of time (generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an initial
market value of at least 102% of the repurchase price, and is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to sell the underlying securities. The fund
may enter into repurchase agreements only with parties who meet creditworthiness
standards approved by the fund's board of trustees, i.e., banks or
broker-dealers that the manager has determined present no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement.

To the extent it invests in repurchase agreements, the Money Fund may not invest
in repurchase agreements with a term of more than one year, and usually would
invest in those with terms ranging from overnight to one week. The securities
underlying a repurchase agreement may, however, have maturity dates longer than
one year from the effective date of the repurchase agreement. The fund may not
enter into a repurchase agreement with a term of more than seven days if, as a
result, more than 10% of the fund's net assets would be invested in such
repurchase agreements and other illiquid securities.

DIVERSIFICATION Each fund is a non-diversified fund. Generally, to meet federal
tax requirements at the close of each quarter, a fund may not invest more than
25% of its total assets in any one issuer and, with respect to 50% of total
assets, may not invest more than 5% of its total assets in any one issuer. These
limitations do not apply to U.S. government securities and may be revised if
applicable federal income tax requirements are revised. The Money Fund also
follows certain procedures required by federal securities laws with respect to
the diversification of its investments.

TEMPORARY INVESTMENTS When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest each fund's portfolio in a
temporary defensive manner. Under these circumstances, each fund may invest all
of its assets in securities that pay taxable interest, including (i) municipal
securities issued by a state or local government other than New York; (ii) high
quality commercial paper; or (iii) securities issued by or guaranteed by the
full faith and credit of the U.S. government. Each fund also may invest all of
its assets in municipal securities issued by a U.S. territory such as Guam,
Puerto Rico or the Mariana Islands. For temporary purposes, the Money Fund also
may invest in obligations of U.S. banks with more than $1 billion in assets.

SECURITIES TRANSACTIONS The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for each fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.

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

CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.

A security's credit quality depends on the issuer's ability to pay interest on
the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (S&P), often rate
municipal securities based on their opinion of the issuer's credit quality. Most
rating agencies use a descending alphabet scale to rate long-term securities,
and a descending numerical scale to rate short-term securities. These ratings
are described at the end of this SAI under "Description of Ratings."

An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered by
an insurance policy that guarantees the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of principal
and interest.

As discussed in the prospectus, each fund has different limitations on the
credit quality of securities it may buy. These limitations are generally applied
when a fund makes an investment so that a fund is not required to sell a
security because of a later change in circumstances. In the case of the Money
Fund, however, the fund and its board must follow guidelines under federal
securities laws and act accordingly if the rating on a security in the fund's
portfolio is downgraded. These procedures only apply to changes between the
"major" rating categories, and not to changes in a security's relative standing
within a rating category.

In addition to considering ratings in its selection of each fund's portfolio
securities, the manager considers, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. Securities that depend on the credit of
the U.S. government are regarded as having a triple A or equivalent rating.

INSURANCE The Insured Fund invests primarily in insured municipal securities.
The Intermediate and Money Funds also may invest in insured municipal
securities.

Each insured municipal security in the Insured Fund's portfolio is covered by
either a "New Issue Insurance Policy," a "Portfolio Insurance Policy" or a
"Secondary Insurance Policy." Normally, the underlying rating of an insured
security is one of the top three ratings of Fitch, Moody's or S&P. An insurer
may insure municipal securities that are rated below the top three ratings or
that are unrated if the securities otherwise meet the insurer's quality
standards.

The fund will only enter into a contract to buy an insured municipal security if
either permanent insurance or an irrevocable commitment to insure the municipal
security by a qualified municipal bond insurer is in place. The insurance
feature guarantees the scheduled payment of principal and interest, but does not
guarantee (i) the market value of the insured municipal security, (ii) the value
of the fund's shares, or (iii) the fund's distributions.

NEW ISSUE INSURANCE POLICY. An issuer may obtain a New Issue Insurance Policy,
also called a "Primary Insurance Policy," when securities are issued. The issuer
pays all premiums on the policy in advance. The policy continues in effect as
long as the securities are outstanding and the insurer remains in business, and
may not otherwise be canceled. Since the policy remains in effect as long as the
securities are outstanding, the insurance is likely to increase the credit
rating of the security, as well as its purchase price and resale value.

PORTFOLIO INSURANCE POLICY. The fund may obtain a Portfolio Insurance Policy,
which is effective only as long as the fund holds the securities described in
the policy and the insurer is in business and meeting its obligations. If the
fund sells a security or the principal amount of the security is paid before
maturity, the policy terminates as to that security and will continue to cover
only those securities the fund still holds. A Portfolio Insurance Policy may not
otherwise be canceled, unless the fund fails to pay the premium. If a security
covered by a Portfolio Insurance Policy is pre-refunded and irrevocably secured
by a U.S. government security, the insurance will no longer be required for that
security.

Because coverage under a Portfolio Insurance Policy ends when the fund sells a
security, the insurance does not affect the resale value of the security.
Therefore, the fund may hold any security insured under a Portfolio Insurance
Policy that is in default or in significant risk of default. The manager will
consider the value of the insurance for the principal and interest payments, the
market value of the security, the market value of securities of similar issuers
whose securities carry similar interest rates, and the discounted present value
of the principal and interest payments to be received from the insurance company
in its evaluation of the security. Absent any unusual or unforeseen
circumstances as a result of the Portfolio Insurance Policy, the manager would
likely recommend that the fund value the defaulted security, or security for
which there is a significant risk of default, at the same price as securities of
a similar nature that are not in default. While a defaulted security is held in
the fund's portfolio, the fund continues to pay the insurance premium on the
security 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.

The insurer may not change premium rates for securities covered by a Portfolio
Insurance Policy, regardless of the issuer's ability or willingness to meet its
obligations. Premiums are payable monthly and are adjusted for purchases and
sales of covered securities during the month. The premium on a Portfolio
Insurance Policy is a fund expense. If the fund fails to pay its premium, the
insurer may take action against the fund to recover any premium payments that
are due.

SECONDARY INSURANCE POLICY. Under its agreement with the provider of the
Portfolio Insurance Policy, the fund may at any time buy a permanent Secondary
Insurance Policy on any municipal security insured under the Portfolio Insurance
Policy, even if the security is currently in default. When the fund buys a
Secondary Insurance Policy, the coverage and obligation of the fund to pay
monthly premiums for the security under the Portfolio Insurance Policy ends. The
insurer may not change the price of the Secondary Insurance Policy, regardless
of the security issuer's ability to meet its debt obligations.

