FRANKLIN TAX ADVANTAGED INTERNATIONAL BOND FUND, 497, 1996-05-06

FRANKLIN TAX ADVANTAGED INTERNATIONAL BOND FUND
497, 1996-05-06

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FRANKLIN PARTNERS FUNDS(R)
Franklin Tax-Advantaged
U.S. Government Securities Fund

Franklin Tax-Advantaged
High Yield Securities Fund

Franklin Tax-Advantaged
International Bond Fund

PROSPECTUS May 1, 1996

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

Franklin Partners Funds(R) (collectively or separately, the "Funds" or "Fund")
consists of three separate and distinct funds: Franklin Tax-Advantaged U.S.
Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged High
Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged
International Bond Fund (the "International Bond Fund"), each a California
limited partnership.

Each Fund is designed to earn income for qualifying non-U.S. shareholders that
is not subject to U.S. federal income tax or U.S. tax withholding requirements
(including "Non-Resident Alien" tax withholding).

The primary investment objective of the Government Fund is current income
through investment in obligations of the U.S. government, its agencies or
instrumentalities. The assets of this Fund will be primarily invested in
obligations ("GNMAs" or "Ginnie Maes") of the Government National Mortgage
Association ("Association").

The primary investment objective of the High Yield Fund is to earn a high level
of current income, with capital appreciation as a secondary objective. The
assets of this Fund will generally be invested in various classes of debt
securities of U.S. issuers, which may include non-investment grade bonds.

The primary investment objective of the International Bond Fund is to seek
current income by investing in debt securities of non-U.S. issuers and foreign
currency denominated debt securities of U.S. issuers.

The High Yield Fund and the International Bond Fund may invest in domestic and
foreign securities as described under "How Does Each Fund Invest Its Assets?"

THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT
GRADE BONDS ISSUED BY BOTH U.S. AND FOREIGN ISSUERS, COMMONLY KNOWN AS "JUNK
BONDS," WHICH ENTAIL DEFAULT AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH
HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH
AN INVESTMENT IN THIS FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND INVESTS.
SEE "WHAT ARE THE FUNDS' POTENTIAL RISKS? - HIGH YIELDING, FIXED-INCOME
SECURITIES."

This prospectus is intended to set forth in a clear and concise manner
information about the Funds that you should know before investing. After reading
this prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items that you will
find useful.

An SAI concerning the Funds, dated May 1, 1996 as may be amended from time to
time, provides a further discussion of certain areas in this prospectus and
other matters that may be of interest to you. It has been filed with the SEC and
is incorporated herein by reference. A copy is available without charge from the
Funds or Distributors, at the address or telephone number shown above.

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

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

THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.

CONTENTS PAGE

Expense Table 3

Financial Highlights - How Have the
Funds Performed? 4

What Is Franklin Partners Funds(R)? 5

How Does Each Fund Invest Its Assets? 7

What Are Some of the Funds'
Potential Risks? 13

How You Participate in the
Results of the Funds' Activities 16

Who Manages the Funds? 17

What Distributions Might
I Receive From the Funds? 19

How Taxation Affects You and the Funds 20

How Do I Buy Shares? 24

What Programs and Privileges
Are Available to Me as a Shareholder? 28

What If My Investment Outlook
Changes? - Exchange Privilege 30

How Do I Sell Shares? 33

Telephone Transactions 36

How Are Fund Shares Valued? 37

How Do I Get More Information
About My Investment? 37

How Do the Funds Measure Performance? 38

General Information 38

Registering Your Account 39

Summary of Partnership Agreements 40

Who Runs Each Fund? 43

Useful Terms and Definitions 44

Appendix 45

Expense Table

The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Funds. These figures are based on the aggregate operating
expenses of each Fund, before any fee waivers and expense reductions, for the
fiscal year ended December 31, 1995.

Government High Yield International
Shareholder Transaction Expenses Fund Fund Bond Fund
-------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............ 4.25% 4.25% 4.25%
Deferred Sales Charge........................... None+ None+ None+
Exchange Fee (per transaction).................. $5.00* $5.00* $5.00*

Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees................................. 0.51% 0.62% 0.63%**
Rule 12b-1 Fees................................. 0.07%*** 0.10%*** 0.09%***
Other Expenses.................................. 0.06% 0.10% 0.28%
-------------------------------------------

Total Fund Operating Expenses................... 0.64% 0.82% 1.00%**
===========================================
</TABLE>

+Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge."
*$5.00 fee imposed only on Market Timers as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The Manager has agreed in advance to waive a portion of its management fee for
the International Bond Fund. With this waiver, management fees and total
operating expenses represented 0.04% and 0.41%, respectively, of the average net
assets of the Fund.
***The maximum amount of Rule 12b-1 fees allowed pursuant to each Fund's
distribution plan is 0.15%. See "Who Manages the Funds? - Plans of
Distribution." Consistent with National Association of Securities Dealers,
Inc.'s rules, it is possible that the combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.

You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Funds. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this prospectus.

Example

As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in each Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period.

Government High Yield International
Fund Fund Bond Fund
------------------------------------------

One Year............................. $ 49* $ 51* $ 52*
Three Years.......................... 62 68 73
Five Years........................... 77 88 95
Ten Years............................ 119 143 160

*Assumes that a contingent deferred sales charge will not apply.

This example is based on the aggregate annual operating expenses, before the fee
waiver for the International Fund, shown above and should not be considered a
representation of past or future expenses, which may be more or less than those
shown. The operating expenses are borne by each Fund and only indirectly by you
as a result of your investment in the Fund. In addition, federal securities
regulations require the example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.

FINANCIAL HIGHLIGHTS - HOW HAVE THE FUNDS PERFORMED?

Set forth below is a table containing the financial highlights for a share of
each Fund. The information for each of the five fiscal years in the period ended
December 31, 1995 has been audited by Coopers & Lybrand, L.L.P., independent
auditors, whose audit report appears in the financial statements in each Fund's
Annual Report to Shareholders for the fiscal year ended December 31, 1995. The
remaining figures, which are also audited, are not covered by the auditors'
current report. See "Reports to Shareholders" under "General Information" in
this prospectus.

Per Share Operating Performance Ratios/Supplemental Data
------------------------------------------------------- ---------------------------
Ratio of
Net Asset Net Net Realized Dividends Net Asset Net Assets Ratio of Net
Year Value at Invest-& Unrealized Total From from Net Value at at End Expenses Income to Portfolio
Ended Beginning ment Gain(Loss) Investment Investment End of Total of Year to Average Average Turnover
Dec. 31 of Year Income on Securities Operations Income Year Return++ (in 000's) Net Assets Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19871 $10.00 $0.603 $0.070 $0.673 $(0.603) $10.07 6.64% $ 9,401 - % 10.46%+ 31.53%
1988 10.07 0.986 (0.180) 0.806 (0.986) 9.89 7.80 42,703 0.263 9.62 6.80
1989 9.89 0.965 0.280 1.245 (0.965) 10.17 12.75 67,864 0.463 9.55 7.07
1990 10.17 0.922 0.060 0.982 (0.922) 10.23 9.82 86,967 0.603 9.16 9.36
1991 10.23 0.865 0.570 1.435 (0.865) 10.80 14.31 127,637 0.80 8.13 12.42
1992 10.80 0.785 (0.050) 0.735 (0.785) 10.75 6.80 312,645 0.67 7.22 15.26
1993 10.75 0.733 0.160 0.893 (0.733) 10.91 8.19 574,007 0.59 6.63 14.63
1994 10.91 0.704 (1.150) (0.446) (0.704) 9.76 (4.26) 456,421 0.61 6.92 10.20
1995 9.76 0.706 1.040 1.746 (0.706) 10.80 18.38 403,565 0.64 6.82 3.50

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19871 10.00 0.516 (0.760) (0.244) (0.516) 9.24 (2.60) 2,923 - 12.67+ -
1988 9.24 1.076 0.020 1.096 (1.076) 9.26 11.79 21,346 0.183 10.88 2.64
1989 9.26 1.173 (0.740) 0.433 (1.173) 8.52 4.10 34,722 0.253 13.08 4.95
1990 8.52 1.132 (2.430) (1.298) (1.132) 6.09 (16.89) 27,155 0.553 15.51 13.29
1991 6.09 0.982 1.890 2.872 (0.982) 7.98 49.19 57,469 0.87 12.96 38.35
1992 7.98 0.922 0.420 1.342 (0.922) 8.40 16.96 39,131 0.76 11.00 29.79
1993 8.40 0.815 0.570 1.385 (0.815) 8.97 16.72 69,545 0.76 9.17 32.27
1994 8.97 0.770 (0.990) (0.220) (0.760) 7.99 (2.58) 81,151 0.81 9.36 18.39
1995 7.99 0.770 0.734 1.504 (0.784) 8.71 19.46 160,080 0.82 8.87 18.47

International Bond Fund

1987* $10.00 $0.620 $1.420 $2.040 $(0.360) $11.68 - % $ 13,688 1.67% 7.49% 120.00%
1988 11.68 0.790 (0.590) 0.200 (0.800) 11.08 (2.85) 9,485 1.62 7.13 47.00
1989 11.08 0.820 0.160 0.980 (0.860) 11.20 9.15 4,709 1.72 7.64 12.00
19902 11.20 1.133 0.819 1.952 (1.202 11.95 15.46** 4,236 0.954 9.75 18.40
1991 11.95 1.018 0.112 1.130 (1.030) 12.05 9.86 5,060 -4 9.05 60.77
1992 12.05 1.012 (1.110) (0.098) (1.102) 10.85 (1.43) 12,662 0.134 9.71 15.26
1993 10.85 0.808 0.505 1.313 (0.823) 11.34 12.13 19,606 0.254 7.31 6.80
1994 11.34 0.794 (0.560) 0.234 (0.794) 10.78 2.06 22,725 0.294 7.69 6.46
1995 10.78 0.938 1.180 2.118 (0.938) 11.96 20.41 28,352 0.414 7.85 4.90

</TABLE>

*For the period January 7, 1987 (commencement of operations) to December 31,
1987.
**For the period June 9, 1990 (transfer of management) to December 31,
1990.
1For the period May 4, 1987 (effective date) to December 31, 1987.
2On June 9, 1990, the investment manager changed from Pilgrim Management
Corporation to Advisers.
3Advisers agreed in advance to waive a portion of its management fees. Without
this action, the ratio of expenses to average net assets for the fiscal years
ended December 31, 1988, 1989 and 1990 would have been: .87%, .76% and .76%,
respectively, for the Government Securities Fund; and .98%, .78% and .79%,
respectively, for the High Yield Fund.
4Advisers agreed in advance to waive a portion of its management fee. Without
this action, the ratio of expenses to average net assets for the fiscal years
ended December 31, 1990, 1991, 1992, 1993,1994 and 1995 would have been 1.42%,
.89%, .92%, .97%, 1.06%, and 1.00%, respectively.
+Annualized.
++Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or any applicable contingent deferred sales charge and assumes
reinvestment of income distributions at net asset value. Prior to May 1, 1994,
distributions from net investment income were reinvested at the maximum offering
price.

WHAT IS FRANKLIN PARTNERS FUNDS(R)?

Franklin Partners Funds consists of three separate diversified, open-end,
management investment companies, commonly called "mutual funds", each registered
with the SEC under the 1940 Act and organized as a limited partnership in the
state of California. The form of organization was adopted to preserve, for
qualifying non-U.S. shareholders, the current exemptions from U.S. federal
income tax and U.S. federal withholding tax, including U.S. "Non-Resident Alien"
tax withholding (principally, the "portfolio interest" exemption for
distributions from the Government Fund and the High Yield Fund and the exemption
from U.S. income taxation of foreign source income for distributions from the
International Bond Fund) that would be available to direct owners of the types
of securities in which each Fund invests. Because the Funds are limited
partnerships, distributions made by the Funds retain their original character so
that qualifying income is not subject to U.S. federal income taxation when
received by the Funds' qualifying non-U.S. shareholders.

Shares of the Funds may be considered Class I shares, as described under "Useful
Terms and Definitions," for redemption, exchange and other purposes.

ELIGIBLE INVESTORS

Each Fund is designed primarily for investors who are not considered to be U.S.
citizens, residents, corporations, partnerships, trusts or estates, or who are
not non-U.S. persons engaged in a U.S. trade or business under the Code.
Investment by non-U.S. persons through U.S. trusts or estates is permitted.
Investment by U.S. investors is not permitted. All prospective investors must
furnish the Funds with account registration information and information on their
tax status as required by the Investment Application and Subscription Agreement
("Application") included with this prospectus, and a Certificate of Foreign
Status on Form W-8 (or substitute).For joint accounts, each joint owner must
furnish a separate Form W-8 (or substitute). By purchasing shares, you will be
deemed to have provided the Special Power of Attorney included in the
Application, agree to be bound by the terms and conditions of the Partnership
Agreement and consent to disclosure of the information contained in the
Certificate of Foreign Status (which includes your name and permanent address)
to the Funds and, to the extent required by the Code, to the U.S. Internal
Revenue Service ("IRS") and to issuers of debt obligations in which the Funds
invest.

CERTAIN TAX CONSIDERATIONS

Due to the structure of each Fund as a limited partnership based in the U.S. and
the primary reliance on the portfolio interest exemption and the exemption of
foreign source interest from U.S. income taxation under the Code to eliminate
U.S. tax and tax withholding on distributions made to shareholders, you should
consider certain factors that are discussed below and more fully under "How
Taxation Affects You and the Funds" in this prospectus and under "Additional
Information Regarding Taxation" in the SAI.

1. Qualifying income generated by each Fund will not be subject to U.S. federal
income tax and U.S. tax withholding requirements for qualifying non-U.S.
shareholders, provided that the Fund is not deemed to be engaged in a trade or
business in the U.S. Each Fund believes that it should not be deemed to be
engaged in a trade or business in the U.S. if the Fund follows certain policies
and guidelines concerning its investment activities. This opinion is based on
the Funds' interpretation of applicable court decisions and other authorities
and not on any specific U.S. Treasury regulations because no such regulations
have been promulgated. Although each Fund believes that their position is fully
supported by applicable law, there can be no assurance that the IRS or a court
of law would not take a contrary position.

2. If you are a shareholder with an address outside the U.S., you must furnish
the Fund in which you invest with a Certificate of Foreign Status on IRS Form
W-8 (or substitute) to avoid U.S. tax withholding at the rate of 30%. If the
Fund does not have a Certificate on file, the Fund must withhold the tax from
any distributions (including redemption distributions) to you to the extent that
the distributions include income from U.S. sources. In the absence of a
Certificate, if a Fund has not distributed all of the U.S. source income
allocable to you during the year, the Fund will be required to apply withholding
(by liquidating shares at the end of the year) to the undistributed U.S. source
income allocated to you for the year.

3. As a partnership, each Fund will be required to file an annual return with
the IRS and the California Franchise Tax Board which identifies each
shareholder's allocated share of the Fund's net income and gains for the taxable
year, whether or not such income and gains have been distributed. Each Fund will
also file an annual form with the IRS with respect to each non-U.S. shareholder
(which includes, as an attachment, the Form W-8 [or substitute] furnished by the
shareholder) indicating, if applicable, that no amount was withheld with respect
to income allocated to such shareholder that qualified for the portfolio
interest exemption or any other applicable exemption under the Code.

4. The value of Fund shares directly owned by a non-U.S. individual upon the
death of such individual may be subject to U.S. estate taxes (and possibly state
inheritance taxes), subject to certain exemptions and to the terms of any
applicable treaty between the U.S. and the individual's country of residence.

HOW DOES EACH FUND INVEST ITS ASSETS?

The objective of each Fund is a fundamental policy and may not be changed
without shareholder approval. Of course, there is no assurance that a Fund
objective will be achieved.

GOVERNMENT SECURITIES FUND

The investment objective of this Fund is current income through investment in a
portfolio limited to securities that are obligations of the U.S. government, its
agencies or instrumentalities. At least 65% of the assets of this Fund will be
invested in these securities. Other than investments in short-term U.S. Treasury
securities or assets held in cash pending investment, the assets of the Fund are
currently invested solely in GNMAs.

Obligations of the U.S. government, its agencies and instrumentalities may also
include, U.S. Treasury bonds, notes and bills, Treasury Certificates of
Indebtedness and securities issued by agencies and instrumentalities of the U.S.
government, including those issued or guaranteed by the Department of Housing
and Urban Development, the Farmers Home Administration, the Small Business
Administration, the Export-Import Bank, Banks for Cooperatives, the Commodity
Credit Corporation, the Federal Deposit Insurance Corporation, Federal Farm
Credit Banks, the Federal Financing Bank, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Land Banks and the Federal Land Bank
Association, the Federal Savings and Loan Insurance Corporation, the General
Insurance Fund, Government Services Administration, the Product Credit
Association, the Student Loan Marketing Association, the Tennessee Valley
Authority, and the U.S. Postal Service.