With a Secondary Insurance Policy, the fund obtains insurance against nonpayment
of scheduled principal and interest for the remaining term of a security. This
insurance coverage continues in effect as long as the insured security is
outstanding and may not otherwise be canceled. Thus, the fund has the
opportunity to sell a security in default rather than hold it in its portfolio
in order to continue, in force, the applicable Portfolio Insurance Policy. When
the fund buys a Secondary Insurance Policy on a security, the single premium is
added to the cost basis of the security and is not considered a fund expense. A
defaulted security covered by a Secondary Insurance Policy would be valued at
its market value.

One of the reasons the fund may buy a Secondary Insurance Policy is to enable it
to sell a security to a third party as a triple A rated or equivalent insured
security. In doing so, the fund may be able to sell the security at a market
price that is higher than what it may otherwise be without the insurance. The
triple A or equivalent rating is not automatic, however, and must specifically
be requested from Fitch, Moody's or S&P for each security.

The fund is likely to buy a Secondary Insurance Policy if, in the manager's
opinion, the market value or net proceeds of the sale of a security by the fund
may exceed the current value of the security, without insurance, plus the cost
of the insurance. Any difference between the excess of a security's market value
as a triple A rated or equivalent security over its market value without such
rating, including the cost of insurance, inures to the fund in determining the
net capital gain or loss realized by the fund upon the sale of the security.

The fund may buy a Secondary Insurance Policy instead of a Portfolio Insurance
Policy at any time, regardless of the effect of market value on the underlying
municipal security, if the manager believes such insurance would best serve the
fund's interests in meeting its investment goals.

QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any one
of several qualified municipal bond insurers. The fund buys insured municipal
securities only if they are secured by an insurance policy issued by an insurer
whose claims paying ability is rated triple A or its equivalent by Fitch,
Moody's or S&P. Currently, there are four primary, triple A rated municipal bond
insurers.

A qualified municipal bond insurer is a company whose charter limits its risk
assumption to insurance of financial obligations. This precludes the assumption
of other types of risk, such as life, medical, fire and casualty, and 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. Most regulators,
however, require minimum standards of solvency and limitations on leverage and
investment of assets. Regulators also place restrictions on the amount an
insurer can guarantee in relation to the insurer's capital base. Neither the
fund nor the manager makes any representations as to the ability of any
insurance company to meet its obligation to the fund if called upon to do so.

Currently, to the best of our knowledge, there are no securities in the fund's
portfolio on which an insurer is paying the principal or interest otherwise
payable by the issuer of the bond.

GENERAL. Under the provisions of an insurance policy, the insurer
unconditionally and irrevocably agrees to pay the appointed trustee or its
successor and its agent (Trustee) the portion of the principal or interest on an
insured security that is due for payment but that has not been paid by the
issuer. The insurer makes such payments to the Trustee on the date the principal
or interest becomes due for payment or on the next business day following the
day on which the insurer receives notice of nonpayment, whichever is later. The
Trustee then disburses the amount of principal or interest due to the fund after
the Trustee receives (i) evidence of the 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 the
principal or interest due for payment will vest in the insurer. After the
disbursement, the insurer becomes the owner of the security, appurtenant coupon,
or right to payment of principal or interest on the security and is fully
subrogated to all of the fund's rights with respect to the security, including
the right to payment. The insurer's rights to the security or to payment of
principal or interest are limited, however, to the amount the insurer has paid.

If the issuer of an insured municipal security fails to pay an installment of
principal or interest that is due for payment, the fund will receive an
insurance payment in the amount of the payment due. When referring to the
principal amount, the term "due for payment" means the security's stated
maturity date or its call date for mandatory sinking fund redemption. It does
not mean any earlier date when payment is due because of a call for redemption
(other than by mandatory sinking fund redemption), acceleration or other
advancement of maturity. When referring to the interest on a security, the term
"due for payment" means the stated date for payment of interest.

The term "due for payment" may have another meaning if the interest on a
security is determined to be subject to federal income taxation, as provided in
the security's underlying documentation. When referring to the principal amount
in this case, the term also means the call date for mandatory redemption as a
result of the determination of taxability, and when referring to the interest on
the security, the term also means the accrued interest, to the call date for
mandatory redemption, at the rate provided in the security's documentation
together with any applicable redemption premium.

INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.

Each fund may not:

1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets thereof) 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 the 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
customarily purchased by institutional investors, including the municipal
securities described above, or to the extent the entry into a repurchase
agreement may be deemed a loan. Although such loans are not presently
intended, this prohibition will not preclude the fund from loaning
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 manager own
beneficially more than one-half 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 the fund may
purchase, hold, and dispose of puts on municipal securities in accordance
with its investment policies.

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 that
the Intermediate Fund may invest in shares of one or more money market
funds managed by Franklin Advisers, Inc., to the extent permitted by
exemptions granted under the Investment Company Act of 1940, and except to
the extent the Insured Fund invests its uninvested daily cash balances in
shares of Franklin New York Tax-Exempt Money Fund and other tax-exempt
money market funds in the Franklin Group of Funds provided i) its purchases
and redemptions of such money market fund shares may not be subject to any
purchase or redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the fund's shares (as determined under Rule 12b-1, as amended
under the federal securities laws) and iii) provided aggregate investments
by the Insured Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of the fund's total net assets or (ii) $2.5 million, or
(B) more than 3% of the outstanding shares of any such money market fund.

11. Invest more than 10% of its assets in securities, in the case of the Money
Fund, with legal or contractual restrictions on resale.

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

If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.

If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.

RISKS
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NEW YORK Since each fund mainly invests in New York municipal securities, its
performance is closely tied to the ability of issuers of New York municipal
securities to continue to make principal and interest payments on their
securities. The issuers' ability to do this is in turn dependent on economic,
political and other conditions within New York. Below is a discussion of certain
conditions that may affect New York issuers. It is not a complete analysis of
every material fact that may affect the ability of issuers of New York municipal
securities to meet their debt obligations or the economic or political
conditions within New York and is subject to change. The information below is
based on relatively recent publications by Moody's and Fitch, two historically
reliable sources, but the fund has not independently verified it.

NEW YORK STATE. The ability of New York issuers to continue to make principal
and interest payments is dependent in large part on the ability of the state to
raise revenues, primarily through taxes, and to control spending. Many factors
can affect the state's revenues including the rate of population growth,
unemployment rates, personal income growth, federal aid, and the ability to
attract and keep successful businesses. A number of factors can also affect the
state's spending including current debt levels, and the existence of accumulated
budget deficits.