INFORMATION ABOUT GNMAS

GNMAs are mortgage-backed securities representing part ownership of a pool of
mortgage loans. GNMAs differ from other bonds in that principal may be paid back
on an unscheduled basis rather than returned in a lump sum at maturity. The Fund
will purchase GNMAs for which principal and interest are guaranteed. The Fund
also purchases "adjustable rate" GNMAs and other types of securities which may
be issued with the Association's guarantee.

THE ASSOCIATION'S GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMAS IS
BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. THE ASSOCIATION MAY
BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS
GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET VALUE OR
YIELD OF THE GNMAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND, WHICH WILL
FLUCTUATE DAILY WITH MARKET CONDITIONS.

Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by the
Fund in securities which may bear interest at a rate higher or lower than the
obligation from which the principal payment was received.

When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.

GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
it is more likely that mortgages contained in GNMA pools will be prepaid, thus
reducing the effective yield. This potential for prepayment during periods of
declining interest rates may reduce the general upward price increases of GNMAs
as compared to the increases experienced by noncallable debt securities over the
same periods. Moreover, any premium paid on the purchase of a GNMA will be lost
if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the Fund will have a direct impact on the net asset value per
share of the Fund.

The Fund's investments are continually monitored and changes are made as market
conditions warrant. However, the Fund does not engage in the trading of
securities for the purpose of realizing short-term profits.

HIGH YIELD FUND

The principal investment objective of this Fund is to earn a high level of
current income. As a secondary objective, the High Yield Fund seeks capital
appreciation to the maximum extent possible, consistent with its principal
objective.

TYPES OF SECURITIES WHICH THE HIGH YIELD FUND MAY BUY

Current yield is the primary standard used by this Fund in selecting its
securities, although potential for capital appreciation may also be considered.
The Fund will invest in debt securities of U.S. and non-U.S. issuers (including
corporate and municipal bonds, short-term paper and secured obligations) that
are offering the highest yield available without excessive risk at the time of
purchase. The Manager will attempt to avoid excessive risk by performing an
independent credit analysis of the issuer, as described below, and by
diversifying the Fund's investments among different issuers.

Depending upon prevailing market and economic conditions, when buying debt
securities, the High Yield Fund will invest at least 65% of its total assets in
investment grade or lower grade securities (those having a rating below the four
highest grades assigned by Moody's Investors Service ["Moody's"] or Standard &
Poor's Corporation ["S&P"], two nationally recognized statistical rating
organizations ["NRSROs"]). Such lower rated securities 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.
(See the discussion under "What Are Some of the Funds' Potential Risks? - Asset
Composition Table" for the ratings assigned by Moody's and S&P for the
securities held by the portfolio of the High Yield Fund.)

The Fund may also, for defensive purposes, temporarily invest its assets in U.S.
government securities, commercial paper (short-term debt securities of large
corporations), various bank debt instruments or other money market instruments.
The income from certain types of short-term investments may not qualify as
"portfolio interest" income or income otherwise exempt under the Code and,
therefore, would generally be subject to U.S. tax and withholding requirements.

Various investment services publish ratings of some of the types of securities
in which the High Yield Fund may invest. Higher yields are ordinarily available
from securities in the lower rated categories of the NRSROs (that is, securities
rated Ba or lower by Moody's or BB or lower by S&P - see the Appendix to this
prospectus) or from unrated securities of comparable quality. These ratings,
which represent the opinions of the NRSROs with respect to the issuer's ability
to pay interest and repay principal, do not purport to reflect the risk of
fluctuations in market value, are not absolute credit standards, and will be
considered in connection with the investment of the High Yield Fund's assets,
but will not be a determining or limiting factor. The High Yield Fund may invest
in securities regardless of their rating (including securities in the lowest
rating categories) or in securities which are not rated. The High Yield Fund,
however, does not intend to invest in securities that are rated below Ca by
Moody's or CC by S&P, or which, if unrated, are not at least of comparable
quality as determined by the investment manager. Securities in these rating
categories 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 obligation. The High Yield Fund will not buy issues that are in
default. As noted above, the High Yield Fund will not invest in securities which
are felt by management to involve excessive risk. In the event the rating on an
issue held in the High Yield Fund's portfolio is changed by the ratings service
or the security goes into default, such event will be considered by the High
Yield Fund in its evaluation of the overall investment merits of that security
but will not necessarily result in an automatic sale of the security.

Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities being considered for the High Yield Fund
includes, among other things, consideration of relative values, based on factors
such as: anticipated cash flow; interest coverage; asset coverage; earnings
prospects; the experience and managerial strength of the issuer; responsiveness
to changes in interest rates and business conditions; debt maturity schedules
and borrowing requirements; and the issuer's changing financial condition and
public recognition thereof. Because the High Yield Fund's portfolio will consist
of debt securities, changes in the level of interest rates, among other things,
will likely affect the value of the Fund's holdings and thus the value of your
investment.

Certain of the high yield, debt securities in which this Fund may invest may be
bought at a discount. The High Yield Fund does not intend to buy securities for
the purpose of achieving capital gains, but generally will hold them as long as
current yields on such securities remain attractive. Capital losses may be
realized when securities bought at a premium are held to maturity or are called
or redeemed at a price lower than their purchase price. Capital gains or losses
also may be realized upon the sale of securities.

Although the High Yield Fund is not limited with respect to the maturity of its
portfolio securities, generally the majority of the Fund's investments will be
intermediate to long-term investments that mature in ten years or more.

Because of the High Yield Fund's policy of seeking high current yield and its
ability to invest in lower grade debt securities, a higher degree of risk
(including the risk of bankruptcy or default by the issuer of a high yield,
lower rated security) may accompany an investment in this Fund than would be the
case in a more conservative income-type investment company. In addition, this
Fund will be more dependent on the investment manager's judgment, analysis and
experience in achieving its investment objective than is the case for funds that
invest in higher quality bonds.

FOR ADDITIONAL RISK FACTORS, SEE THE SECTION CAPTIONED "WHAT ARE SOME OF THE
FUNDS' POTENTIAL RISKS? - HIGH YIELDING, FIXED-INCOME SECURITIES."

INTERNATIONAL BOND FUND

The primary investment objective of the International Bond Fund is to seek
current income by investing in readily marketable bonds and debentures of
non-U.S. issuers and foreign currency denominated bonds and debentures of U.S.
issuers. Under normal conditions, this Fund attempts to invest 100%, and will
invest at least 65%, of its total assets in these securities, and the domiciles
of the issuers or the currency denominations will include at least three
different countries. The International Bond Fund intends to limit its
investments to issuers domiciled in, and instruments denominated in the
currencies of, developed countries.

To protect against losses resulting from changes in foreign currency exchange
rates, the International Bond Fund may engage in various strategies to hedge its
portfolio against these risks. These strategies include use of foreign currency
options, foreign currency futures, options on such futures and forward foreign
exchange contracts. Transactions in options, futures and options on futures are
generally considered "derivative securities." While the International Bond
Fund's use of hedging strategies is intended to reduce the volatility of the net
asset value of its shares, this Fund's net asset value will still fluctuate and
there can be no assurance that these hedging transactions will be effective.

The International Bond Fund may also, for hedging purposes, buy foreign
currencies in the form of bank deposits as well as other foreign money market
instruments, including but not limited to bankers' acceptances, certificates of
deposits, commercial paper, short-term government and corporate obligations and
repurchase agreements, subject to certain tax restrictions. In addition, this
Fund may invest the cash balances which it may be required (for operational
purposes) to hold outside of the U.S. in foreign currency-denominated
instruments (generally bank accounts).

Under current tax laws, certain foreign exchange gains realized by the
International Bond Fund from its hedging activities may be subject to U.S.
federal income tax and withholding requirements. See "What Are the Funds'
Potential Risks?" in the SAI for a more detailed discussion of the International
Bond Fund's authorized hedging activities.

Although the International Bond Fund is not limited with respect to the maturity
of its portfolio securities, it is anticipated that the majority of the Fund's
investments will be intermediate to long-term investments that mature in ten
years or more.

Although certain risks are involved in forward foreign exchange contracts,
foreign currency options, foreign currency futures and related options on such
futures (as discussed above and in the SAI), the investment manager believes
that, because the International Bond Fund will only engage in these transactions
for hedging purposes, the use of these strategies will not subject the Fund to
the risks frequently associated with the speculative use of forward contracts,
options and futures transactions. In addition, the International Bond Fund will
not invest funds in foreign currency positions, the principal amount of which
taken through options on foreign currencies, foreign currency futures contracts,
forward foreign currency contracts and options on foreign currency futures
contracts with respect to any particular foreign currency would exceed the sum
of the principal amount of securities denominated in such foreign currency owned
or committed to be bought by the Fund. Tax requirements may further limit the
International Bond Fund's ability to engage in these hedging transactions and
strategies.

FURTHER RISK DISCUSSION IS INCLUDED UNDER THE CAPTION "WHAT ARE SOME OF THE
FUNDS' POTENTIAL RISKS? - HIGH YIELDING, FIXED-INCOME SECURITIES."

SOME OF THE FUNDS' OTHER INVESTMENT POLICIES

Long-Term Investments. It is not the policy of any Fund to buy or sell
securities for trading purposes as such activity may cause the Fund to be deemed
to be engaged in a trade or business in the U.S. for U.S. federal income tax
purposes. Rather, it is the policy of each Fund to buy securities for long-term
investment to generate income. To the extent consistent with guidelines each
Fund follows in order not to be deemed to be engaged in a trade or business in
the U.S., however, each Fund may make changes in its investments in accordance
with management's appraisal of the factors affecting the market and the national
economy in order to protect the Fund from losses in the value of its
investments.

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

Illiquid Investments. It is the policy of each Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which such Fund has valued the
securities) may not constitute, at the time of purchase more than 10% of the
value of the net assets of the Fund in which they are held.

Borrowing. The Funds do not borrow money or mortgage or pledge any of their
assets except that the Funds may borrow for temporary or emergency purposes, and
pledge their assets therefor, in an amount up to 5% of total asset value of each
Fund, and subject to certain tax requirements.

Securities of Non-U.S. Issuers. Securities of non-U.S. issuers cannot be bought
by the Government Fund. There are no restrictions on investment of assets of the
High Yield Fund or the International Bond Fund in non-U.S. securities, provided
such investments are consistent with the investment objectives and policies of
such Funds. The High Yield Fund, however, presently has no intention of
investing more than 10% of its net assets in securities of non-U.S. issuers not
publicly traded in the U.S. Interest income from non-U.S. securities will
generally be exempt from U.S. federal income tax and U.S. tax withholding.

The High Yield Fund will ordinarily buy securities of non-U.S. issuers which are
traded in the U.S. or buy American Depositary Receipts ("ADRs"), which are
certificates issued by U.S. banks representing the right to receive securities
of a non-U.S. issuer deposited with that bank or a correspondent bank. ADRs
bought by the High Yield Fund will be "sponsored," that is, establishment of the
issuing facility is brought about by the participation of the issuer and the
depository institution pursuant to a deposit agreement which sets out the rights
and responsibilities of the issuer, the Depositary and the ADR holder. The Fund
may buy the securities of non-U.S. issuers, located in developed countries only,
directly in non-U.S. markets.

Investments in non-U.S. securities, where delivery takes place outside the U.S.,
will be made in compliance with any applicable currency restrictions and other
tax laws and laws limiting the amount and types of such investments.

Securities which are acquired by the High Yield Fund or the International Bond
Fund outside the U.S. and which are publicly traded in the U.S. or on a
recognized non-U.S. securities exchange or securities market are not considered
by the Fund to be illiquid assets so long as (i) the securities, if resold, may
be sold in one or more such trading markets, (ii) the Fund reasonably believes
it can readily dispose of the securities for cash in one or more of such
markets, and (iii) current market quotations are readily available.

Other. Consistent with each Fund's intention to produce income that is not
subject to U.S. federal income tax or U.S. withholding tax for qualifying
non-U.S. shareholders, each Fund will generally invest in debt securities of
U.S. issuers that are issued after July 18, 1984 in registered form or in debt
securities of non-U.S. issuers that are not engaged in U.S. trade or business so
that the income generated by such investments may be treated as "portfolio
interest" or "non-U.S. source" income, respectively. (See "How Taxation Affects
You and the Funds.")

In order to comply with guidelines concerning each Fund's investment activities
and to strengthen its position that it is not engaged in a U.S. trade or
business, a Fund may have to refrain from selling or buying particular
securities under circumstances in which such securities would otherwise have
been sold or bought. Conversely, in order to protect the value of its
investments, a Fund may have to take actions which are not consistent with the
guidelines and may weaken its tax position. The effect of the guidelines is more
pronounced for the High Yield Fund and the International Bond Fund because of
the nature of their investments. See the tax section of this prospectus for
further information.

The Funds are subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which further limit
their activities to some extent. A list of these restrictions and more
information concerning the policies discussed herein are included in the SAI.

WHAT ARE SOME OF THE FUNDS' POTENTIAL RISKS?

FOREIGN SECURITIES

There are certain risks involved in a U.S. investment company's investment in
the securities of non-U.S. issuers. These risks include: fluctuations in
currency exchange rates, devaluation of currencies, imposition of withholding
taxes on Fund income, reduced availability in the U.S. of public information
concerning non-U.S. issuers, future political and economic developments and the
imposition of currency exchange regulations or other governmental laws or
restrictions, and the fact that non-U.S. companies are not generally subject to
the same type of accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are applicable to U.S. companies.
Moreover, securities of many non-U.S. issuers may be less liquid than the
securities of comparable U.S. issuers and their prices more volatile, and the
Funds will incur transaction costs in converting assets from one currency to
another. Brokerage commissions and custody fees for non-U.S. securities are also
generally higher than those in the U.S. In addition, with respect to certain
countries, there is the possibility of expropriation or the nationalization of
issuers of securities held by a Fund, confiscatory taxation, and limitations on
the use or removal of monies (e.g., currency blockages) or other Fund assets.

HIGH YIELDING DEBT SECURITIES

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

Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
a Fund may have unrealized losses on such defaulted securities which are
reflected in the price of the Fund's shares. In general, securities which
default lose much of their value in the time period prior to the actual default
so that a Fund's net assets are impacted prior to the default. The Funds may
retain an issue which has defaulted because such issue may present an
opportunity for subsequent price recovery.

High yielding debt securities frequently have call or buy-back features which
permit an issuer to call or repurchase the securities from the Funds. Although
such securities are typically not callable for a period from three to five years
after their issuance, if a call were exercised by the issuer during periods of
declining interest rates, the Manager may find it necessary to replace such
securities with lower yielding securities, which could result in less net
investment income to a Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for the Fund to
manage the timing of its receipt of income, which may have tax implications. The
Funds may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to allocate such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.

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

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

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

The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact a Fund's net asset value. In addition, the Funds may incur
additional expenses to the extent they are required to seek recovery upon a
default in the payment of principal or interest on their portfolio holdings. The
Funds will rely on the Manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the Manager will take
into consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.

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

Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or the cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.

Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Funds will be deemed to receive interest over the life of
such bonds and income will be allocated to the shareholders as if interest were
paid on a current basis, although no cash interest payments are received by the
Funds until the cash payment date or until the bonds mature.

For tax imposed restrictions on trading, see "U.S. Tax Treatment of Non-U.S.
Shareholders" under "How Taxation Affects You and the Funds."

Because of the High Yield Fund's policy of investing in higher yielding, higher
risk securities, an investment in the High Yield Fund is accompanied by a higher
degree of risk than is present with an investment in higher rated, lower
yielding securities. Accordingly, an investment in the High Yield Fund should
not be considered a complete investment program, and should be carefully
evaluated for its appropriateness in light of the shareholder's overall
investment needs and goals. Persons on fixed incomes, such as retired persons,
should also consider the increased risk of loss to principal which is present
with an investment in higher risk securities such as those in which the High
Yield Fund invests. The International Bond Fund may also invest a portion of its
assets in comparable securities, although the International Bond Fund currently
does not intend to invest more than 5% of its assets in such securities.

ASSET COMPOSITION TABLE

Asset Composition Table. A credit rating by an NRSRO evaluates only the safety
of principal and interest of a bond, and does not consider the market value risk
associated with an investment in such a bond. The table below shows the
percentage of the High Yield Fund's assets invested in fixed income securities
rated in each of the specific rating categories shown and those that are not
rated by the NRSRO but deemed by the Manager to be of comparable credit quality.
The information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in the
fiscal year ended December 31, 1995. The Appendix to this prospectus includes a
description of each rating category.

Average Weighted
Moody's Rating Percentage of Assets
- ------------------------------------------------------------------------------

Aaa .................... --
Aa ..................... --
A ...................... --
Baa .................... .53
Ba ..................... 16.17
B ...................... 69.92
CAE .................... 2.90
Ca ..................... .18

Average Weighted
S&P Rating Percentage of Assets
- ------------------------------------------------------------------------------

AAA ..................... --
AA ...................... --
A ....................... --
BBB ..................... 1.93
BB ...................... 30.12
B* ...................... 51.99
CCC ..................... 2.32
CC ...................... --
D ....................... .09

*1.84% of these securities, which are unrated by an NRSRO, have been included in
the B rating category.

HOW YOU PARTICIPATE IN THE
RESULTS OF THE FUNDS' ACTIVITIES

If the securities owned by a Fund increase in value, the value of the shares of
the Fund which you own will increase. If the securities owned by a Fund decrease
in value, the value of your shares will also decline. In this way, you
participate in any change in the value of the securities owned by the Fund.

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets. In
particular, changes in interest rates, including changes in the prevailing rates
of interest in any of the countries in which the International Bond and High
Yield Funds invest, will affect the value of a Fund's portfolio and thus its
share price. Increased rates of interest which frequently accompany inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. In addition, with respect to the High Yield and International Bond
Funds, changes in currency valuations will impact the price of Fund shares.
History reflects both increases and decreases in interest rates in individual
countries and throughout the world, and in currency valuations, and these may
reoccur unpredictably in the future.

WHO MANAGES THE FUNDS?

The Managing General Partners of each Fund establish the Fund's policies and
supervise and review the operations and management of the Fund pursuant to the
Partnership Agreements, the provisions of which are summarized under the heading
"Summary of Partnership Agreements," and a copy of each Fund's Partnership
Agreement is reproduced in its entirety in the SAI. The Managing General
Partners of each Fund have been elected for an indefinite term. The Managing
General Partners are responsible for electing the officers of each Fund who are
responsible for administering its day-to-day operations.

Each Fund has a corporate Non-Managing General Partner who does not participate
in the management of the Fund, but who is obligated to maintain (together with
the Managing General Partners) a minimum 1% investment in each Fund. Franklin
Partners, Inc., a California corporation, is the Non-Managing General Partner
for each Fund. All of the outstanding stock of Franklin Partners, Inc. is owned
by Resources, a publicly owned holding company, the principal shareholders of
which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately
20% and 16%, respectively, of Resources' outstanding shares. Resources is
engaged in various aspects of the financial services industry through its
subsidiaries.

Advisers, a wholly-owned subsidiary of Resources, serves as each Fund's
investment manager. Advisers acts as investment manager or administrator to 36
U.S. registered investment companies (119 separate series) with aggregate assets
of over $81 billion.

Pursuant to a management agreement, the Manager supervises and implements each
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
managing general partners of the Funds are prohibited from investing in
securities held by the Funds or other funds which are managed or administered by
the Manager to the extent such transactions comply with the Funds' Code of
Ethics. Please see "Investment Advisory and Other Services" and "General
Information" in the SAI for further information on securities transactions and a
summary of the Funds' Code of Ethics.

During the fiscal year ended December 31, 1995, the Government Fund and the High
Yield Fund paid management fees representing 0.51% and 0.62%, respectively, of
the average net assets of the Fund. Management fees, before any advance waiver,
for the International Bond Fund totaled 0.63% of its average monthly net assets.
Pursuant to an agreement by Advisers to limit its fees, the International Bond
Fund paid management fees totaling 0.04% of its average monthly net assets. This
arrangement may be terminated by the Manager at any time upon notice to the
Managing General Partners.

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

Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
income-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.

During the fiscal year ended December 31, 1995 expenses borne by the Funds,
including fees paid to Advisers and to Investor Services, totaled 0.64%, 0.82%,
and 0.41% of the average monthly net assets of the Government Fund, High Yield
Fund, and International Bond Fund, respectively. The 0.41% for the International
Bond Fund represents the ratio after advance fee waiver by the Manager. Had such
action not been taken, total expenses would have represented 1.00% of the
International Bond Fund's average monthly net assets.

SUBADVISORY AGREEMENT

Pursuant to a subadvisory agreement between Advisers and Templeton Investment
Counsel, Inc. ("TICI"), a Florida corporation with offices at Broward Financial
Centre, Suite 2100, Fort Lauderdale, Florida 33394-3091, an indirect
wholly-owned subsidiary of Resources, TICI provides certain investment services
with respect to the assets of the International Bond Fund. Under the subadvisory
agreement, TICI will provide, subject to the Manager's discretion, a portion of
the investment advisory services for which the Manager is responsible pursuant
to its management agreement relating to the International Bond Fund. TICI will
be paid a fee from the investment advisory fees received by Advisers. Please see
"Investment Advisory and Other Services" in the SAI.

PLANS OF DISTRIBUTION

A plan of distribution has been approved and adopted for each Fund (the
"Plan(s)") pursuant to Rule 12b-1 under the 1940 Act. Under the Plans, each Fund
may reimburse Distributors or others for all expenses incurred by Distributors
or others in the promotion and distribution of the Fund's shares. Such expenses
may include, but are not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales literature
and related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates.

The maximum amount which each Fund may reimburse Distributors or others for
distribution expenses is 0.15% per annum of its average daily net assets,
payable on a quarterly basis. All expenses of distribution in excess of 0.15%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund.

The Plans also cover any payments to or by the Funds, Advisers, Distributors, or
other parties on behalf of the Funds, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under each Plan are included in the maximum
operating expenses which may be borne by the Fund. For more information,
including a discussion of the policies established by the Managing General
Partners with regard to the amount of Plan fees, please see "The Funds'
Underwriter" in the SAI.

WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?

A proportionate share of each Fund's net investment income is allocated to
shareholders daily and distributed monthly on or about the last business day of
that month. The amount of distributions may vary from month to month and is not
guaranteed in any way. Daily allocation of net investment income will begin on
the day after the Fund receives your money or settlement of a wire order trade
and will continue to accrue through the day of receipt of your redemption
request or the settlement of a wire order trade.

Increases and decreases in the value of a Fund's portfolio securities are
reflected in the value of your shares in the Fund without regard to whether the
increases or decreases have been realized through a sale or other disposition of
the securities. Net capital gains (or losses) realized by each Fund on
transactions in their respective portfolio securities are allocated among the
shareholders for tax purposes in accordance with the tax allocation methods
described below.

Net capital gains and losses realized by a Fund on transactions in its
investment portfolio are allocated among the shareholders of a Fund under a
formula designed generally to allocate realized gains to shareholders to whom
net unrealized gains have been credited previously and to allocate realized
losses to shareholders to whom net unrealized losses have been debited
previously. Realized gains or losses in excess of the amounts allocated under
the formula are allocated among all shareholders in proportion to the number of
shares owned on the day the gain or loss is realized. Since Treasury regulations
do not specify a particular method of allocating gains and losses for tax
purposes in these circumstances, it is possible that the IRS could challenge the
Funds' method of allocating capital gains and losses.

All distributions are authorized by the Managing General Partners who, at any
time, have the right to modify the amount of the distributions to reflect each
Fund's financial situation. See the SAI for more information.

After each calendar year, each Fund is required to send you (regardless of
whether you are or are not a U.S. taxpayer) a U.S. Federal and State of
California tax form (Form K-1) which identifies your share of net income, gains
and losses for the taxable year and (for non-U.S. taxpayers) a U.S. Federal Form
1042S. Copies of these forms will be filed with the IRS and the California
Franchise Tax Board.

DISTRIBUTION OPTIONS

You may choose to receive your income distributions from the Funds in any of
these ways:

1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge). This is a convenient way to accumulate additional shares and maintain
or increase your earnings base.

2. Purchase shares of other Franklin Templeton Funds - You may direct your
income distributions to purchase the same class of shares of another Franklin
Templeton Fund (without a sales charge or imposition of a contingent deferred
sales charge). Many shareholders find this a convenient way to diversify their
investments.

3. Receive income distributions in cash -You may have the money sent directly to
you, to another person, or to a checking account. If you choose to send the
money to a checking account, please see "Electronic Fund Transfers" under "What
Programs and Privileges Are Available to Me as a Shareholder?"

To select one of these options, please complete sections 1 and 8 of the
Application included with this prospectus or tell your investment representative
which option you prefer. If no option is selected, your income distributions
will be automatically reinvested in the Fund. You may change the distribution
option selected at any time by notifying the Fund by mail or by telephone.
Please allow at least seven days prior to the reinvestment date for a Fund to
process the new option.

HOW TAXATION AFFECTS YOU AND THE FUNDS

The following summary of U.S. federal income tax law applicable to the Funds and
their shareholders is based on statutes, regulations, rulings, case law and
other authorities in effect as of the date of this prospectus. Additional
information on tax matters relating to the Funds and their shareholders is
included in the section entitled, "Additional Information Regarding Taxation" in
the SAI.

U.S. Tax Status of the Funds. Each Fund has obtained a ruling from the IRS to
the effect that the Fund will be classified as a partnership and that its
general and limited partners will be treated as partners for tax purposes. The
rulings are conditioned on maintenance by the general partners at all times of a
minimum 1% aggregate investment in each item of partnership income, gain, loss,
deduction or credit. The general partners intend to comply with this
requirement, which is contained in each Fund's Partnership Agreement.

As limited partnerships, the Funds are not subject to U.S. federal income tax
or, as a general rule, to state income tax. Although federal tax legislation
enacted in 1987 will cause publicly traded partnerships, including partnerships
such as the Funds, to be taxed as corporations, this legislation will not apply
to the Funds until after 1997, provided that the Funds do not add a "substantial
new line of business" prior to that time. The Managing General Partners of the
Funds intend to avoid changes in Fund activities which might constitute the
addition of a "substantial new line of business" and will determine at the
appropriate time whether the Funds may be continued in the same or modified form
after 1997. Prior to the change in tax treatment, the Managing General Partners
will recommend to shareholders steps which will allow non-U.S. shareholders to
receive income free of U.S. taxation. All shareholders will be advised of the
recommendation of the Managing General Partners, will be provided with
information concerning the choices available, and will have an opportunity to
make suitable investment choices at that time. Among the alternatives presently
under consideration by the Managing General Partners is a proposal which,
subject to compliance with applicable laws, would permit each non-U.S.
shareholder to transfer that shareholder's assets to selected funds in the
Templeton Global Strategy Funds organized under the laws of Luxembourg to form a
SICAV (Societe d'Investissements a Capital Variable). Non-U.S. shareholders in a
SICAV are not subject to U.S. taxation.

In a limited partnership, the character of any income earned or capital gains
realized by each Fund flows through directly to its shareholders and is taxed at
that level. Shareholders generally are liable for payment of taxes on their
allocated share of Fund income and realized capital gains. To the extent,
however, that a Fund earns income or realizes capital gains in a form that is
exempt from U.S. federal income tax for non-U.S. shareholders (as discussed
below), qualifying non-U.S. shareholders are likewise not subject to the payment
of U.S. federal income tax or U.S. withholding tax on their allocated share of
these types of income from the Funds, subject to the conditions stated below.
U.S. withholding tax refers to the withholding requirements under Sections 1441
and 1442 of the Code (which impose withholding at the rate of 30%, subject to
reductions pursuant to tax treaties) and, if applicable, Section 3406 of the
Code (which imposes back-up withholding at the rate of 31%).

To the extent the High Yield Fund and the International Bond Fund generate
income or capital gains from debt obligations purchased or issued outside of the
U.S., such Funds may be required to pay taxes in foreign countries on such
income or gains. Non-U.S. shareholders in those Funds may be able to obtain a
credit or other relief from such taxes under the tax laws of their own countries
or under treaties between their countries and the countries imposing such taxes
on the Funds.

U.S. Tax Treatment of Non-U.S. Shareholders. A non-U.S. shareholder (i.e., a
shareholder other than a U.S. citizen or resident or a U.S. corporation,
partnership, estate or trust as defined in the Code) investing in a Fund who was
deemed to be engaged in a trade or business in the U.S. would be subject to U.S.
federal income tax on any ordinary income and capital gains realized by the Fund
to the extent such income and gains were deemed to be effectively connected with
the conduct of such trade or business. (U.S. taxation of such income and gains
would not be avoided under the terms of an applicable U.S. income tax treaty
because such shareholder would be deemed to have a permanent establishment in
the U.S.)

Each Fund believes that neither the Funds, nor their shareholders solely by
virtue of their investment in the Funds, should be deemed to be engaged in a
trade or business in the U.S. if the Funds adhere to their stated investment
objectives, policies and restrictions and to certain guidelines concerning their
investment activities. Each Fund intends to comply with these restrictions and
guidelines. Assuming that the Funds comply with the guidelines, any non-U.S.
shareholder of a Fund should not be deemed to be engaged in a trade or business
in the U.S. solely by virtue of an investment in the Fund. Shareholders should
also note that their investments in other funds in the Franklin Templeton Funds
or in other U.S. investments generally would not, by themselves, cause them to
be deemed to be engaged in a trade or business in the U.S.; however, it is
possible that a shareholder could be deemed to be engaged in a trade or business
in the U.S. if the shareholder engages in frequent trading (as opposed to
investment) activity and generally does not hold U.S. investments for any
substantial period of time.

If a Fund were deemed to be engaged in a U.S. trade or business by the IRS or a
court of law, then its non-U.S. shareholders would be subject to U.S. federal
income tax and the Fund would be obligated to withhold tax at the highest rate
applicable to a particular class of shareholders on effectively connected
taxable income allocable to each non-U.S. shareholder within that class (see the
SAI).

Assuming that a non-U.S. shareholder is not engaged in a trade or business in
the U.S., ordinary income realized by each Fund will not be subject to U.S.
federal income tax (including "Non-Resident Alien" withholding taxes), if (i)
the ordinary income consists of interest income which qualifies for the
"portfolio interest" exemption under Sections 871(h) and 881(c) of the Code (or
is otherwise exempt from U.S. tax withholding), (ii) the shareholder has
furnished a valid and effective original or certified copy of an original Form
W-8 (or substitute) to the Funds and has renewed the Form W-8 as required, (iii)
the Funds have no actual knowledge that the shareholder is in fact a U.S. person
and (iv) the shareholder is not (a) a "10-percent shareholder," as defined in
Section 871(h)(3) of the Code, of the issuer of a security held by the Fund
which generates the portfolio interest income, (b) a controlled foreign
corporation related to such issuer, or (c) a bank deemed to be receiving such
interest (other than interest on an obligation of the U.S.) on an extension of
credit made pursuant to a loan agreement entered into in the ordinary course of
its trade or business. The Funds have been advised that interest income will
qualify for the "portfolio interest" exemption if it is paid with respect to a
debt obligation issued after July 18, 1984 in registered form with respect to
which the U.S. person who would otherwise be required to withhold U.S. federal
income tax from such interest under Section 1441 or 1442 of the Code (i.e., the
Fund) has received a valid and effective statement (such as that contained in
the Application) that the beneficial owner of the obligation (i.e., the
shareholder) is not a U.S. person.

A Fund's investments in zero coupon or deferred interest securities or in
pay-in-kind bonds are subject to special tax rules concerning the amount, timing
and character of the income allocations made to shareholders by causing the Fund
to recognize income prior to the receipt of cash payments. This income will
qualify for the "portfolio interest" exemption, provided that the other
requirements relating to the exemption are satisfied. Certain foreign exchange
gains and losses realized by the High Yield Fund and the International Bond Fund
may be treated as ordinary income and losses rather than capital gains and
losses. Such ordinary income does not appear to be subject to U.S. federal
income tax (including withholding taxes) for a non-U.S. shareholder who is not
engaged in a trade or business in the U.S.

With respect to the High Yield Fund and the International Bond Fund, a non-U.S.
shareholder who is not engaged in a trade or business in the U.S. will also not
be subject to U.S. federal income tax (including withholding taxes) on ordinary
income realized by the Fund which constitutes "non-U.S. source" income. The Fund
has been advised that interest income will be deemed to be "non-U.S. source"
income if it is received with respect to securities issued by governments other
than the U.S. or by a non-U.S. corporation unless the corporation is engaged in
a trade or business in the U.S. Interest on securities of all non-U.S.
corporations engaged in a trade or business in the U.S. is generally treated at
least in part as U.S. source income, although such interest may be exempt from
U.S. withholding taxes by virtue of qualifying for the portfolio interest
exemption.