In recent years, New York's economy has improved, in large part due to strong
growth in the state's financial services sector. Nonetheless, the state's
population, employment and personal income growth rates have continued to lag
national growth rates and the state has been unable to restore employment to its
pre-recession level.

With its improved economic performance, the state also has been able to improve
its finances. New York has had three consecutive years of budget surpluses and
has eliminated its accumulated GAAP general fund deficit. For fiscal 1997 and
1998, the state's surpluses totaled $1.4 billion and $2.0 billion, respectively.
As of September 1998, a cash surplus of more than $1 billion was estimated for
fiscal 1999. The state's accumulated surplus was $567 million as of March 1998.
Going forward, however, recent estimates have shown a budget gap of nearly $5.5
billion by 2001, due to the continued implementation of revenue reducing tax
cuts along with increased spending (about 7% in 1999). This gap could widen if
the recent strong performance of Wall Street and the state's overall financial
services sector does not continue.

New York's debt burden has continued to be one of the highest among the states.
As of August 1998, New York ranked fourth with a debt per capita of $1,914.
There are no signs that this will change in the near term. The state's current
capital plan relies heavily on the issuance of debt. While many state's have
used recent budget surpluses to finance capital expenditures on a
"pay-as-you-go" basis and reduce their reliance on debt financing, New York has
not. Estimates have shown that New York's use of pay-as-you-go financing may
decline from 22% in fiscal 1999 to 10% in 2003.

Despite recent improvements in New York's economic and financial performance,
its high debt levels and projected budget imbalances leave the state vulnerable
to an economic slowdown and volatility in its financial services sector.

The state has either guaranteed or supported, through lease-purchase
arrangements or other contractual or moral obligations, a substantial principal
amount of securities issued by various state agencies and authorities. Moral
obligations do not impose immediate financial obligations on the state and
require appropriations by the legislature before any payments can be made. If
the state fails to appropriate necessary amounts or to take other action to
allow authorities and agencies to meet their obligations, the authorities and
agencies could default on their debt obligations. If a default occurs, it would
likely have a significant adverse impact on the market price of the obligations
of both the state and its various authorities and agencies.

To the extent state agencies and local governments require state assistance to
meet their financial obligations, the ability of the state of New York to meet
its own obligations or to obtain additional financing could be adversely
affected. This financial situation could result not only in defaults of state
and agency obligations, but could also adversely affect the marketability of New
York municipal securities.

In addition, if constitutional challenges to state laws or other court actions
are brought against the state or its agencies and municipalities relating to
financing, or the amount and use of taxes, these actions could adversely affect
the ability of the state and its political subdivisions to meet their debt
obligations, and may require extraordinary appropriations, expenditure
reductions, or both.

NEW YORK CITY. In 1975, New York City suffered several financial crises. In that
year, the city lost access to public credit markets and was not able to sell
short-term notes until 1979 or long-term notes until 1981. In an effort to help
the city out of its financial difficulties, the state legislature created the
Municipal Assistance Corporation (MAC). MAC has the authority to issue bonds and
notes and to pay or lend the proceeds to New York City, as well as to exchange
its obligations for city obligations. MAC bonds are payable out of certain state
sales and use taxes imposed by the city, state stock transfer taxes and per
capita state aid to the city. The state is not, however, obligated to continue
these taxes, to continue appropriating revenues from these taxes or to continue
appropriating per capita state aid to pay MAC obligations. MAC does not have
taxing powers, and its bonds are not obligations enforceable against either New
York City or New York state.

From 1975 until June 30, 1986, the city's financial condition was subject to
oversight and review by the New York State Financial Control Board (FCB). To be
eligible for guarantees and assistance, the city was required to submit to the
FCB, at least 50 days before the beginning of each fiscal year, a financial plan
for the city and certain agencies covering the four-year period beginning with
the upcoming fiscal year. The four-year financial plans had to show a balanced
budget determined in accordance with generally accepted accounting principles.
On June 30, 1986, some of the FCB's powers were suspended because the city had
satisfied certain statutory conditions. The powers suspended included the FCB's
power to approve or disapprove certain contracts, long-term and short-term
borrowings and the four-year financial plans. The city, however, is still
required to develop four-year financial plans each year and the FCB continues to
have certain review powers. The FCB must reimpose its full powers if there is
the occurrence or a substantial likelihood and imminence of the occurrence of
any one of certain events including the existence of an operating deficit
greater than $100 million, or failure by the city to pay principal of or
interest on any of its notes or bonds when due or payable.

In recent years, the city's overall debt burden has been high and has approached
constitutional general obligation debt limits. At the same time, the city
recently adopted a 10-year, $45 billion capital plan to maintain its essential
infrastructure. To help finance the capital plan and allow the city to operate
under its constitutional debt limit, the state's legislature created the New
York City Transitional Finance Authority in March 1997, which is authorized to
issue additional debt for the city's use. This debt will be backed primarily by
city personal income taxes. Going forward, the city will need to somehow balance
the maintenance of its infrastructure with its growing debt burden. In fiscal
1998, debt service costs were approximately 8.7% of the city's expenditures.
This figure may grow to 11.4% by 2002 and could reduce the city's future
financial flexibility, especially in the event of an economic downturn or other
financial crisis.

On the positive side, the city ended fiscal 1998 with a surplus of more than $2
billion. Similar to improvements at the state level, the city's improved
financial performance has been due in large part to the strong performance of
the securities industry and overall financial services sector, which may or may
not continue. Despite improved economic performance, the city's employment
growth has remained below national levels and the city has been able to regain
only approximately 60% of the jobs lost during the most recent recession.

U.S. TERRITORIES Since each fund may invest up to 35% of its assets in municipal
securities issued by U.S. territories, the ability of municipal issuers in U.S.
territories to continue to make principal and interest payments also may affect
a fund's performance. As with New York, the ability to make these payments is
dependent on economic, political and other conditions. Below is a discussion of
certain conditions within some of the territories where the funds may be
invested. It is not a complete analysis of every material fact that may affect
the ability of issuers of U.S. territory municipal securities to meet their debt
obligations or the economic or political conditions within the territories and
is subject to change. It is based on relatively recent data available to the
funds from Moody's and other historically reliable sources, but it has not been
independently verified by the funds.

GUAM. Guam's economy has been heavily dependent on its tourism industry, which
accounted for almost 40% of total employment in 1997. It has been especially
dependent on Japanese tourism, which has made Guam vulnerable to fluctuations in
the relationship between the U.S. dollar and the Japanese yen.

In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a comprehensive
financial plan in June 1995 to help balance the budget and reduce the general
fund deficit by fiscal 1999. As of fiscal 1997, the deficit had improved and the
budget was balanced.

While Guam's debt burden has been manageable, Guam's ability to maintain current
debt levels may be challenged in the near future. U.S. military downsizing has
reduced the federal presence on the island and also may reduce federal support
for infrastructure projects. At the same time, Guam has faced increasing
pressure to improve its infrastructure to help generate economic development.

Overall, as of October 1997, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and the need for continued political support
towards the goals of the financial plan.

MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum wage
and immigration laws in an effort to help stimulate industry and the economy.
The islands' minimum wage has been more than $2 per hour below the U.S. level
and tens of thousands of workers have immigrated from various Asian countries to
provide cheap labor for the islands' industries. Recently, the islands' tourism
and apparel industries combined to help increase gross business receipts from
$224 million in 1985 to $2 billion in 1996.

PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has improved.
Relatively strong revenue growth and more aggressive tax collection procedures
resulted in a general fund surplus for fiscal 1998 (unaudited). For fiscal 1999,
spending increases of 11% are budgeted, which may create an operating deficit
and deplete the commonwealth's unreserved fund balance.

Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico will also need to address its large
unfunded pension liability of more than $6 billion.

Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Internal Revenue Code. This section has given certain U.S. corporations
operating in Puerto Rico significant tax advantages. These incentives have
helped considerably with Puerto Rico's economic growth, especially with the
development of its manufacturing sector. U.S. firms that have benefited from
these incentives have provided a significant portion of Puerto Rico's revenues,
employment and deposits in local financial institutions. The section 936
incentives will be phased out over a 10-year period ending in 2006. It is hoped
that this long phase-out period will give Puerto Rico sufficient time to lessen
the potentially negative effects of section 936's elimination. Outstanding
issues relating to the potential for a transition to statehood also may have
broad implications for Puerto Rico and its financial and credit position.

OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------

The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the Insured Fund to ensure no material conflicts exist among its
share classes. While none is expected, the board will act appropriately to
resolve any material conflict that may arise.

The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.

Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE

President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).

Harris J. Ashton (66)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE

Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).

Robert F. Carlson (71)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE

Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.

S. Joseph Fortunato (66)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE

Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.

*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE

President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 50 of the investment
companies in the Franklin Templeton Group of Funds.

*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE

Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.

Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102,
Cupertino, CA 95014
TRUSTEE

General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be, of
27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems),
Digital Transmission Systems, Inc. (wireless communications) and Quarterdeck
Corporation (software firm), and General Partner, Peregrine Associates, which
was the General Partner of Peregrine Ventures (venture capital firm).

*William J. Lippman (74)
One Parker Plaza, 16th Floor, Fort Lee, NJ 07024
TRUSTEE

Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of six of the investment companies in the Franklin
Templeton Group of Funds.

Gordon S. Macklin (70)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE

Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.

Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.

Martin L. Flanagan (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.

Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.

Thomas J. Kenny (36)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Executive Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in the Franklin Templeton Group of Funds.

Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER

Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.

Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.

*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

The trust pays noninterested board members $215 per month plus $210 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.

NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
NAME THE TRUST 1 OF FUNDS 1 EACH SERVES 2
- ------------------------------------------------------------------------------

Frank H. Abbott, III $2,437 $159,051 27

Harris J. Ashton $2,681 $361,157 49

Robert F. Carlson $3,165 $78,052 9

S. Joseph Fortunato $2,528 $367,835 51

Frank W.T. LaHaye $2,647 $163,753 27

Gordon S. Macklin $2,681 $361,157 49

1. For the year ended December 31, 1998. During the period from January 1, 1998,
through May 31, 1998, fees at the rate of $50 per month plus $50 per board
meeting attended were in effect for the Trust.
2. We base the number of boards on the number of registered investment companies
in the
Franklin Templeton Group of Funds. This number does not include the total number
of series or funds within each investment company for which the board members
are responsible. The Franklin Templeton Group of Funds currently includes 54
registered investment companies, with approximately 163 U.S. based funds or
series.

Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members 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.

Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.

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

MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.

The manager provides investment research and portfolio management services, and
selects the securities for each fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the funds' portfolio transactions. The manager provides periodic reports
to the board, which reviews and supervises the manager's investment activities.
To protect the funds, the manager and its officers, directors and employees are
covered by fidelity insurance.

The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of each fund. Similarly, with respect to each
fund, the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the funds or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the funds' code of
ethics.

Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.

MANAGEMENT FEES The Insured and Intermediate Funds each pay the manager a fee
equal to a monthly rate of:

o 5/96 of 1% (approximately 5/8 of 1% per year) of the value of net assets up
to and including $100 million; and

o 1/24 of 1% (approximately 1/2 of 1% per year) of the value of net assets
over $100 million and not over $250 million; and

o 9/240 of 1% (approximately 45/100 of 1% per year) of the value of net
assets in excess of $250 million.

The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
Insured Fund's shares pays its proportionate share of the fee.

The Money Fund pays the manager a fee equal to a daily rate of:

o 1/584 of 1% of the value of net assets up to and including $100 million;
and

o 1/730 of 1% of the value of net assets over $100 million up to and
including $250 million; and

o 1/811 of 1% of the value of net assets in excess of $250 million.

The fee is payable at the request of the manager according to the terms of the
management agreement.

For the last three fiscal years ended December 31, the funds paid the following
management fees:

MANAGEMENT FEES PAID ($)
--------------------------------------
1998 1997 1996
- --------------------------------------------------------------------

Insured Fund 1,482,054 1,433,123 1,283,052 1

Intermediate Fund 2 164,966 132,873 76,133

Money Fund 3 240,349 261,796 225,867

1. Management fees, before any advance waiver, totaled $1,414,871. Under an
agreement by the manager to limit its fees, the fund paid the management fees
shown.
2. For the fiscal years ended December 31, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $420,910, $317,251 and $278,912,
respectively. Under an agreement by the manager to limit its fees, the fund paid
the management fees shown.
3. For the fiscal years ended December 31, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $376,567, $389,114 and $387,116,
respectively. Under an agreement by the manager to limit its fees, the fund paid
the management fees shown.

ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.

The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.

ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:

o 0.15% of each fund's average daily net assets up to $200 million;

o 0.135% of average daily net assets over $200 million up to $700 million;

o 0.10% of average daily net assets over $700 million up to $1.2 billion; and

o 0.075% of average daily net assets over $1.2 billion.