A non-U.S. shareholder who is not engaged in a U.S. trade or business will
generally not be subject to U.S. federal income tax (including withholding
taxes) on the allocated share of net short-term or long-term capital gains
realized by a Fund or on proceeds from the redemption of Fund shares, provided
that the shareholder is not treated as a U.S. resident under the Code. In the
case of an individual, a non-U.S. shareholder is one who has been physically
present in the U.S. for less than 31 days during the current calendar year. An
individual who is physically present in the U.S. for at least 31 but less than
183 days during the current calendar year will still be treated as a non-U.S.
shareholder, provided that the total number of days physically present in the
current calendar year and the two preceding calendar years does not exceed 183
days (counting all of the days in the current calendar year, only one-third of
the days in the first preceding calendar year and only one-sixth of the days in
the second preceding calendar year). An individual who is physically present in
the U.S. for 183 days or more during the current calendar year is generally not
treated as a non-U.S. shareholder. In addition, lawful permanent residents or
green card holders may not be treated as non-U.S. shareholders. Shareholders
should contact their tax advisors for more specific information regarding the
determination of U.S. residency status for tax purposes.

Redemption proceeds will also not be subject to U.S. tax if they constitute
non-U.S. source income by virtue of the shareholder's non-U.S. status. Even if
proceeds of redemptions are not subject to U.S. tax under the rules just
described, the Funds may still be required to withhold on the portion of such
proceeds which represents the shareholder's allocable share of income or gains
of the Funds which would otherwise be subject to withholding.

Non-U.S. shareholders who do not furnish a valid and effective Form W-8 (or
substitute) may be subject to U.S. withholding taxes on their allocated shares
of income and gains realized by the Funds and on proceeds from redemptions of
their shares. Regardless of whether a valid and effective Form W-8 (or
substitute) is furnished, non-U.S. shareholders will be subject to U.S.
withholding taxes on their allocated shares of income realized by the Funds from
sources other than (i) "portfolio interest," (ii) "U.S. source" income otherwise
exempt from withholding, (iii) "non-U.S. source" income, and (iv) net realized
capital gains, unless such withholding taxes are reduced or eliminated under the
terms of an applicable U.S. income tax treaty and the shareholder complies with
all procedures for claiming the benefits of such a treaty. It is the intention
of each Fund to withhold amounts required by the Code with respect to
non-qualifying income and/or non-qualifying shareholders either at the time of
distribution or by subsequent redemption of shares in the shareholder's account.

You may also be subject to taxation on income and gain earned from your
investment in the Fund imposed by state and local jurisdictions or by your
country of residence for tax purposes. In addition, the value of shares owned by
a U.S. or non-U.S. shareholder may be subject to U.S. federal estate tax (and
state inheritance tax) upon the death of the shareholder.

The foregoing discussion is only a summary and does not address potential tax
liability under the tax laws of any country other than the U.S. A complete
discussion will depend on the jurisdiction in which you reside for tax purposes.
The foregoing discussion also assumes you are generally not subject to U.S. tax
or withholding with respect to other income or activities unrelated to an
investment in the Funds or to U.S. state tax or withholding. Should you become
subject to U.S. or state tax or withholding, the tax consequences of owning,
exchanging, or selling shares of the Funds will be significantly different and
you should consult a tax adviser in this circumstance.

U.S. Tax Treatment of U.S. Shareholders. If you are treated under the Code as a
U.S. citizen or resident or a U.S. corporation, partnership, estate or trust you
will be subject to U.S. federal income tax on the distributive share of each
item of income, deduction, credit, gain or loss realized by the Fund,
notwithstanding the fact that such income may not have been distributed and that
a portion of such income may consist of "portfolio interest" or other income
which would be exempt from U.S. tax if allocated to a non-U.S. person. Fund
shareholders may not use Fund losses to offset "passive activity income" from
other investments or "passive activity losses" from other investments to offset
Fund income.

State Tax Considerations. As a general rule, partnerships are not considered to
be separate taxable entities under state law. Title 31 of the U.S. Code exempts
U.S. government obligations and the interest they pay from taxation under state,
municipal or local authority. To the extent the Government Fund earns interest
income on obligations of the U.S., its agencies or instrumentalities (other than
GNMAs and other indirect obligations of the U.S.), such income is generally
exempt from state and local income tax. Income generated from investment in
GNMAs, however, is subject to state and local income tax in most states.

It is possible that certain states such as California could take the position
that nonresident shareholders of the Funds (including shareholders who are not
subject to U.S. federal income taxation) are subject to tax in such states on
their shares of Fund income derived from sources within the respective states as
a result of Fund activities conducted in the state. The Funds intend to file a
partnership tax return and Forms K-1 in the state of California, but to take the
position with respect to other states that they are under no obligation to file
any other tax or information returns in such states because their activities in
any such state would not be extensive enough to support the exercise of taxing
jurisdiction by such state.

The Funds believe that shareholders who are not residents of California should
not be subject to income tax in California because the activities of the Funds
would not rise to the level of conduct of a trade or business in California. If
a Fund were determined to be conducting a trade or business (rather than merely
investing), however, the Fund would be required to withhold California income
tax at the rate of 9.3% of the income amounts allocable to non-U.S. shareholders
and 7% of income amounts allocable to U.S. shareholders who reside outside
California. Prospective shareholders in the Funds may wish to consult their own
tax advisers about the risks of taxation of their distributive shares of Fund
income and gains in states other than their states or countries of residence and
the availability of tax credits in their own states or countries for taxes paid
to such states.

In the event non-U.S. shareholders in the Funds are subject to state taxation of
their distributive shares of Fund income and gains, such income may be exempt
from state taxation to the extent it consists of interest on direct obligations
of the U.S. See the SAI for more information concerning taxation of
shareholders.

HOW DO I BUY SHARES?

You may invest in a Fund with a minimum of $2,500 and make additional
investments at any time with as little as $100. To open your account, contact
your investment representative or complete and sign the enclosed Application and
return it to the Fund with your check. All orders must be paid for in U.S.
dollars.

PURCHASE PRICE OF FUND SHARES

You may buy shares at the public offering price, unless you qualify to purchase
shares at a discount or without a sales charge as discussed below. The offering
price will be calculated to two decimal places using standard rounding criteria.

QUANTITY DISCOUNTS IN SALES CHARGES

The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.

<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
-------------------
Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
- --------------------------------------------------------------------------------------

<S> <C> <C> <C>
Under $100,000.......................... 4.25% 4.44% 4.00%
$100,000 but less than $250,000......... 3.50% 3.63% 3.25%
$250,000 but less than $500,000......... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000....... 2.15% 2.20% 2.00%
$1,000,000 or more...................... None** None None***
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.

Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.

Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the 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. You
or your investment representative must inform us that the Letter is in effect
each time you purchase shares.

BY COMPLETING THE LETTER OF INTENT SECTION OF THE APPLICATION, YOU ACKNOWLEDGE
AND AGREE TO THE FOLLOWING:

o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Fund shares registered in your name.

o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.

o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.

o You will receive income distributions on the reserved shares; we will pay or
reinvest these distributions as you direct.

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

If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.

Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable 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. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 3.5%.

We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.

In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.

If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.

PURCHASES AT NET ASSET VALUE

You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:

(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive From the Fund?" or call Shareholder Services at
1-800/632-2301; or

(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days.

You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money within 365 days of the redemption date. You may reinvest up to the
total amount of the redemption proceeds under this privilege. If a different
class of shares is purchased, the full front-end sales charge must be paid at
the time of purchase of the new shares. While you will receive credit for any
contingent deferred sales charge paid on the shares redeemed, a new contingency
period will begin. Shares that were no longer subject to a contingent deferred
sales charge will be reinvested at net asset value and will not be subject to a
new contingent deferred sales charge. Shares exchanged into other Franklin
Templeton Funds are not considered "redeemed" for this privilege (see "What If
My Investment Outlook Changes? - Exchange Privilege").

If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.

If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.

Certain categories of shareholders also qualify to purchase shares of the Fund
at net asset value regardless of the source of the investment proceeds. If you
or your account is included in one of the categories below, none of the shares
of the Fund you purchase will be subject to front-end or contingent deferred
sales charges:

(i) registered securities dealers and their affiliates, for their investment
accounts only;

(ii) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;

(iii) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in comprehensive
fee programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or by
another registered investment advisor affiliated with that broker;

(iv) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;

(v) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity for qualifying investors and agree to
invest at least $1 million in Franklin Templeton Funds over a 13 month period.
We will accept orders for such 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 such order;

(vi) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;

(vii) accounts managed by the Franklin Templeton Group; or

(viii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund.

IF YOU QUALIFY TO BUY SHARES AT NET ASSET VALUE AS DISCUSSED IN THIS SECTION,
PLEASE SPECIFY IN WRITING THE PRIVILEGE THAT APPLIES TO YOUR PURCHASE AND
INCLUDE THAT WRITTEN STATEMENT WITH YOUR PURCHASE ORDER. WE WILL NOT BE
RESPONSIBLE FOR PURCHASES THAT ARE NOT MADE AT NET ASSET VALUE IF THIS WRITTEN
STATEMENT IS NOT INCLUDED WITH YOUR ORDER.

If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.

GENERAL

The Funds continuously offer their shares through securities dealers who have an
agreement with Distributors. The Funds and Distributors may refuse any order for
the purchase of shares.

Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.

If the purchase of shares of a Fund with the assistance of certain banks were
deemed to be an impermissible activity for the bank(s) under the Glass-Steagall
Act, or other federal laws, the activities will be discontinued by the bank(s).
If you were using assistance from such a bank, you would then be able to seek
other avenues to invest in the Funds' shares, such as securities dealers
registered with the SEC.

Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of $1 million or more: 0.75% on sales of $1
million but less than $2 million, plus 0.60% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.

Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraph (v) under
"Purchases at Net Asset Value" above.

Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.

For additional information about shares of the Funds, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and Managing General Partners of each Fund who are affiliated with Distributors.
See "Officers and Managing General Partners."

WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?

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

SHARES EVIDENCING PARTNERSHIP INTEREST IN THE FUNDS

The Funds do not issue certificates of partnership interest. Shares for an
initial investment, as well as subsequent investments, including the
reinvestment of income, are generally credited to an account in the name of a
shareholder on the books of the Funds and are reflected in periodic confirmation
statements. Maintaining shares in uncertificated form (also known as "plan
balance") minimizes the risk of loss or theft of a share certificate.

CONFIRMATIONS

A confirmation statement will be sent to you quarterly to reflect the
distributions reinvested during the period and after each other transaction
which affects your account. This statement will also show the total number of
shares you own.

AUTOMATIC INVESTMENT PLAN

The Automatic Investment Plan offers a convenient way to invest in the Funds.
Under the plan, you can arrange to have money transferred automatically from
your checking account to a Fund each month to buy additional shares. If you are
interested in this program, please refer to the Automatic Investment Plan
Application at the back of this prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.

SYSTEMATIC WITHDRAWAL PLAN

The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.

If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Application included with this
prospectus and indicate how you would like to receive your payments. You may
choose to receive your payments in any of the following ways:

1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.

2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.

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 first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.

Selling 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. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or distribution from income, part of the payment may be a return of
your investment.

You should ordinarily not make additional investments in the Fund of less than
$5,000 or three times the amount of annual withdrawals under the plan because of
the sales charge on additional purchases. Shares redeemed under the plan may
also be subject to a contingent deferred sales charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"

You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.

ELECTRONIC FUND TRANSFERS

You may choose to have income distributions from the Funds or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.

INSTITUTIONAL ACCOUNTS

THERE MAY BE ADDITIONAL METHODS OF BUYING, SELLING OR EXCHANGING SHARES OF THE
FUND AVAILABLE TO INSTITUTIONAL ACCOUNTS. FOR FURTHER INFORMATION, CONTACT THE
FRANKLIN TEMPLETON INSTITUTIONAL SERVICES DEPARTMENT AT 1-800/321-8563.

WHAT IF MY INVESTMENT OUTLOOK CHANGES?-
EXCHANGE PRIVILEGE

NON-U.S. SHAREHOLDERS SHOULD NOTE THAT INCOME FROM OTHER FUNDS IN THE FRANKLIN
TEMPLETON FUNDS MAY BE SUBJECT TO U.S. TAX AND WITHHOLDING REQUIREMENTS AND THAT
FREQUENT USE OF THIS EXCHANGE PROCEDURE, TOGETHER WITH OTHER TRADING ACTIVITIES,
COULD CAUSE THEM TO BE DEEMED TO BE ENGAGED IN A U.S. TRADE OR BUSINESS AND
THEREFORE SUBJECT TO U.S. TAXATION.

The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, shares of a Fund may be exchanged
for the same class of shares of another Franklin Templeton Fund eligible for
sale in your state or country of residence and in conformity with that fund's
stated eligibility requirements and investment minimums.

No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their income distributions to the Funds at
net asset value.

A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed.

Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.

You may exchange shares in any of the following ways:

BY MAIL

Send written instructions signed by all account owners. The transaction will be
effective upon receipt of the written instructions.

BY TELEPHONE

You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.

The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Please see "Telephone Transactions - Verification
Procedures."

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

THROUGH SECURITIES DEALERS

As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above. A
securities dealer may charge a fee for handling an exchange.

ADDITIONAL INFORMATION REGARDING EXCHANGES

NON-U.S. SHAREHOLDERS MAY BE SUBJECT TO WITHHOLDING ON EXCHANGES UNLESS A FORM
W-8 (OR SUBSTITUTE) IS ON FILE.

Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of a Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.

The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.

If you request the exchange of the total value of your account, accrued but
unpaid income distributions will be reinvested in the Fund at the net asset
value on the date of the exchange, and then the entire share balance will be
exchanged into the new fund in accordance with the procedures set forth above.
Because the exchange is considered a redemption and purchase of shares, if you
are subject to U.S. tax you may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this prospectus and under "Additional Information
Regarding Taxation" in the SAI.

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

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

MARKET TIMERS

Market Timers will be charged a $5.00 administrative service fee for each
exchange. All other exchanges are without charge.

RESTRICTIONS ON EXCHANGES

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

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

The Fund also reserves the right to refuse the purchase side of an exchange
request by any Market Timer, person, or group if, in the Manager's judgment, the
Funds would be unable to invest effectively in accordance with their investment
objectives and policies, or would otherwise potentially be adversely affected.
The purchase side of an exchange may be restricted or refused if the Funds
receive or anticipate simultaneous orders affecting significant portions of the
Funds' assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Funds and therefore may be
refused.

The Funds and Distributors, as indicated in "How Do I Buy Shares?" reserve the
right to refuse any order for the purchase of shares.

HOW DO I SELL SHARES?

You may sell (redeem) your shares at any time and receive from the Funds the
value of the shares. You may sell shares in any of the following ways:

BY MAIL

Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this prospectus. You will then receive
from the Fund the value of the shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated will receive the price calculated on the following business day. The
net asset value per share is determined as of the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) each day that the Exchange is open
for trading. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.

TO BE CONSIDERED IN PROPER FORM, SIGNATURES MUST BE GUARANTEED IF THE REDEMPTION
REQUEST INVOLVES ANY OF THE FOLLOWING:

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

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

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

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

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

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

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

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

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

Custodial - Signature guaranteed letter of instruction from the custodian.

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

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

BY TELEPHONE

If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this prospectus, you may redeem
shares of the Fund by telephone. You may obtain additional information about
telephone redemptions by writing to the Fund or Investor Services at the address
shown on the cover or by calling 1-800/632-2301 (in the U.S. only). The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. You, however, bear the risk of loss in certain
cases as described under "Telephone Transactions Verification Procedures."

If your account has a completed Agreement on file, redemptions of shares may be
made for up to $50,000 per day per Fund account. Telephone redemption requests
received before the scheduled close of the Exchange (generally 1:00 p.m. Pacific
time) on any business day will be processed that same day. The redemption check
will be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record.

Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this prospectus. Institutional accounts
(certain corporations, bank trust departments and government entities that
qualify to purchase shares at net asset value pursuant to the terms of this
prospectus) that wish to execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by calling 1-800/321-8563
(in the U.S. only.)

THROUGH SECURITIES DEALERS

The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer-ordered trade, such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the redemption. The seven-day
period within which the proceeds of your redemption will be sent will begin when
the Fund receives all documents required to complete ("settle") the repurchase
in proper form. Your dealer may charge a fee for handling the order. See "How Do
I Buy and Sell Shares?" in the SAI for more information on the redemption of
shares.