During the last three fiscal years ended December 31, the manager paid FT
Services the following administration fees:

ADMINISTRATION FEES PAID ($)
--------------------------------------
1998 1997 1996 1
- --------------------------------------------------------------------

Insured Fund 398,776 384,599 96,404

Intermediate Fund 99,949 75,401 17,039

Money Fund 90,400 93,354 22,562

1. For the period from October 1, 1996, through December 31, 1996.

SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is each fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.

For its services, Investor Services receives a fixed fee per account. Each fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.

CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of each fund's securities and other assets.

AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).

PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Since most purchases 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 buying 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 using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the funds do not buy
securities in underwritings where they are given no choice, or only limited
choice, in the designation of dealers to receive the commission. The funds seek
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 provided by the dealers in the
execution of orders.

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

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

During the fiscal years ended December 31, 1998, 1997 and 1996, the funds did
not pay any brokerage commissions.

As of December 31, 1998, the funds did not own securities of their regular
broker-dealers.

DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

The Insured Fund calculates dividends and capital gains the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the distribution and service (Rule 12b-1)
fees of each class. The funds do not pay "interest" or guarantee any fixed rate
of return on an investment in their shares.

DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of interest on its investments. This income, less expenses incurred in
the operation of the fund, constitutes the fund's net investment income from
which dividends may be paid to you.

The Money Fund's daily net income includes accrued interest and any original
issue or acquisition 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 $1 share
price), less the estimated expenses of the fund.

By meeting certain requirements of the Internal Revenue Code, the funds have
qualified and continue to qualify to pay exempt-interest dividends to you. These
dividends are derived from interest income exempt from regular federal income
tax, and are not subject to regular federal income tax when they are distributed
to you. In addition, to the extent that exempt-interest dividends are derived
from interest on obligations of New York or its political subdivisions, or from
interest on qualifying U.S. territorial obligations (including qualifying
obligations of Puerto Rico, the U.S. Virgin Islands or Guam), they also will be
exempt from New York's personal income taxes. New York generally does not grant
tax-free treatment to interest on state and municipal securities of other
states.

The funds may earn taxable income on any temporary investments, on the discount
from stripped obligations or their coupons, on income from securities loans or
other taxable transactions, or on ordinary income derived from the sale of
market discount bonds. Any fund distributions from such income will be taxable
to you as ordinary income, whether you receive them in cash or in additional
shares.

DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the funds.
Because the Money Fund is a money fund, it does not anticipate realizing any
long term capital gains.

MAINTAINING A $1 SHARE PRICE - MONEY FUND Gains and losses on the sale of
portfolio securities and unrealized appreciation or depreciation in the value of
these securities may require the Money Fund to adjust distributions to maintain
a $1 share price. These procedures may result in under- or over-distributions by
the Money Fund of its net investment income.

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year, including the
portion of the distributions that on average comprise taxable income or interest
income that is a tax preference item under the alternative minimum tax. If you
have not held fund shares for a full year, a fund may designate and distribute
to you, as taxable, tax-exempt or tax preference income, a percentage of income
that is not equal to the actual amount of such income earned during the period
of your investment in the fund.

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's earnings and profits.

EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires each fund to distribute to you by December 31 of each
year, at a minimum, the following amounts: 98% of its taxable ordinary income
earned during the calendar year; 98% of its capital gain net income earned
during the twelve month period ending October 31; and 100% of any undistributed
amounts from the prior year. Each fund intends to declare and pay these amounts
in December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.

REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.

All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.

Because the Money Fund tries to maintain a stable $1 share price, you should not
expect to realize a capital gain or loss on the sale or exchange of your Money
Fund shares.

DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In doing so, all or a portion of the sales charge that you paid for your
original shares in a fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment. Because shares of the Money Fund may
be purchased without a sales charge, this deferral of basis rule should not
apply to the sale of Money Fund shares.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because each fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions generally will be eligible for the corporate dividends-received
deduction. None of the dividends paid by the funds for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.

TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Internal
Revenue Code and under the income tax provisions of several states. Private
activity bond interest could subject you to or increase your liability under
federal and state alternative minimum taxes, depending on your individual or
corporate tax position. Persons who are defined in the Internal Revenue Code as
substantial users (or persons related to such users) of facilities financed by
private activity bonds should consult with their tax advisors before buying fund
shares.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------

Each fund is a series of Franklin New York Tax-Free Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust in July 1986, and is registered with
the SEC.

As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.

Certain Franklin Templeton Funds offer multiple classes of shares. The different
classes have proportionate interests in the same portfolio of investment
securities. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.

The Insured Fund currently offers two classes of shares, Class A and Class C.
Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The full title of each class is:

o Franklin New York Insured Tax-Free Income Fund - Class A

o Franklin New York Insured Tax-Free Income Fund - Class C

The Intermediate Fund and the Money Fund each offer only one share class.
Because the Intermediate Fund's sales charge structure and Rule 12b-1 plan are
similar to those of Class A shares, shares of the fund are considered Class A
shares for redemption, exchange and other purposes. Shares of the Money Fund
also are considered Class A shares for redemption, exchange and other purposes.
Before January 1, 1999, these funds' shares were considered Class I shares.

The funds may offer additional classes of shares in the future.

Shares of each class of the Insured Fund represent proportionate interests in
the fund's assets. On matters that affect the fund as a whole, each class has
the same voting and other rights and preferences as any other class. On matters
that affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the trust for matters that affect the trust as a whole. Additional
series may be offered in the future.

The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.

The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.

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

As of February 5, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.

BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------

The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.

For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.

All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. All checks, drafts, wires and other payment
mediums used to buy or sell Money Fund shares must be drawn on a U.S. bank and
are accepted subject to collection at full face value. Checks drawn in U.S.
funds on foreign banks will not be credited to your account and dividends will
not begin to accrue until the proceeds are collected, which may take a long
period of time.

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

INITIAL SALES CHARGES The maximum initial sales charge for the Insured Fund is
4.25% for Class A and 1% for Class C. The maximum initial sales charge for the
Intermediate Fund is 2.25%. There is no initial sales charge for the Money Fund.

The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.

CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.

LETTER OF INTENT (LOI). You may buy shares of the Intermediate Fund and Class A
shares of the Insured Fund at a reduced sales charge by completing the letter of
intent section of your account application. A letter of intent is a commitment
by you to invest a specified dollar amount during a 13 month period. The amount
you agree to invest determines the sales charge you pay. By completing the
letter of intent section of the application, you acknowledge and agree to the
following:

o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.

o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.

o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.

o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.

After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.

Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the LOI
have been completed.

If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.

If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.

GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.