CONTINGENT DEFERRED SALES CHARGE

In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested income distributions) or the net asset value at the time of purchase
of such shares, and is retained by Distributors. The contingent deferred sales
charge is waived in certain instances.

In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested income distributions; and (iii)
other shares held longer than the contingency period. Shares subject to a
contingent deferred sales charge will then be redeemed on a "first-in,
first-out" basis. For tax purposes, a contingent deferred sales charge is
treated as either a reduction in redemption proceeds or an adjustment to the
cost basis of the shares redeemed.

The contingent deferred sales charge is waived, as applicable, for: specified
net asset value purchases discussed under "How Do I Buy Shares? - Purchases at
Net Asset Value"; exchanges; any account fees; redemptions initiated by the Fund
due to an account falling below the minimum specified account size; redemptions
following the death of the shareholder or beneficial owner; and redemptions
through a Systematic Withdrawal Plan set up for shares prior to February 1,
1995, and for Systematic Withdrawal Plans set up thereafter, redemptions of up
to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually). For example, if an account maintained an annual balance of
$1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic
Withdrawal Plan free of charge. Any amount over that $120,000 would be assessed
a 1% contingent deferred sales charge.

All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.

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

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.

The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.

OTHER INFORMATION

Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.

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

For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.

TELEPHONE TRANSACTIONS

By calling Investor Services at 1-800/632-2301 (in the U.S. only), you or your
investment representative of record, if any, may be able to execute various
telephone transactions, including to: (i) effect a change in address, (ii)
change a distribution option, (iii) transfer Fund shares in one account to
another identically registered account in the Fund, and (v) exchange Fund shares
as described in this prospectus by telephone. In addition, if you complete and
file an Agreement as described under "How Do I Sell Shares? - By Telephone" you
will be able to redeem shares of the Fund.

VERIFICATION PROCEDURES

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

GENERAL

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

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

HOW ARE FUND SHARES VALUED?

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

The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.

HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?

Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this prospectus.

From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753 (in the U.S. only), you may obtain
account information, current price and, if available, yield or other performance
information specific to the Fund or any Franklin Templeton Fund. In addition,
you may process an exchange, within the same class, into an identically
registered Franklin account and request duplicate confirmation or year-end
statements and deposit slips.

The Fund code, which will be needed to access system information, is 154 for the
International Bond Fund, 155 for the Government Fund and 156 for the High Yield
Fund. The system's automated operator will prompt you with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.

To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
<TABLE>
<CAPTION>

Telephone No. Hours of Operation (Pacific Time)
Department Name (in the U.S. only) (Monday through Friday)
- ------------------------------------------------------------------------------

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

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

HOW DO THE FUNDS MEASURE PERFORMANCE?

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

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

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

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

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

GENERAL INFORMATION

REPORTS TO SHAREHOLDERS

Each Fund's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Funds, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Funds at
the telephone number or address set forth on the cover page of this prospectus.

Additional information on Fund performance is included in the Funds' Annual
Report to Shareholders and under "General Information" in the SAI.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem your shares, at net asset value, if your
account has been in existence for at least 12 months and has a value of less
than $2,000 but only where the value of your account has been reduced by the
prior voluntary redemption of shares and has been inactive (except for the
reinvestment of distributions) for a period of at least six months, provided you
are given advance notice. For more information, see "How Do I Buy and Sell
Shares?" in the SAI.

OTHER INFORMATION

Although each Fund is offering only its own shares, it is possible that one Fund
might become liable for any misstatements in this prospectus about one of the
other Funds. The Managing General Partners of each Fund have considered this
factor in approving the use of a single, combined prospectus.

Prior to June 9, 1990, the International Bond Fund was managed by Pilgrim
Management Corporation ("PMC") and was one of the three mutual funds
constituting the Pilgrim Foreign Investors Funds. At a special meeting of
shareholders held on June 7, 1990, shareholders of the International Bond Fund
voted to approve a change in management which resulted in the appointment of
Advisers as investment manager of such Fund, which then changed its name from
Pilgrim International Bond Fund.

REGISTERING YOUR ACCOUNT

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

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

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

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

Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.

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

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

SUMMARY OF PARTNERSHIP AGREEMENTS

Each Fund is a California limited partnership. The Government Fund and the High
Yield Fund were organized on January 27, 1987 and the International Bond Fund
was organized on September 4, 1986. As limited partnerships, the Funds are not
required to hold annual meetings and do not intend to do so. Each Fund, however,
will hold meetings of partners for such purposes as electing new or additional
general partners, changing fundamental investment policies, approving an
investment management agreement or a distribution plan and, at the request of
shareholders owning 10% or more of the shares of a Fund, replacing its general
partners. All shares of each Fund are of one class, have one vote and, when
issued, are fully paid, nonassessable and redeemable. All shares of each Fund
have equal voting, distribution and liquidation rights but have no subscription,
preemptive or conversion rights. There is no cumulative voting.

The full text of the Partnership Agreement of each Fund is set forth in the SAI.
The following statements summarize and explain certain provisions of each
Partnership Agreement and are qualified in their entirety by the terms of each
Fund's respective Partnership Agreement.

Voting Rights of Partners. Each Fund's shareholders have the voting, approval,
consent or similar rights required under the 1940 Act for voting security
holders. Shareholders of each Fund have the exclusive right to vote on matters
affecting that Fund as set forth in the Partnership Agreement.

A meeting of the shareholders may be called by the Managing General Partners or
by limited partners holding 10% or more of the outstanding shares. Shareholders
on the record date of a meeting will be entitled to vote at that meeting if they
are admitted as limited partners prior to the meeting date.

General Partners. The general partners of each Fund consist of a number of
individuals, referred to as Managing General Partners, and one corporate general
partner, referred to as the Non-Managing General Partner (together, the "General
Partners"). The Managing General Partners have complete and exclusive control
over the management, conduct and operation of each Fund.

The General Partners have been elected for an indefinite term by the
shareholders of each Fund. If at any time the number of Managing General
Partners is reduced to less than three, the remaining Managing General Partners
shall, within 120 days, call a meeting for the purpose of electing an additional
Managing General Partner(s) so as to restore their number to at least three.
Each Partnership Agreement provides that the General Partners are not personally
liable to any shareholder of the Fund for the repayment of any amounts standing
in the account of any shareholder, and that any such payment shall be solely
from the assets of each respective Fund, except liability incurred by reason of
the General Partners' willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office. Each
Partnership Agreement also provides that the General Partners will not be liable
to any shareholder by reason of any failure to withhold income tax or any change
in any federal or state tax laws applicable to the Fund or its shareholders as
long as the General Partners have acted in good faith and in a manner reasonably
believed to be in the best interests of the shareholders. A General Partner is
generally entitled to indemnification from each Fund against liabilities and
expenses to which the General Partner may become subject in the capacity of a
General Partner of that Fund, including any liability resulting from failure to
withhold income tax or any change in applicable income tax laws, provided the
General Partner has acted in good faith and for a purpose which such partner
reasonably believed to be in the best interests of the Fund or its shareholders.
Such indemnification is limited to the assets of that respective Fund.

Liability of Limited Partners. Generally, limited partners are not personally
liable for obligations of the partnership of which they are shareholders unless
they participate in the control of the partnership's activities. Under the terms
of each Partnership Agreement, each Fund's limited partners do not have the
right to participate in the control of the Fund's activities, but they may
exercise the right to vote on matters affecting the basic structure of the Fund,
including matters requiring shareholder approval under the 1940 Act.

Under California law, the liability of each limited partner (in the capacity of
a limited partner) for the losses, debts and obligations of the Fund is
generally limited to the partner's capital contribution (which is the price of
such partner's shares net of all sales charges) and the partner's share of any
undistributed income or assets of the Fund. A limited partner may, however,
under certain circumstances, be required to return amounts previously
distributed for the benefit of the Fund's creditors. Each Fund intends to
include in its contracts a provision limiting the claims of creditors to the
Fund's assets and may carry insurance in such amounts as the Managing General
Partners, in their judgment, consider reasonable to cover potential liabilities
of the Fund. In addition, the Partnership Agreement for each Fund provides for
indemnification out of the Fund's property for any shareholder held personally
liable for any obligation of the Fund. Each Partnership Agreement also provides
that the Fund shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
liability as a limited partner is limited to circumstances in which the Fund
itself would be unable to meet its obligations. The Manager believes that, in
view of the above and in view of the character of the operations of each Fund as
an investment company, the risk of personal liability to shareholders is
extremely remote.

Admission of Limited Partners. In order to be admitted as a limited partner, a
purchaser of shares is either required to complete a partnership subscription
agreement, including a special power of attorney, in the form set forth in the
Application, or to take action indicating acceptance thereof. Admission of a
purchaser as a limited partner also requires the consent of the Managing General
Partners and the addition of the purchaser to the Partnership List of the Fund.
The Partnership List is a current list of all shareholders who are partners,
their addresses and the amount of their contributions and current share
ownership. The Managing General Partners of each Fund, while recognizing that
they have the right to withhold their consent, have stated that they intend to
give such consent as a matter of course to eligible shareholders and the
Partnership List will be updated daily on each business day.

Prohibition of Assignment of Shares. A limited partner of any Fund does not have
the right to voluntarily transfer or assign shares to any other person other
than to secure a loan. In the event that any person who is holding shares as
collateral becomes the owner of such shares due to foreclosure or otherwise,
such person shall not have the right to be substituted as a limited partner but
shall have the right (upon presentation of satisfactory evidence to the Managing
General Partners of the right to succeed to the interests of the Limited
Partner): (1) to redeem the shares and (2) to receive distributions with respect
to such shares. Under limited circumstances, a successor in interest of a
limited partner shall have the right to be substituted as a limited partner.

Term of Existence - Dissolution. The Government Fund and the High Yield Fund
will continue until December 31, 2050, and the International Bond Fund will
continue until December 31, 2036 but shall be dissolved before such date if and
when: (1) the shareholders of a Fund approve the prior dissolution of the Fund;
(2) a Fund disposes of all of its assets; (3) a General Partner withdraws and
the remaining General Partners do not elect to continue the operations of the
Partnership; or (4) there are no remaining General Partners (unless the
shareholders agree by unanimous vote to continue the Fund in circumstances where
the last remaining General Partner was not removed by them, and new General
Partners are promptly elected by the shareholders). Except by requiring a Fund
to redeem outstanding shares as described under "How Do I Sell Shares?" limited
partners have no right to the return of any part of their contributions to any
Fund until dissolution of the Fund. Distributions by each Fund, whether upon
redemption, dissolution or otherwise, will be in proportion to the number of
outstanding shares held without regard to the dollar amount contributed to the
Fund or the amount of any profits of the Fund received.

Other Provisions. Each Partnership Agreement also provides procedures for the
pricing, purchase and redemption of shares of each Fund as described in this
prospectus, as well as procedures relating to the giving of notices, the calling
of meetings and the solicitation of shareholder consents. In addition, each
Partnership Agreement contains provisions relating to the maintenance of books
and records by each Fund, the allocation for U.S. tax purposes of items of
income, gain, loss, deduction and credit, and the procedures by which amendments
to a Partnership Agreement may be effected. Limited partners have the right to
obtain current copies of the Partnership List, the Partnership Agreement and
certain other records of each Fund of which they are shareholders for their
personal use only. The Partnership List and other records of each Fund, although
available to other limited partners upon request and to certain other persons in
connection with Fund matters, are not matters of public record.

WHO RUNS EACH FUND?

The team responsible for the day-to-day management of each Fund's portfolio is:

GOVERNMENT FUND

Jack Lemein
Roger Bayston
Anthony Coffey

HIGH YIELD FUND

Chris Molumphy
Betsy Hofman-Schwab
Martin Wiskemann

INTERNATIONAL BOND FUND

Neil S. Devlin
Thomas J. Dickson
Thomas Latta

BIOGRAPHICAL INFORMATION

Roger Bayston
Portfolio Manager
of Advisers

Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisers or an affiliate since earning his MBA degree in 1991.

Anthony Coffey
Portfolio Manager
of Advisers

Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in applied mathematics and economics from
Harvard University. Mr. Coffey has been with Advisers or an affiliate since
1989. He is a member of several securities industry-related associations.

Neil S. Devlin
Portfolio Manager
of TICI

Mr. Devlin is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in economics and philosophy from Brandeis University. Mr. Devlin joined
Templeton in 1987. He has managed the International Bond Fund since January
1995.

Thomas J. Dickson
Portfolio Manager
of TICI

Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined Franklin in 1992 and
Templeton in 1994. He has managed the International Bond Fund since January
1995.

Betsy Hofman-Schwab
Portfolio Manager
of Advisers

Ms. Hofman-Schwab is a level three Chartered Financial Analyst candidate and
holds a Master of Business Administration degree from the College of Notre Dame
in California. She earned her Bachelor of Science degree in finance at the
College of Notre Dame in California. She has been with Franklin since 1981 and
has managed the High Yield Fund since its inception.

Thomas Latta
Portfolio Manager
of TICI

Mr. Latta attended the University of Missouri and New York University. Mr. Latta
has been in the securities industry since 1981 and with Templeton since 1991.
Prior to joining Templeton, Mr. Latta worked as a portfolio manager with
Forester and Hairston, a global fixed-income investment management firm, and
prior thereto, he worked as an investment adviser with Merrill Lynch. He has
managed the International Bond Fund since 1995.

Jack Lemein
Senior Vice President
of Advisers

Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations. Mr. Lemein has managed the Government Fund since its inception.

Chris Molumphy
Portfolio Manager
of Advisers

Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor of
Arts degree in economics from Stanford University. He has been with Advisers or
an affiliate since 1988. Mr. Molumphy is a member of several securities
industry-related associations. He has managed the High Yield Fund since joining
Franklin in 1988.

R. Martin Wiskemann
Senior Vice President
of Advisers

Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been in the securities business for
more than 30 years, managing mutual fund equity and fixed-income portfolios, and
private investment accounts. He is a member of several securities industry
associations. He joined Franklin in 1972 and has managed the High Yield Fund
since its inception.

USEFUL TERMS AND DEFINITIONS

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

Advisers - Franklin Advisers, Inc., the Fund's investment manager.

Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the Managing General Partners.
Certain funds in the Franklin Templeton Funds currently offer their shares in
two classes, designated "Class I" and "Class II." Because the Funds' sales
charge structure and plan of distribution are similar to those of Class I
shares, shares of the Funds may be considered Class I shares for redemption,
exchange and other purposes.

Code - Internal Revenue Code of 1986, as amended.

Distributors - Franklin/Templeton Distributors, Inc., the Funds' principal
underwriter.

Exchange - New York Stock Exchange.

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

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

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

Investor Services - Franklin/Templeton Investor Services, Inc.

Letter - Letter of Intent.

Limited partners - Purchasers of shares of limited partnership interests of a
Fund.

Manager - Franklin Advisers, Inc., the Fund's investment manager.

Managing General Partners - The individuals authorized under the Agreement of
Limited Partnership to oversee the management, conduct and operation of each
Fund.

Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.

Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.

Offering price - The public offering price is equal to the net asset value per
share plus the 4.25% sales charge.

Partnership Agreement - Agreement of Limited Partnership of the Funds, each
organized as a California Limited Partnership.

Proper Form (Purchases) - generally, the Funds must receive a completed
Application accompanied by a negotiable check.

Resources - Franklin Resources, Inc.

SAI - Statement of Additional Information.

SEC - Securities and Exchange Commission.

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

Shareholders - Limited partners.

TeleFACTS(R) - Franklin Templeton's automated customer servicing system.

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

U.S. - United States.

APPENDIX

DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S

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

A - 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 which suggest a
susceptibility to impairment sometime in the future.

Baa - 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. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.

Ba - 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 is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

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

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

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

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

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

S&P

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

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

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

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

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

C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 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.

FRANKLIN
PARTNERS
FUNDS(R)

Franklin Tax-Advantaged
U.S. Government Securities Fund

Franklin Tax-Advantaged High Yield Securities Fund

Franklin Tax-Advantaged International Bond Fund

STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 MAY 1, 1996
San Mateo, CA 94403-7777 1-800/DIAL BEN

Contents Page

What Are the Funds' Potential Risks?.............. 2
Investment Restrictions........................... 4
Officers and Managing General Partners............ 7
Investment Advisory and Other Services............ 10
How Do the Funds Purchase Securities
For Their Portfolio?............................. 12
How Do I Buy and Sell Shares?..................... 13
How Are Fund Shares Valued?....................... 15
Additional Information Regarding Taxation......... 16
The Funds' Underwriter............................ 17
General Information............................... 19
Financial Statements.............................. 22
Appendix A........................................ A-1
Appendix B........................................ B-1
Appendix C........................................ C-1

The Franklin Partners Funds(R) (collectively, the "Funds" or separately, the
"Fund") consist of three separate and distinct funds: Franklin Tax-Advantaged
U.S. Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged
High Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged
International Bond Fund (the "International Bond Fund"), each a California
limited partnership. Each Fund is a diversified, open-end management investment
company. As noted in the Prospectus, each Fund has its own investment objective,
which is a fundamental policy, and follows policies designed to achieve that
objective.

A Prospectus for the Funds, dated May 1, 1996, as may be amended from time to
time, provides the basic information you should know before investing in the
Funds and may be obtained without charge from the Funds or the Funds' principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address or telephone number shown above.

This Statement of Additional Information ("SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide you with additional information
regarding the activities and operations of the Funds, and should be read in
conjunction with the Funds' Prospectus.

PART SAI 05/96
What Are the Funds' Potential Risks?

Securities of Non-U.S. Issuers. The Government Fund will not acquire the
securities of non-U.S. issuers under any circumstances. The High Yield Fund and
the International Bond Fund will not acquire outside of the United States
("U.S.") the securities of non-U.S. issuers under circumstances where, at the
time of acquisition, such Funds have reason to believe that they could not
resell the securities in a public market. (Shareholders should recognize,
however, that securities of non-U.S. issuers are often bought or sold with less
frequency and volume, and therefore may have greater price volatility than is
the case with many U.S. securities.) Notwithstanding the fact that these Funds
intend to acquire the securities of non-U.S. issuers only where there are public
markets, investments by the Funds in the securities of such issuers may be
considered as tending to increase the risks with respect to the liquidity of the
Funds' portfolios and their ability to meet a large number of shareholder
redemption requests should there be economic or political turmoil in a country
in which the Funds had a substantial portion of their assets invested or should
relations between the U.S. and other countries deteriorate markedly.

The interest payable on the securities of non-U.S. issuers held by the High
Yield Fund and the International Bond Fund may be subject to withholding taxes
in countries other than the U.S. and, while individual shareholders may be able
to claim some credit or deduction for such taxes with respect to their allocated
shares of such tax payments, the general effect of these taxes will be to reduce
the Funds' income. In addition, the expense ratio of the High Yield Fund and the
International Bond Fund may be slightly higher than the expenses of the
Government Fund due to special costs associated with maintaining custody of
foreign securities, the higher commission rates charged on many foreign
exchanges, and other factors.

Special Considerations Relating to Foreign Exchange. The value in U.S. dollars
of the assets of the High Yield Fund and the International Bond Fund invested in
securities of non-U.S. issuers may be affected favorably or unfavorably by
changes in currency exchange rates and exchange control regulations, and each
Fund may incur costs in connection with conversions between various currencies.
The Funds may conduct their currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in a particular currency exchange
market or through forward foreign currency exchange contracts and currency
futures contracts entered into for hedging purposes as explained below.

Hedging and Foreign Currency Transactions. The High Yield Fund and the
International Bond Fund may engage in the following strategies to hedge their
portfolios against risk associated with currency fluctuations. Use of these
strategies may be limited by requirements of the Funds to purchase and hold
their securities for long-term investment and to meet other tax requirements
imposed by the Internal Revenue Code and U.S. Treasury regulations. These
strategies include the use of currency options, currency futures, options on
such futures and forward foreign currency exchange contracts. Transactions in
forward contracts, options and futures are generally considered "derivative
securities." While such strategies' intention would be to reduce the volatility
of the net asset value of the Funds' shares, the Funds' net asset value would
still fluctuate and no assurance could be given of the effectiveness of such
transactions. Hedging against currency fluctuations does not eliminate price
fluctuations in the hedged securities that are attributable to interest rate
changes and other factors.

The use of futures and options transactions involves the risk of imperfect
correlation in movements in the price of these contracts and movements in the
price of the securities and currencies which are the subject of the hedge, as
well as imperfect correlation due to the difference in maturities of the hedged
position. If the price of the contract moves more or less than the price of the
security or currency, the Funds will experience a gain or loss which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. These strategies also involve the risk that the Funds may
not be able to close an option or futures position, or that the Funds could lose
their margin deposit or collateral in the event of bankruptcy of the broker with
whom they have an open position.

Although certain risks are involved in forward foreign currency exchange
contracts, currency options, currency futures and options on such futures, the
Funds' investment manager believes that, because the Funds will only engage in
these transactions for hedging purposes, the use of these strategies will not
subject the Funds to the risks frequently associated with the speculative use of
forward contracts, options and futures transactions. Moreover, the High Yield
Fund and the International Bond Fund may not buy or sell foreign currency
futures or options on such futures if the sum of the initial margin deposits on
all of the Funds' futures positions and the premiums paid for related options
would exceed 5% of a Fund's total assets. Each Fund is also required to maintain
in a segregated account cash and high quality liquid debt securities in an
amount equal to the currency to be purchased by the Fund under a forward,
futures or option on a futures contract providing for such purchase.

Foreign exchange gains and gains realized by each Fund from its hedging
activities may be subject to U.S. tax and withholding requirements.

The following is a description of the hedging instruments the High Yield Fund
and the International Bond Fund may utilize with respect to foreign currency
exchange rate fluctuation risks.

A forward foreign currency exchange contract involves an obligation to buy or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are individually negotiated and privately
traded directly between currency traders (usually large commercial banks) and
their customers. The High Yield Fund and the International Bond Fund are
authorized to deal in forward contracts with respect to the currencies in which
their portfolio securities are (or will be) denominated as a hedge against
contractual agreements to buy or sell a specified security at a specified future
date (up to one year) and price at the time of the contract. Each Fund's
dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the forward
purchase or sale of currency with respect to receivables or payables of a Fund
accruing in connection with the purchase and sale of its portfolio securities
denominated in a particular currency. Position hedging is the forward sale of
currency with respect to portfolio security positions denominated or quoted in
such currency. Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of the securities decline. These transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the High Yield Fund or the International Bond Fund to
hedge against a devaluation that is so generally anticipated that neither Fund
is able to contract to sell the currency at a price above the devaluation level
it anticipates.

Listed currency options give the buyer of such options the right to buy or sell
a particular currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) issued by a clearing
corporation and have standardized strike prices and expiration dates. By way of
illustration, a Fund may use currency options to hedge the stated value in U.S.
dollars of an investment in a Japanese yen-denominated security. In such
circumstances, the Fund may buy a currency put option enabling it to sell a
specified amount of yen for dollars at a specified price by a future date. To
the extent the hedge is successful, a loss in the value of the yen relative to
the dollar will tend to be offset by an increase in the value of the put option.
To offset, in whole or in part, the cost of acquiring the put option, the Fund
may also sell a call option which, if exercised, requires it to sell a specified
amount of yen for dollars at a specified price by a future date (a technique
called a "straddle"). By selling the call option in this illustration, the Fund
relinquishes the opportunity to profit from increases in the relative value of
the yen to the dollar.

Each Fund will cover currency call options that it has written by maintaining in
a segregated account cash or securities denominated in the currency that is the
subject of the call option, in an amount equal to the value of the optioned
currency. The High Yield Fund and the International Bond Fund will cover
currency put options they have written by maintaining in a segregated account
cash or high quality liquid debt securities in an amount equal to the value of
currency that the Fund is required to buy under the put option. The exchanges on
which options on currencies are traded have generally established limitations
governing the maximum number of call or put options on the same underlying
currency (whether or not covered) that may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts that any person may trade on a
particular trading day. The Funds' investment manager does not believe that
these trading and position limits will have any adverse impact on the portfolio
strategies for hedging the portfolio of either the High Yield Fund or the
International Bond Fund.

Currency futures are standardized contracts traded on commodities exchanges.
They involve an obligation to buy or sell a predetermined amount of currency at
a predetermined date and at a specified price. The High Yield Fund and the
International Bond Fund would incur brokerage costs and would be required to
make and maintain "margin" deposits in connection with transactions in futures
contracts, as described below. The Funds would also be required to segregate
assets to cover futures contracts requiring the purchase of foreign currencies.
Options on currency futures entitle the Funds to assume a position in an
underlying currency futures contract. Futures contracts and options for futures
contracts are traded on boards of trades or futures exchanges regulated by the
Commodity Futures Trading Commission, a U.S. government agency.

At the time a futures contract or related futures option transaction is entered
into, cash or U.S. government securities equal to the market value of the Fund's
obligation under the contract or option transaction (less any related margin
deposits) is deposited in a segregated account with the Fund's custodian bank to
collateralize the position and thereby ensure that such position is unleveraged.
The segregated account is marked-to-market daily. The Funds will not engage in
such hedging transactions if the sum of the initial margin deposits on all of
the Fund's futures positions and premiums paid for related futures options would
exceed 5% of the Fund's total assets.

Neither the High Yield Fund nor the International Bond Fund will speculate in
forward foreign currency exchange contracts, currency options, currency futures
or options on such futures and will engage in transactions in such contracts and
options solely for the purpose of hedging against currency risk, as described
herein. Accordingly, the aggregate value of the currency that is the subject of
such contracts and options will not exceed the market value of the securities
either Fund owns and that are denominated in such currency, or the expected
acquisition price of securities that either Fund has committed or anticipates to
buy and that are denominated in such currency. In the case of securities that
have been sold by the High Yield Fund or the International Bond Fund but not yet
delivered, the aggregate value of the currency which is the subject of such
contracts and options will not exceed the proceeds of the sale denominated in
such currency. The Funds intend to enter into options and futures transactions
only if there appears to be a liquid secondary market for such options or
futures. There can be no assurance, however, that a liquid secondary market will
exist at any specific time. Thus, it may not be possible to close an option or
futures position.

The High Yield Fund and the International Bond Fund may also, for hedging
purposes, purchase currencies in the form of bank deposits as well as other
non-U.S. dollar denominated money market instruments, including, but not limited
to, bankers' acceptances, certificates of deposits, commercial paper, short-term
government and corporate obligations and repurchase agreements. Each Fund's
dealing in foreign exchange transactions will be limited to the transactions
described above and may be further limited by tax restrictions. Neither Fund is
required to enter into such transactions with regard to its positions and
transactions in the securities of non-U.S. issuers, and will not do so unless
deemed appropriate by each Fund's investment manager. In addition, while these
transactions may minimize the risk to the value of each Fund's portfolio
securities resulting from adverse currency movements with respect to the U.S.
dollar, they do not eliminate fluctuations in the underlying prices of the
securities. These transactions may limit potential gain from a favorable change
in the relationship between the U.S. dollar and other currencies. Unanticipated
changes in currency exchange rates may result in poorer overall performance for
the High Yield Fund and the International Bond Fund than if they had not engaged
in the foreign exchange transactions.

Portfolio Turnover. It is intended that portfolio changes in each Fund will be
made as infrequently as possible. These changes will be based on market and
economic factors generally, and special considerations affecting any particular
security, such as the limitation of loss or realization of price appreciation at
a time believed to be opportune. Subject to the policy of each Fund not to buy
or sell securities for trading purposes and certain tax restrictions, however,
changes in particular portfolio holdings may be made if a security has reached
its anticipated level of performance or when required for operational or other
reasons. The sale of securities held for relatively short periods and
reinvestment of the proceeds will result in increased brokerage and transaction
costs to the Funds.

Investment Restrictions

The Funds have adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of the applicable Fund. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), a "vote of a majority of the
outstanding voting securities" of the applicable Fund means the affirmative vote
of the lesser of (i) more than 50% of the outstanding shares of the Fund or (ii)
67% or more of the shares of the Fund present at a shareholder meeting if more
than 50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy.

The Government Fund and the High Yield Fund may not:

1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that the Funds may borrow from banks for temporary or emergency purposes in an
amount up to 5% of total asset value.

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

3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
both Funds may enter into repurchase agreements.

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

5. Invest more than 5% of the value of its gross assets in the securities of
any one issuer, except that this limitation does not apply to investments in
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.

6. Purchase the securities of any issuer, if, as a result, a Fund would own more
than 10% of any class of the outstanding voting securities of such issuer.

7. Purchase from or sell to its officers and general partners, or any firm of
which any officer or general partner is a member, as principal, any securities,
except that a Fund may deal with such persons or firms as brokers and pay a
customary brokerage commission; retain securities of any issuer, if to the
knowledge of a Fund, one or more of its officers, general partners or investment
advisor own beneficially more than one-half of 1% of the securities of such
issuer and all such officers and general partners together own beneficially more
than 5% of such securities.

8. Invest more than 5% of the value of its total assets in securities of any
issuer which has not had a record, together with predecessors, of at least three
years continuous operations.

9. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices) or interests in oil, gas or other
mineral exploration or development programs (does not preclude investment in
marketable securities of companies engaged in such activities, provided that
such securities do not constitute "U.S. real property interests" for U.S.
federal income tax purposes).

10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof. (Does not preclude authorized transactions
in foreign currencies.)

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

12. Concentrate more than 25% of the market value of its assets in the
securities of companies engaged in any one industry (does not apply to
investment in the securities of the U.S. government, its agencies or
instrumentalities).

13. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Fund from (a) making any permitted
borrowing, mortgages or pledges, or (b) entering into repurchase transactions.
This is not a fundamental policy of the Funds and may be changed by the Funds'
managing general partners without shareholder approval.

14. Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.

15. Invest more than 10% of its assets in securities with legal or contractual
restrictions or which are not readily marketable (except for permissible
transactions in repurchase agreements).

In addition to the Government Fund and the High Yield Fund's fundamental
policies, it is their present policy not to buy any securities issued by a
corporation that has not been in continuous operation for three years, but such
period may include the operation of a predecessor. This is not a fundamental
policy and may be changed by a Fund's managing general partners without
shareholder approval.

The International Bond Fund may not:

1. With respect to at least 75% of its total assets, invest in the securities
of any one issuer (other than the U.S. government and its agencies and
instrumentalities), if immediately after and as a result of such investment (a)
more than 5% of the total assets of the Fund would be invested in such issuer or
(b) more than 10% of the outstanding voting securities of such issuer would be
owned by the Fund.

2. Make loans to others, except through the purchase of debt securities in
accordance with its investment objectives and policies or to the extent the
entry into a repurchase agreement is deemed to be a loan.

3.(a)Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 25% of its total assets (at
the lower of cost or fair market value). Any such borrowing will be made
only if immediately thereafter there is an asset coverage of at least 300%
of all borrowings, and no additional investments may be made while any such
borrowings are in excess of 5% of total assets.

(b)Mortgage, pledge or hypothecate any of its assets except in connection with
any such borrowings.

4. Purchase securities on margin, sell securities short, participate on a joint
or joint and several basis in any securities trading account, or underwrite
securities. (Does not preclude the Fund from obtaining such short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities. Does not preclude permissible foreign currency hedging
transactions.)

5. Buy or sell interests in oil, gas or mineral exploration or development
programs, or real estate. (Does not preclude investments in marketable
securities of companies engaged in such activities to the extent such securities
do not constitute U.S. real property interests for U.S. federal income tax
purposes.)

6. Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any of the managing general partners or officers of the Fund or its
investment advisor own beneficially more than 1/2 of 1%, and such managing
general partners or officers holding more than 1/2 of 1% together own
beneficially more than 5% of the issuer's securities.

7. Invest more than 5% of the value of its total assets in securities of any
issuer which has not had a record, together with predecessors, of at least three
years of continuous operation. This is not a fundamental policy and may be
changed by the Fund's managing general partners without prior shareholder
approval.

8. Purchase or sell commodities or commodity contracts or invest in put, call,
straddle or spread options. (Does not preclude transactions in foreign exchange
for hedging purposes, including forward foreign exchange transactions, the
purchase or sale of foreign currency options, foreign currency futures
transactions and the purchase or sale of options on foreign currency futures, or
transactions in foreign exchange in connection with the investment of cash
balances held outside of the U.S.)

9. Invest more than 10% of its assets in securities with legal or contractual
restrictions on resale, securities which are not readily marketable, and
repurchase agreements with more than seven days to maturity.

10. Invest in any issuer for purposes of exercising control or management.

11. Concentrate more than 25% of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. government, its agencies or
instrumentalities.)

12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into repurchase
transactions.