A qualified group is one that:

o Was formed at least six months ago,

o Has a purpose other than buying fund shares at a discount,

o Has more than 10 members,

o Can arrange for meetings between our representatives and group members,

o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,

o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and

o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.

WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:

o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class C shares.

o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.

o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Valuemark Funds or the Templeton Variable Products Series
Fund. You should contact your tax advisor for information on any tax
consequences that may apply.

o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.

If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.

o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.

If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.

If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.

WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:

o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts 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 the order.

o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined the fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the fund is permissible and suitable for you and the effect,
if any, of payments by the fund on arbitrage rebate calculations.

o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs

o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors

o Registered securities dealers and their affiliates, for their investment
accounts only

o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer

o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies

o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days

o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer

o Accounts managed by the Franklin Templeton Group

o Certain unit investment trusts and their holders reinvesting distributions
from the trusts

SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, shares of the Insured and Intermediate Funds are available to these
banks' trust accounts without a sales charge. The banks may charge service fees
to their customers who participate in the trusts. A portion of these service
fees may be paid to Distributors or one of its affiliates to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.

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

SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- --------------------------------------------------------------------------------

Under $30,000 3.0

$30,000 but less than $100,000 2.0

$100,000 but less than $400,000 1.0

$400,000 or more 0

DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge on shares of the Insured and Intermediate Funds. A securities dealer who
receives 90% or more of the sales charge may be deemed an underwriter under the
Securities Act of 1933, as amended. Financial institutions or their affiliated
brokers may receive an agency transaction fee in the percentages indicated in
the dealer compensation table in the funds' prospectus.

Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of shares of
the Intermediate Fund or Class A shares of the Insured Fund of $1 million or
more: 0.75% on sales of $1 million to $2 million, plus 0.60% on sales over $2
million to $3 million, plus 0.50% on sales over $3 million to $50 million, plus
0.25% on sales over $50 million to $100 million, plus 0.15% on sales over $100
million.

These breakpoints are reset every 12 months for purposes of additional
purchases.

Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.

Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.

CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
shares of the Intermediate Fund or Class A shares of the Insured Fund, either as
a lump sum or through our cumulative quantity discount or letter of intent
programs, a CDSC may apply on any shares you sell within 12 months of purchase.
For Class C shares of the Insured Fund, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.

CDSC WAIVERS. The CDSC for any share class generally will be waived for:

o Account fees

o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase

o Redemptions by the fund when an account falls below the minimum required
account size

o Redemptions following the death of the shareholder or beneficial owner

o Redemptions through a systematic withdrawal plan set up before February 1,
1995

o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan

EXCHANGE PRIVILEGE If you request the exchange of the total value of your
Insured or Intermediate Fund account, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the fund at net asset value on
the date of the exchange, and then the entire share balance will be exchanged
into the new fund. Backup withholding and information reporting may apply.

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

The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.

SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares of a fund and receive regular payments from your account on a
monthly, quarterly, semiannual or annual basis. The value of your account must
be at least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. There are no service charges for establishing or maintaining a
systematic withdrawal plan. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account.

Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.

To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan in the
Insured or Intermediate Fund if you plan to buy shares on a regular basis.
Shares sold under the plan also may be subject to a CDSC.

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

You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The funds may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the funds
receive notification of the shareholder's death or incapacity.

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

SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.

All purchases of Money Fund shares will be credited to you, in full and
fractional fund shares (rounded to the nearest 1/100 of a share), in an account
maintained for you by the fund's transfer agent. No share certificates will be
issued for fractional shares at any time. No certificates will be issued to you
if you have elected to redeem shares by check or by preauthorized bank or
brokerage firm account methods.

The offering of fund shares may be suspended at any time and resumed at any time
thereafter.

Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.

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

Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.

In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.

The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the funds nor their agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as described
in the prospectus.

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

Investor Services may charge you separate fees, negotiated directly with you,
for providing special services in connection with your Money Fund account, such
as processing a large number of checks each month. Fees for special services
will not increase the fund's expenses.

Special procedures have been designed for banks and other institutions wishing
to open multiple accounts in the Money Fund. An institution may open a single
master account by filing one application form with the 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 instructions may be
provided to the fund at a later date. These sub-accounts may be established by
the institution with registration either by name or number. The investment
minimums applicable to the fund are applicable to each sub-account. The 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.

The Money Fund will provide to each institution, on a quarterly basis or more
frequently if requested, a statement setting forth each sub-account's share
balance, income earned for the period, income earned for the year to date, and
total current market value.

If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.

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

For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.

In the event of disputes involving multiple claims of ownership or authority to
control your 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, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.

PRICING SHARES
- --------------------------------------------------------------------------------

When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.

The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.

The Insured and Intermediate Funds calculate the NAV per share each business day
at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
pacific time). The Money Fund calculates its NAV per share each business day at
3:00 p.m. pacific time. The funds do not calculate their NAV on days the New
York Stock Exchange (NYSE) is closed for trading, which include New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

THE INSURED AND INTERMEDIATE FUNDS When determining their NAV, each fund values
cash and receivables at their realizable amounts, and records interest as
accrued. Each fund values over-the-counter portfolio securities within the range
of the most recent quoted bid and ask prices. If portfolio securities trade both
in the over-the-counter market and on a stock exchange, each fund values them
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. In the absence of a sale or reported bid
and ask 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
municipal securities.

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

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

THE MONEY FUND The valuation of the fund's portfolio securities, including any
securities held in a separate account maintained for when-issued securities, is
based on the amortized cost of the securities, which does not take into account
unrealized capital gains or losses. This method 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 fund would receive if it
sold the instrument. During periods of declining interest rates, the daily yield
on shares of the fund computed as described above may tend to be higher than a
like computation made by a fund with identical investments but using 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 fund resulted
in a lower aggregate portfolio value on a particular day, a prospective investor
in the fund would be able to obtain a somewhat higher yield than would result
from an investment in a fund using only market values, and existing investors in
the fund would receive less investment income. The opposite would be true in a
period of rising interest rates.

The fund's use of amortized cost, which helps the fund maintain a $1 share
price, is permitted by a rule adopted by the U.S. Securities and Exchange
Commission (SEC). Under this rule, the fund must adhere to certain conditions.
The fund must maintain a dollar-weighted average portfolio maturity of 90 days
or less and only buy instruments with remaining maturities of 397 calendar days
or less. The fund also must invest only in those U.S. dollar-denominated
securities that the manager, in accordance with procedures adopted by the board,
determines present minimal credit risks and that are rated in one of the top two
ratings by U.S. nationally recognized rating services (or comparable unrated
securities), or are instruments issued by an issuer that, with respect to an
outstanding issue of short-term debt that is comparable in priority and
protection, has received a rating within the two highest ratings. Securities
subject to floating or variable interest rates with demand features that comply
with applicable SEC rules may have stated maturities in excess of 397 days.