There are no restrictions or limitations on investments in obligations of the
U.S., or of corporations chartered by Congress as federal government
instrumentalities for any of the Funds. The underlying assets of each Fund may
be retained in cash, including cash equivalents which are Treasury bills,
commercial paper and short-term bank obligations such as certificates of
deposit, bankers' acceptances and repurchase agreements, subject to certain tax
restrictions. It is intended, however, that only so much of the underlying
assets of each Fund be retained in cash as is deemed necessary for normal
operation of such Fund. Each Fund may invest in securities that cannot be
offered to the public for sale without first being registered under the
Securities Act of 1933 ("restricted securities"), or in other securities which,
in the opinion of the managing general partners, may be otherwise illiquid.

If a percentage restriction contained herein is adhered to at the time of
investment, a later increase or decrease in the percentage resulting from a
change in value of portfolio securities or the amount of net assets will not be
considered a violation of any of the foregoing restrictions.

Officers and Managing General Partners

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

Positions and Offices Principal Occupations
Name, Age and Address with each Fund During Past Five Years

Frank H. Abbott, III (75) Managing
1045 Sansome St. General Partner
San Francisco, CA 94111

President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.

Harris J. Ashton (63) Managing
General Host Corporation General Partner
Metro Center, 1 Station Place
Stamford, CT 06904-2045

President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.

* Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards and
Managing
General Partner

Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.

S. Joseph Fortunato (63) Managing
Park Avenue at Morris County General Partner
P. O. Box 1945
Morristown, NJ 07962-1945

Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.

David W. Garbellano (81) Managing
111 New Montgomery St., General Partner
#402
San Francisco, CA 94105

Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.

* Charles B. Johnson (63) Chairman of the
777 Mariners Island Blvd. Board and
San Mateo, CA 94404 Managing General
Partner

President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.

* Charles E. Johnson (39) Managing
500 East Broward Blvd. General Partner
Fort Lauderdale, FL 33394-3091

Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 40 of the investment companies in the Franklin Templeton Group of Funds.

* Rupert H. Johnson, Jr. (55) President and
777 Mariners Island Blvd. Managing General
San Mateo, CA 94404 Partner

Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 61 of the investment companies
in the Franklin Templeton Group of Funds.

Gordon S. Macklin (67) Managing
8212 Burning Tree Road General Partner
Bethesda, MD 20817

Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.

Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 61 of the investment companies in the Franklin Templeton Group of Funds.

Martin L. Flanagan (35) Vice President and
777 Mariners Island Blvd. Chief Financial
San Mateo, CA 94404 Officer

Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.

Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton Group of Funds.

Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer

Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.

Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.

R. Martin Wiskemann (69) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 21 of the
investment companies in the Franklin Group of Funds.

The preceding table indicates those officers and managing general partners who
are also affiliated persons of Distributors and the investment manager. Certain
managing general partners are not affiliated with the investment manager
("nonaffiliated managing general partners"). The nonaffiliated managing general
partners of the Government Fund and the High Yield Fund are currently paid fees
of $150 per quarter plus $150 per meeting attended by each Fund. As indicated
above, certain of the Funds' nonaffiliated managing general partners also serve
as directors or trustees of other investment companies in the Franklin Group of
Funds" and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated managing general partners by the
Funds and by other funds in the Franklin Templeton Group of Funds. The
nonaffiliated managing general partners of the International Fund are not
currently, but may in the future, be paid fees and receive reimbursement of
expenses for attending meetings.
<TABLE>
<CAPTION>

Total Fees Total Fees Total Fees Number of Boards
Received Received Received from the in the Franklin Templeton
From the From the Franklin Templeton Group of Funds on
Name Government Fund* High Yield Fund* Group of Funds** which Each Serves***

<S> <C> <C> <C> <C>
Frank H. Abbott, III.............. $900 $1,200 $162,420 31
Harris J. Ashton.................. 900 1,200 327,925 56
S. Joseph Fortunato............... 900 1,200 344,745 58
David W. Garbellano............... 900 1,200 146,100 30
Gordon S. Macklin................. 900 1,200 321,525 53
</TABLE>

*For the fiscal year ended December 31, 1995

**For the calendar year ended December 31, 1995.

***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
managing general partners are responsible. The Franklin Templeton Group of Funds
currently includes 61 registered investment companies, consisting of
approximately 162 U.S. based funds or series.

Nonaffiliated managing general partners 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, trustee or
managing general partner. No officer or managing general partner received any
other compensation directly from the Funds. Certain officers or managing general
partners who are shareholders of Franklin Resources, Inc. ("Resources") may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.

As of February 12, 1996, the officers and managing general partners, as a group,
together with Franklin Partners, Inc. as the Non-Managing General Partner, owned
of record and beneficially approximately 637,907 or 1.7% of the total
outstanding shares of the Government Fund, 174,488 or 0.8% of the outstanding
shares of the High Yield Fund and 37,712 or 1.4% of the total outstanding shares
of the International Bond Fund. Officers and managing general partners, as a
group, owned of record and beneficially approximately 114 shares of the High
Yield Fund, 88 shares of the International Bond Fund and 31 shares of the
Government Fund, or less than 1% of each Fund's outstanding shares. Many of the
Funds' managing general partners also own shares in various of the other funds
in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.

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

Investment Advisory and Other Services

The investment manager of each Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries that are involved in
investment management and shareholder services. Templeton Investment Counsel,
Inc. ("TICI"), acts as subadviser to the International Bond Fund pursuant to a
contract between TICI and Advisers on behalf of the International Bond Fund.
Pursuant to the subadvisory agreement between Advisers and TICI, and subject to
the overall policies, control, direction and review of the Managing General
Partners and to the instructions and supervision of Advisers, TICI will provide
a continuous investment program for the International Bond Fund, including
allocation of its assets among the various securities markets of the world and
investment research and advice with respect to securities and investments and
cash equivalents.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for
each Fund to purchase, hold or sell and the selection of brokers through whom
the Fund's portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of each Fund's managing general partners
to whom the Manager renders periodic reports of the Fund's investment
activities. Under the terms of the management agreement, the Manager provides
office space and office furnishings, facilities and equipment required for
managing the business affairs of each Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Manager is covered by
fidelity insurance on its officers, directors and employees for the protection
of each Fund. Please see the Statement of Operations in the financial statements
included in the Funds' Annual Report to Shareholders for the fiscal year ended
December 31, 1995.

The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Funds. Similarly, with respect to each Fund, the
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by each Fund or other
funds which it manages or administers. 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.

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

Under the subadvisory agreement with the Manager, TICI will receive a fee from
the Manager computed at the close of business on the last business day of each
month equal to a monthly rate of 1/2 of 5/96 of 1% of the value of the
International Bond Fund's net assets up to and including $100,000,000; 1/2 of
1/24 of 1% of the value of the International Bond Fund's net assets over
$100,000,000 up to and including $250,000,000; and 1/2 of 9/240 of 1% of the
value of the International Bond Fund's net assets in excess of $250,000,000.
TICI's fee will not be paid by the International Bond Fund.

The management agreements for each Fund specify that the management fee will be
reduced to the extent necessary to comply with the most stringent limits on the
expenses which may be borne by a Fund as prescribed by any state in which the
Fund's shares are offered for sale. The most stringent current limit requires
the Manager to reduce or eliminate its fee to the extent that aggregate
operating expenses of each Fund (excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation costs) would otherwise
exceed in any fiscal year 2.5% of the first $30 million of average net assets of
each Fund, 2.0% of the next $70 million of average net assets of each Fund and
1.5% of average net assets of each Fund in excess of $100 million. Expense
reductions have not been necessary based on state requirements.

The Manager has agreed in advance to waive a portion of its management fees for
the International Bond Fund and make certain payments to reduce expenses. For
the fiscal years ended December 31, 1993, 1994 and 1995, management fees, before
any advance waiver, were $100,033, $141,108 and $151,345, respectively. There
were no management fees paid by the International Bond Fund for the fiscal years
ended December 31, 1993 and 1994. The management fee paid by the International
Bond Fund for the fiscal year ended December 31, 1995, was $10,234.

For fiscal years ended December 31, 1993, 1994 and 1995, the High Yield Fund
paid $340,356, $481,741 and $$678,079 in management fees and the Government Fund
paid $2,331,382, $2,608,074 and $2,173,657 for the respective years.

The management agreements are in effect until February 28, 1997. Thereafter,
they may continue in effect for successive annual periods providing such
continuance is specifically approved at least annually by a vote of each Fund's
managing general partners or by a vote of the holders of a majority of each
Fund's outstanding voting securities, and in either event by a majority vote of
each Fund's managing general partners who are not parties to the management
agreements or interested persons of any such party (other than as managing
general partners of the Funds), cast in person at a meeting called for that
purpose. Each management agreement may be terminated without penalty at any time
by the managing general partners or by a vote of the holders of a majority of
each Fund's outstanding voting securities, or by the Manager on 60 days' written
notice and will automatically terminate in the event of their assignment, as
defined in the 1940 Act.

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

Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286, acts as custodian of the securities and other assets of each Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle, Delaware
19720, acts as custodian in connection with transfer services through bank
automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.

Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the independent auditors for each Fund. During the fiscal year ended
December 31, 1995, their auditing services consisted of rendering an opinion on
the financial statements of the Funds included in the Funds' Annual Report to
Shareholders for the fiscal year ended December 31, 1995.

How Do the Funds Purchase
Securities For Their Portfolio?

Under the current management agreements, the selection of brokers and dealers to
execute transactions in each Fund's portfolio is made by the Manager in
accordance with criteria set forth in the management agreements and any
directions which each Fund's managing general partners may give.

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

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

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

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

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

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

The High Yield Fund and the International Bond Fund anticipate that brokerage
transactions involving the securities of non-U.S. issuers will be conducted
primarily on the principal stock exchange of such countries. Most foreign stock
exchange transactions are executed at fixed commission rates. Fixed commissions
on foreign stock exchange transactions are generally higher than negotiated
commissions on U.S. transactions, although the Funds will endeavor to achieve
the best net results in effecting their portfolio transactions. There is
generally less government supervision and regulation of stock exchanges and
brokers outside the U. S.

During the past three fiscal years ended December 31, the Funds paid no
brokerage commissions. As of December 31, 1995, the Funds did not own securities
of their regular broker-dealers.

How Do I Buy and Sell Shares?

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

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

If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.

Distribution checks returned to a Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your distribution option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.

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

Under agreements with certain banks in Taiwan, Republic of China, the Funds'
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors or 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 Funds may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of each Fund may be
offered with the following schedule of sales charges:

Sales
Size of Purchase - U.S. dollars Charge
Under $30,000................................. 3%
$30,000 but less than $100,000................ 2%
$100,000 but less than $400,000............... 1%
$400,000 or more.............................. 0%

Purchases and Redemptions
Through Securities Dealers

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

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

Other Payments to Securities Dealers

As discussed in the Prospectus under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks as described below. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the securities dealer
or set off against other payments due to the securities dealer in the event
shares are redeemed within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the securities dealer.

With respect to purchases made at net asset value by certain trust companies and
trust departments of banks, either Distributors or one of its affiliates, out of
its own resources, may pay up to 1% of the amount invested.

Letter of Intent

You may qualify for a reduced sales charge on the purchase of shares of a Fund,
as described in the Prospectus. At any time within 90 days after the first
investment which you want to qualify for a reduced sales charge, you may file
with the Fund a signed Shareholder Application with the Letter of Intent (the
"Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based upon purchases
in more than one of the Franklin Templeton Funds will be effective only after
notification to Distributors that the investment qualifies for a discount. Your
holdings in the Franklin Templeton Funds, including Class II shares, acquired
more than 90 days before the Letter is filed, will be counted towards completion
of the Letter but will not be entitled to a retroactive downward adjustment 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 Letter have been completed. If the Letter is not completed
within the 13-month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less redemptions) during
the period. If you execute a Letter prior to a change in the sales charge
structure for the Fund, you will be entitled to complete the Letter at the lower
of the new sales charge structure or the sales charge structure in effect at the
time the Letter was filed.

As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name. If the total purchases, less redemptions, equal the amount specified under
the Letter, the reserved shares will be deposited to an account in your name or
delivered to you or as you direct. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the securities dealer through whom purchases were made
pursuant to the Letter (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for 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,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.

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 Securities and Exchange Commission ("SEC"). In
the case of redemption requests in excess of these amounts, the managing general
partners reserve 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 such 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 Funds do not intend to redeem illiquid
securities in kind. Should it happen, however, you may not be able to recover
your investment in a timely manner.

Redemptions by the Funds

Due to the relatively high cost of handling small investments, each Fund
reserves the right to involuntarily redeem your shares at net asset value if
your account has been in existence for at least 12 months and has a value of
less than $2,000, but only where the value of your account has been reduced by
the prior voluntary redemption of shares and there has been no investment (other
than the reinvestment of any distributions) made within the six months preceding
notice of the Fund's intention to take this action. In any event, before the
Fund redeems your shares and sends you the proceeds, it will notify you that the
value of the shares in your account is less than the minimum amount and allow
you six months to make an additional investment in an amount which will increase
the value of your account to the minimum amount.

Reports to Shareholders

The Fund sends annual and semiannual reports regarding its performance and
portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.

How Are Fund Shares Valued?

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

For the purpose of determining the aggregate net assets of each Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager.

Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
a Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the Exchange on each day on which the Exchange is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every Exchange business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
Exchange and on which a Fund's net asset value is not calculated. The Funds
calculate net asset value per share, and therefore effect sales and redemptions
of their shares, as of the scheduled close of the Exchange each day that the
Exchange is open for trading. This calculation does not take place
contemporaneously with the determination of the prices of many of the portfolio
securities used in the calculation and, if events occur which materially affect
the values of these foreign securities, they will be valued at fair value as
determined by management and approved in good faith by the Managing General
Partners.

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

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 managing general partners. With the
approval of managing general partners, the Funds may utilize a pricing service,
bank or securities dealer to perform any of the above described functions.

Additional Information Regarding Taxation

As explained more fully in the following paragraphs, the daily allocation of
income by each Fund will be in a "defined amount" equal to the daily
distributable net investment income of such Fund for that day. The daily
distributable net investment income for a particular day will be equal to the
interest income for that day, less the daily expenses for that day. For the
purpose of computing its book net income, each Fund will account for net
investment income in accordance with generally accepted accounting principles
(see "Significant Accounting Policies" in the Notes to the Financial Statements
in the Funds' Annual Report to Shareholders).

Additional Information Regarding
U.S. Tax Treatment of U.S. Investors

Your adjusted basis in your partnership interest in a Fund (i.e., your aggregate
shares in the Fund) will generally be the aggregate prices paid for such shares
(including sales charges), increased by the amounts of your distributive share
of items of income and gain of the Fund and reduced, but not below zero, by the
amounts of your distributive share of Fund losses and the amount of any cash
distributions (including distributions upon redemption of shares) received by
you. Subject to the limitations discussed below, you will generally be permitted
to deduct your distributive share of Fund losses to the extent of your basis in
your Fund shares. For purposes of the "passive activity loss" rules, your share
of the Fund's income or loss will be treated as "portfolio" income or loss.
Thus, income from the Fund may not be offset by losses from your "passive
activities," and losses from the Fund will not reduce your income from "passive
activities." Your share of certain expenses of the Fund will be treated as a
"miscellaneous itemized deduction" and will be deductible only by you if you
itemize deductions and only to the extent that your total miscellaneous itemized
deductions from all sources exceed 2% of your adjusted gross income. If your
adjusted gross income exceeds a specified amount (generally $176,950 in 1996),
you must reduce the otherwise allowable itemized deductions by an amount equal
to 3% of the excess adjusted gross income.

If you are a U.S. shareholder of a Fund, you will not be subject to federal
income tax on cash distributions received in redemption of Fund shares to the
extent such distributions do not exceed your adjusted basis in your Fund shares.
Redemptions of shares may be subject to 31% backup withholding in the case of
non-exempt U.S. shareholders who have failed to furnish the Fund with their
correct taxpayer identification numbers on Form W-9.

Each item of partnership income or gain will retain its character for tax
purposes when allocated to you.

Tax Consequences of Being Deemed
Engaged in a U.S. Trade or Business

As stated in the Prospectus, each Fund believes that neither the Fund nor its
non-U.S. shareholders solely by virtue of their investment in the Fund should be
deemed to be engaged in a trade or business in the U.S. if the Fund adheres to
its stated investment objectives, policies and restrictions and to certain
guidelines and operating procedures concerning its investment activities. These
opinions are based upon case law and other authorities in effect as of the date
of this SAI. In the event this position is challenged, it is the intention of
each Fund to contest the challenge. A final determination by a court of law,
however, to the effect that a Fund is engaged in a U.S. trade or business would
have material tax consequences for the Fund's shareholders. Such a determination
would nullify the applicability of the "portfolio interest" exemption and cause
all income of the Fund to be deemed to be effectively connected with such trade
or business (including such "portfolio interest" and capital gains realized by
the Fund or the shareholders) and therefore subject to U.S. federal income tax
and U.S. tax withholding requirements.