The board has established procedures designed to stabilize, to the extent
reasonably possible, the fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
fund's holdings by the board, at such intervals as it may deem appropriate, to
determine if the fund's net asset value calculated by using available market
quotations deviates from $1 per share based on amortized cost. The extent of any
deviation will be examined by the board. If a deviation exceeds 1/2 of 1%, the
board will promptly consider what action, if any, will be initiated. If the
board determines that a deviation exists that may result in material dilution or
other unfair results to investors or existing shareholders, it will take
corrective action that it regards as necessary and appropriate, which may
include selling portfolio instruments before maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends,
redeeming shares in kind, or establishing a net asset value per share by using
available market quotations.

THE UNDERWRITER
- --------------------------------------------------------------------------------

Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.

Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. 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 table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended December 31:

AMOUNT
RECEIVED IN
TOTAL AMOUNT CONNECTION WITH
COMMISSIONS RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
- --------------------------------------------------------------------------------

1998

Insured Fund 678,360 42,034 4,871

Intermediate Fund 162,565 22,481 1,171

Money Fund 0 0 0

1997

Insured Fund 575,735 36,079 6,625

Intermediate Fund 163,157 21,084 0

Money Fund 0 0 0

1996

Insured Fund 875,662 54,350 1,590

Intermediate Fund 160,045 20,496 0

Money Fund 0 0 0

Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.

DISTRIBUTION AND SERVICE (12B-1) FEES The Intermediate Fund and each class of
the Insured Fund have separate distribution or "Rule 12b-1" plans. Under each
plan, the funds shall pay or may reimburse Distributors or others for the
expenses of activities that are primarily intended to sell shares of the class.
These expenses may include, among others, distribution or service fees paid to
securities dealers or others who have executed a servicing agreement with the
funds, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.

The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.

THE CLASS A PLANS. Payments by the Insured and Intermediate Funds under their
Class A plans may not exceed 0.10% per year of Class A's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.

In implementing the Class A plan for the Insured Fund, the board has determined
that the annual fees payable under the plan will be equal to the sum of: (i) the
amount obtained by multiplying 0.10% by the average daily net assets represented
by the fund's Class A shares that were acquired by investors on or after May 1,
1994, the effective date of the plan (new assets), and (ii) the amount obtained
by multiplying 0.05% by the average daily net assets represented by the fund's
Class A shares that were acquired before May 1, 1994 (old assets). These fees
will be paid to the current securities dealer of record on the account. In
addition, until such time as the maximum payment of 0.10% is reached on a yearly
basis, up to an additional 0.02% will be paid to Distributors under the plan.
When the fund reaches $4 billion in assets, the amount to be paid to
Distributors will be reduced from 0.02% to 0.01%. The payments made to
Distributors will be used by Distributors to defray other marketing expenses
that have been incurred in accordance with the plan, such as advertising.

For the Insured Fund, the fee is a Class A expense. This means that all Class A
shareholders, regardless of when they purchased their shares, will bear Rule
12b-1 expenses at the same rate. The initial rate will be at least 0.07% (0.05%
plus 0.02%) of the average daily net assets of Class A and, as Class A shares
are sold on or after May 1, 1994, will increase over time. Thus, as the
proportion of Class A shares purchased on or after May 1, 1994, increases in
relation to outstanding Class A shares, the expenses attributable to payments
under the plan also will increase (but will not exceed 0.10% of average daily
net assets). While this is the currently anticipated calculation for fees
payable under the Class A plan, the plan permits the board to allow the fund to
pay a full 0.10% on all assets at any time. The approval of the board would be
required to change the calculation of the payments to be made under the Class A
plan.

The Class A plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.

THE CLASS C PLAN. Under the Class C plan, the Insured Fund pays Distributors up
to 0.50% per year of the class's average daily net assets, payable quarterly, to
pay Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund also may pay a servicing fee of
up to 0.15% per year of the class's average daily net assets, payable quarterly.
This fee may be used to pay securities dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.

The expenses relating to the Class C plan also are used to pay Distributors for
advancing the commission costs to securities dealers with respect to the initial
sale of Class C shares.

THE CLASS A AND C PLANS. In addition to the payments that Distributors or others
are entitled to under each plan, each plan also provides that to the extent the
fund, the manager or Distributors or other parties on behalf of the fund, the
manager or Distributors make payments that are deemed to be for the financing of
any activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.

In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.

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. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.

Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. The plan for the
Intermediate Fund also may be terminated by any act that constitutes an
assignment of the underwriting agreement with Distributors. Distributors or any
dealer or other firm also may 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 outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.

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

For the fiscal year ended December 31, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the funds paid Distributors under the
plans were:

DISTRIBUTORS' ELIGIBLE AMOUNT PAID
EXPENSES ($) BY THE FUND ($)
- --------------------------------------------------------------------------------

Insured Fund - Class A 487,576 237,021

Insured Fund - Class C 95,494 41,177

Intermediate Fund - Class A 345,781 62,719

PERFORMANCE
- --------------------------------------------------------------------------------

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds, and
effective yield quotations used by the Money Fund, are based on the standardized
methods of computing performance mandated by the SEC. Performance figures
reflect Rule 12b-1 fees from the date of the plan's implementation. An
explanation of these and other methods used by the funds to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.

INSURED AND INTERMEDIATE FUNDS

AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.

When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended December 31, 1998, were:

SINCE
INCEPTION
1 YEAR 5 YEARS (5/1/91)
- --------------------------------------------------------------------------------

Insured Fund - Class A 1.42% 4.60% 6.95%

SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------

Insured Fund - Class C 3.49% - 6.93%

SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
- --------------------------------------------------------------------------------

Intermediate Fund 4.27% 5.09% 6.04%

The following SEC formula was used to calculate these figures:

n
P(1+T) = 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 each period at the end of each period

CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended December 31, 1998, were:

SINCE
INCEPTION
1 YEAR 5 YEARS (5/1/91)
- --------------------------------------------------------------------------------

Insured Fund - Class A 1.42% 25.19% 67.44%

SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------

Insured Fund - Class C 3.49% - 27.86%

SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
- --------------------------------------------------------------------------------

Intermediate Fund 4.27% 28.20% 44.49%

CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of a class during the base
period. The yields for the 30-day period ended December 31, 1998, were:

CLASS A CLASS C
- --------------------------------------------------------------------------------

Insured Fund 3.70% 3.29%

Intermediate Fund 3.62% -

The following SEC formula was used to calculate these figures:

6
Yield = 2 [(A-B + 1) - 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

TAXABLE-EQUIVALENT YIELD Each fund also may quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by dividing
the portion of the yield that is tax-exempt by one minus the highest applicable
combined federal, state and city income tax rate and adding the product to the
portion of the yield that is not tax-exempt, if any. The taxable-equivalent
yields for the 30-day period ended December 31, 1998, were:

CLASS A CLASS C
- --------------------------------------------------------------------------------

Insured Fund 6.90% 6.14%

Intermediate Fund 6.75% -

CURRENT DISTRIBUTION RATE Current yield and taxable-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 shareholders. Amounts paid to
shareholders are reflected in the quoted current distribution rate or
taxable-equivalent distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum offering price. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than interest, if
any, and is calculated over a different period of time. The current distribution
rates for the 30-day period ended December 31, 1998, were:

CLASS A CLASS C
- --------------------------------------------------------------------------------

Insured Fund 4.61% 4.43%

Intermediate Fund 4.68% -

A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the current distribution rate. The advertised taxable-equivalent
distribution rate will reflect the most current federal, state and city tax
rates available to the fund. The taxable-equivalent distribution rates for the
30-day period ended December 31, 1998, were:

CLASS A CLASS C
- --------------------------------------------------------------------------------

Insured Fund 8.60% 8.26%

Intermediate Fund 8.73% -

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

MONEY FUND

The average annual total returns for the indicated periods ended December 31,
1998, were:

SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (10/10/86)
- --------------------------------------------------------------------------------

Money Fund 2.79% 2.77% 3.21% 3.42%

The following SEC formula was used to calculate these figures:

n
P(1+T) = 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 each period at the end of each period

CURRENT YIELD Current yield shows the income per share earned by the fund. It is
calculated by determining the net change, excluding capital changes, in the
value of a hypothetical pre-existing account with 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.
The result is then annualized by multiplying the base period return by 365/7.
The current yield for the seven day period ended December 31, 1998, was 3.01%.

EFFECTIVE YIELD The fund's effective yield is calculated in the same manner as
its current yield, except the annualization of the return for the seven day
period reflects the results of compounding. The effective yield for the seven
day period ended December 31, 1998, was 3.06%.

The following SEC formula was used to calculate this figure:

365/7
Effective yield = [(Base period return + 1) ] - 1

TAXABLE-EQUIVALENT YIELD The Money Fund also may quote a taxable-equivalent
yield and a taxable-equivalent effective yield that show the before-tax yield
that would have to be earned from a taxable investment to equal the fund's
yield. These yields are computed by dividing the portion of the yield that is
tax-exempt by one minus the highest applicable combined federal, state and city
income tax rate and adding the product to the portion of the yield that is not
tax-exempt, if any. The taxable-equivalent yield based on the fund's current
yield for the seven day period ended December 31, 1998, was 5.62%. The
taxable-equivalent effective yield based on the fund's effective yield for the
seven day period ended December 31, 1998, was 5.71%.

ALL FUNDS

As of December 31, 1998, the combined federal, state and city income tax rate
upon which the taxable-equivalent yield quotations were based was 46.4%. From
time to time, as any changes to the rate become effective, taxable-equivalent
yield quotations advertised by the funds will be updated to reflect these
changes. Each fund expects updates may be necessary as tax rates are changed by
federal, state and city governments. The advantage of tax-free investments, like
the 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.

OTHER PERFORMANCE QUOTATIONS The Insured and Intermediate Funds also may quote
the performance of shares without a sales charge. Sales literature and
advertising may quote a cumulative total return, average annual total return and
other measures of performance with the substitution of net asset value for the
public offering price.

Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.

COMPARISONS To help you better evaluate how an investment in the funds may
satisfy your investment goal, advertisements and other materials about the funds
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:

o Merrill Lynch New York Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the New York municipal market.

o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.

o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.

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

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

o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.

o Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide performance
statistics over specified time periods.

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

o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg, L.P.

o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.

o 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.

o IBC Money Fund Report(R) - industry averages for seven day annualized and
compounded yields of taxable, tax-free and government money funds.

o Bank Rate Monitor - a weekly publication that reports various bank
investments such as CD rates, average savings account rates and average
loan rates.

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

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

o Standard & Poor's(R) Bond Indices - measure yield and price of corporate,
municipal, and government bonds.

o 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.

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

Advertisements or sales material issued by each fund also 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 annual amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.

Advertisements or information also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of a fund's fixed-income investments, as well as the value of its shares that
are based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of a fund's shares
can be expected to increase. CDs 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 comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by a fund to calculate its figures. In addition,
there can be no assurance that a fund will continue its performance as compared
to these other averages.

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

The funds are members of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 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, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $216 billion in assets under management for approximately 7 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton Group
of Funds offers 114 U.S. based open-end investment companies to the public. Each
fund may identify itself by its NASDAQ symbol or CUSIP number.

Franklin is a leader in the tax-free mutual fund industry and manages more than
$51 billion in municipal security assets for over three quarters of a million
investors. According to Research and Ratings Review, Franklin had one of the
largest staffs of municipal securities analysts in the industry, as of June 30,
1998.

Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1999, taxes could cost almost $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 1999).
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 you 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 also may provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.

Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of municipal securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of the fund's
shares.

Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.

The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the funds and their shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.

DESCRIPTION OF RATINGS
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MUNICIPAL BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. (MOODY'S)

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

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

Baa: Municipal bonds rated Baa are considered medium-grade obligations. 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.
These bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.

Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered 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 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 rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.

C: Municipal bonds 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 that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.

STANDARD & POOR'S CORPORATION (S&P)

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

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

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

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

BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they 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.

Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

FITCH INVESTORS SERVICE, INC. (FITCH)

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

AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's 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: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's 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: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered 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.

BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. Business and financial alternatives can be identified,
however, that could assist the obligor in satisfying its debt service
requirements.

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

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

CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.

C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.

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

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

MUNICIPAL NOTE RATINGS

MOODY'S

Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's 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; 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 will usually 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 overwhelming safety
characteristics will be given a "plus" (+) designation.

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

COMMERCIAL PAPER RATINGS

MOODY'S

Moody's commercial paper ratings, which are also applicable to municipal paper
investments, are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's 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&P's 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.

FITCH

Fitch's 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 issuer's 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. Reflect 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-5: 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.