The Funds' Underwriter

Pursuant to underwriting agreements in effect until February 28, 1997,
Distributors acts as principal underwriter in a continuous public offering for
shares of each Fund. The underwriting agreements will continue in effect for
successive annual periods provided that their continuance is specifically
approved at least annually by a vote of each Fund's managing general partners,
or by a vote of the holders of a majority of each Fund's outstanding voting
securities, and in either event by a majority vote of the managing general
partners who are not parties to the underwriting agreement or interested persons
of any such party (other than as managing general partners of each Fund), cast
in person at a meeting called for that purpose. The underwriting agreements
terminate automatically in the event of their assignment and may be terminated
by either party on 90 days' written notice.

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

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

In connection with the offering of the High Yield Fund's shares, aggregate
underwriting commissions for the fiscal years ended 1993, 1994 and 1995 were
$691,683, $400,528 and $550,638, respectively. After allowances to dealers,
Distributors retained $32,168, $24,102 and $22,287 in net underwriting discounts
and commissions and there were no fees received in connection with redemptions
or repurchases of shares for the respective years. In connection with the
offering of the Government Fund's shares, aggregate underwriting commissions for
the fiscal years ended 1993, 1994 and 1995 were $6,282,489, $2,067,833 and
$632,871, respectively. After allowances to dealers, Distributors retained
$190,128, $150,068 and $40,752 in net underwriting discounts and there were no
fees received in connection with redemptions or repurchases of shares for the
respective years. For fiscal years ended December 31, 1993, 1994 and 1995,
underwriting commissions for the International Bond Fund were $303,473, $219,143
and $102,938, respectively. After allowances to dealers, Distributors retained
$12,255, $12,763 and $5,763 in net underwriting discounts and commissions and
there were no fees received on redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under each
Fund's distribution plan, as discussed below. Except as noted, Distributors
received no other compensation from the Funds for acting as underwriter.

Distribution Plans

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

In implementing each Plan, the managing general partners have determined that
the annual fees payable under the Plans will be equal to the sum of: (i) the
amount obtained by multiplying 0.15% by the average daily net assets represented
by shares of a Fund that were acquired by investors on or after May 1, 1994, the
effective date of each Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by shares of each
Fund that were acquired before May 1, 1994 ("Old Assets"). Such fees will be
paid to the current securities dealer of record on the account. In addition,
until such time as the maximum payment of 0.15% is reached on a yearly basis, up
to an additional 0.02% will be paid to Distributors under each Plan. The
payments to be made to Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance with each Plan, such as
advertising.

The fees are a Fund expense so that all shareholders, regardless of when they
purchased their shares, will bear 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
and, as Fund shares are sold on or after May 1, 1994, will increase over time.
Thus, as the proportion of Fund shares purchased on or after May 1, 1994,
increases in relation to outstanding Fund shares, the expenses attributable to
payments under each Plan will also increase (but will not exceed 0.15% of
average daily net assets). While this is the currently anticipated calculation
for fees payable under each Plan, the Plans permit each Fund's managing general
partners to allow the respective Fund to pay a full 0.15% on all assets at any
time. The approval of the managing general partners would be required to change
the calculation of the payments to be made under each Plan.

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

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

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

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

To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In such an 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.

The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through February 28, 1997, and renewable annually by a
vote of the managing general partners, including a majority vote of the managing
general partners who are non-interested persons of the Funds 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 managing general partners be done by the
non-interested managing general partners. The Plans and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested managing general partners 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 each Fund's outstanding shares. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.

The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of each Fund's outstanding shares, and all material amendments to the Plans or
any related agreements shall be approved by a vote of the non-interested
managing general partners, 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 managing general partners
at least quarterly on the amounts and purpose of any payment made under the Plan
and any related agreements, as well as to furnish the managing general partners
with such other information as may reasonably be requested in order to enable
the managing general partners to make an informed determination of whether the
Plan should be continued.

For the fiscal year ended December 31, 1995, the total amount paid by the
Government Fund, High Yield Fund and the International Bond Fund pursuant to the
Plans were $323,634, $114,863 and $21,362, which were used for the following
purposes.

Dollar
Government Fund Amount
Advertising............................... $ 15,500
Printing and mailing of prospectuses
other than to current shareholders....... $ 44,339
Payments to underwriters.................. $ 17,355
Payments to broker-dealers................ $246,439

Dollar
High Yield Fund Amount
Advertising............................... $ 2,676
Printing and mailing of prospectuses
other than to current shareholders....... $ 15,300
Payments to underwriters.................. $ 4,418
Payments to broker-dealers................ $ 92,469

Dollar
International Bond Fund Amount
Advertising............................... $ 911
Printing and mailing of prospectuses
other than to current shareholders....... $ 2,856
Payments to underwriters.................. $ 1,013
Payments to broker-dealers................ $ 16,582

General Information

Each Fund is organized as a California limited partnership pursuant to the
California Revised Limited Partnership Act. The full text of the Agreement of
Limited Partnership of each Fund is set forth herein as Appendix A (Government
Fund), Appendix B (High Yield Fund) and Appendix C (International Bond Fund).
The California Revised Limited Partnership Act does not specifically authorize
the exercise by limited partners of the voting rights required by the 1940 Act
which are specified in each Partnership Agreement. Although there are no
authoritative judicial decisions on this matter and no absolute assurances can
be given on this point, it is the opinion of counsel to each Fund that the
existence or exercise of these voting rights will not subject the limited
partners of any Fund to liability as general partners under California laws.
There is not, however, specific statutory or other authority for the existence
or exercise of some or all these voting rights in most other jurisdictions. As a
result, to the extent that a Fund is subject to the jurisdiction of courts in
these other jurisdictions, it is possible that these courts may not apply
California law, or, if they apply California law, they may nevertheless
interpret the law to subject the Funds' limited partners to liability as general
partners.

Performance

As noted in the Prospectus, each Fund may from time to time quote various
performance figures to illustrate the Fund's past performance and may
occasionally cite statistics to reflect its volatility or risk. Performance
quotations by investment companies are subject to rules adopted by the SEC.
These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
each Fund be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by each Fund are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by each Fund to compute or express performance follows.

Total Return

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

The average annual compounded rates of return for the one- and five-year period
ended on December 31, 1995, and for the period from inception to December 31,
1995, were as follows:

One-Year Five-Year From
Period Period Inception

Government Fund....... 13.39% 7.70% 8.88%*
High Yield Fund....... 14.44% 18.17% 9.59%*
International Bond
Fund................. 15.27% 7.65% 9.69%**

*Inception May 4, 1987.

**From change of investment manager on June 9, 1990.

These figures were calculated according to the SEC formula:

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 the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)

As discussed in the Prospectus, each Fund may quote total rates of return in
addition to its average annual total return. These quotations are computed in
the same manner as each Fund's average annual compounded rate, except they will
be based on each Fund's actual return for a specified period rather than on its
average return over one-, five- and ten-year periods, or fractional portion
thereof. The Funds' total rates of return for the one- and five-year period
ended on December 31, 1995, and for the period from inception to December 31,
1995, were as follows:

One-Year Five-Year From
Period Period Inception

Government Fund....... 13.39% 44.88% 109.07%*
High Yield Fund....... 14.44% 130.42% 121.10%*
International Bond
Fund................. 15.27% 44.55% 67.34%**

*Inception May 4, 1987.

**From change of investment manager on June 9, 1990.

Current Yield

Current yield reflects the income per share earned by each Fund's portfolio
investments and is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for each Fund for the 30-day period ended December 31, 1995, were as
follows:

Government Fund.............................. 6.29%
High Yield Fund.............................. 8.14%
International Bond Fund...................... 6.33%
These figures were obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period

b = expenses accrued for the period (net of reimbursements)

c = the average daily number of shares outstanding during the period that were
entitled to receive dividends

d = the maximum offering price per share on the last day of the period

Current Distribution Rate

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

Volatility

Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by 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.

Other Performance Quotations

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

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

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

Comparisons

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

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

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

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

d) 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.

e) 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.

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

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

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

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

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

k) International Business Communications Money Fund Report(R) - Industry
averages for seven-day annualized and compounded yields of taxable, tax-free,
and government money funds.

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

m) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.

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

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

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

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

Other Features and Benefits

Each Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and/or
other long-term goals. The Franklin College Costs Planner may assist 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 a Fund
cannot guarantee that such goals will be met.

Miscellaneous Information

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, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $140
billion in assets under management for more than 4 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offer to the public 115 U.S. based mutual funds. Each
Fund may identify itself by its NASDAQ symbol or CUSIP number.

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

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

Ownership and Authority Disputes

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, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the Internal Revenue Service in response to a
Notice of Levy.

Financial Statements

The audited financial statements contained in the Annual Report to Shareholders
of the Funds, for the fiscal year ended December 31, 1995, including the
auditors' report, are incorporated herein by reference.

FRANKLIN TAX-ADVANTAGED
U.S. GOVERNMENT SECURITIES FUND
(A CALIFORNIA LIMITED PARTNERSHIP)

AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
Dated May 1, 1987
as amended April 28, 1988 and May 1, 1991

APPENDIX "A"

TABLE OF CONTENTS

1. GENERAL PROVISIONS
1.1 Formation
1.2 Name and Place of Business
1.3 Term
1.4 Agent for Service of Process
1.5 Certificate of Limited Partnership
1.6 Other Acts/Filings

2. DEFINITIONS
2.1 Affiliate
2.2 Capital Account
2.3 General Partner
2.4 Holder of Record or Holder of a Share
2.5 Limited Partner
2.6 Majority Vote
2.7 Managing General Partner
2.8 Net Asset Value (per Share)
2.9 Non-Managing General Partner
2.10 Officers
2.11 Persons
2.12 Partners
2.13 Partnership
2.14 Partnership Act
2.15 Partnership Group
2.16 Partnership List
2.17 Registration Statement
2.18 Secretary of State
2.19 Share (including fractional Shares)
2.20 Substituted Limited Partner
2.21 Tax Code
2.22 Transfer Agent
2.23 1940 Act

3. ACTIVITIES AND PURPOSE
3.1 Operating Policy
3.2 Investment Objectives
3.3 Investment and Operating Limitations
3.4 Other Authorized Activities

4. GENERAL PARTNERS
4.1 Identity and Number
4.2 Managing and Non-Managing General Partners
4.3 General Partners' Contributions
4.4 Management and Control
4.5 Action by the Managing General Partners
4.6 Limitations of the Authority of the Managing General
Partners
4.7 Right of General Partners to Become Limited Partners
4.8 Termination of a General Partner
4.9 Additional or Successor General Partners
4.10 Liability to Limited Partners
4.11 Assignment and Substitution
4.12 No Agency
4.13 Reimbursement and Compensation
4.14 Indemnification

5. LIMITED PARTNERS
5.1 Identity of Limited Partners
5.2 Admission of Limited Partners
5.3 Contributions of the Limited Partners
5.4 Additional Contributions of Limited Partners
5.5 Use of Contributions
5.6 Redemption by Limited Partners
5.7 Minimum Contribution and Mandatory Redemption
5.8 Limited Liability
5.9 No Power to Control Operations
5.10 Tax Responsibility

6. SHARES OF PARTNERSHIP INTEREST

7. PURCHASE AND EXCHANGE OF SHARES
7.1 Purchase of Shares
7.2 Net Asset Value
7.3 Exchange of Shares

8. REDEMPTION OR REPURCHASE OF SHARES
8.1 Redemption of Shares
8.2 Payment for Redeemed Shares

9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE
9.1 Rights of Limited Partners
9.2 Action of the Partners
9.3 Meeting
9.4 Notices
9.5 Validity of Vote for Certain Matters
9.6 Adjournment
9.7 Waiver of Notice and Consent to Meeting
9.8 Quorum
9.9 Required Vote
9.10 Action by Consent Without a Meeting
9.11 Record Date
9.12 Proxies
9.13 Number of Votes

10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES
10.1 Fees of General Partners
10.2 Distributions of Income and Gains
10.3 Allocation of Income, Gains, Losses, Deductions and
Credits
10.4 Returns of Contributions
10.5 Capital Accounts
10.6 Allocations for Tax Purposes

11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION
OF PARTNERS
11.1 Prohibition on Assignment
11.2 Rights of the Holders of Shares as Collateral or
Judgment Creditor
11.3 Death, Incompetency, Bankruptcy or Termination of the
Existence of a Partner
11.4 Substituted Limited Partners

12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
12.1 Dissolution
12.2 Liquidation
12.3 Termination

13. BOOKS, RECORDS, ACCOUNTS AND REPORTS
13.1 Books and Records
13.2 Limited Partners' Rights to Records
13.3 Accounting Basis and Fiscal Year
13.4 Tax Returns
13.5 Filings with Regulatory Agencies
13.6 Tax Matters and Notice Partner

14. AMENDMENTS OF PARTNERSHIP DOCUMENTS
14.1 Amendments in General
14.2 Amendments Without Consent of Limited Partners
14.3 Amendments Needing Consent of Affected Partners
14.4 Amendments to Certificate of Limited Partnership
14.5 Amendments After Change of Law

15. MISCELLANEOUS PROVISIONS
15.1 Notices
15.2 Section Headings
15.3 Construction
15.4 Severability
15.5 Governing Law
15.6 Counterparts
15.7 Entire Agreement
15.8 Cross-References
15.9 Power of Attorney to the General Partners
15.10 Further Assurances
15.11 Successors and Assigns
15.12 Waiver of Action for Partition
15.13 Creditors
15.14 Remedies
15.15 Custodian
15.16 Use of Name Franklin
15.17 Authority
15.18 Signatures
15.19 Arbitration

FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND

(a California limited partnership)

This amended and restated AGREEMENT OF LIMITED PARTNERSHIP
("Partnership Agreement") is entered into as of this 1st day of
May, 1987 by and among the undersigned individuals, as Managing
General Partners; FRANKLIN PARTNERS, INC., a California
corporation, as Non-Managing General Partner (collectively, the
"General Partners"); and each of the persons identified on the
Partnership List of the Partnership as limited partners (the
"Limited Partners").

This Partnership Agreement amends and restates in its
entirety the Agreement of Limited Partnership dated as of January
20, 1987.

1. GENERAL PROVISIONS

1.1 Formation. The parties hereby agree to continue
the limited partnership (the "Partnership") under the terms and
conditions set forth below pursuant to the California Revised
Limited Partnership Act (the "Partnership Act").

1.2 Name and Place of Business. The name of the
Partnership is Franklin Tax-Advantaged U.S. Government Securities
Fund (a California limited partnership), or such other name as
shall be selected from time to time by the Managing General
Partners upon notice to the Limited Partners. The principal place
of business of the Partnership shall be 777 Mariners Island
Boulevard, San Mateo, California 94404, or such other place or
places as the Managing General Partners may deem necessary or
desirable to the conduct of the Partnership's activities,
including places or the conduct of activities relating to its
investments, the location and holding of its assets, the
execution of its portfolio transactions and other operations.

1.3 Term. The term of the Partnership commenced upon
the filing of the Certificate of Limited Partnership with the
Secretary of State on January 27, 1987 and shall continue until
the 31st day of December, 2050, unless terminated earlier in
accordance with the provisions of this Partnership Agreement.

1.4 Agent for Service of Process. The agent for
service of process on the Partnership in California is Murray L.
Simpson, Esq. or such other eligible California resident
individual or corporation qualified to act as an agent for
service of process as the Managing General Partners shall
designate.

1.5 Certificate of Limited Partnership. The Managing
General Partners have caused a Certificate of Limited Partnership
to be filed with the Secretary of State in accordance with the
terms of the Partnership Act.

1.6 Other Acts/Filings. The Partners shall from time
to time execute or cause to be executed all such certificates,
fictitious business name statements, and other documents, and do
or cause to be done all such filings, recordings, publishings,
and other acts as the Managing General Partners may deem
necessary or appropriate to comply with the requirements of law
for the formation and operation of the Partnership in all
jurisdictions in which the Partnership shall desire to conduct
its activities.

2. DEFINITIONS

When used in this Partnership Agreement the following
terms shall have the meanings set forth below:

2.1 Affiliate. "Affiliate" shall mean:(i) any person
directly or indirectly controlling, controlled by or under common
control with another person; (ii) a person owning or controlling
10% or more of the outstanding securities of that other person;
(iii) any officer, director or partner of that other person; and
(iv) if that other person is an officer, director or partner, any
company for which that person acts in any such capacity (person
shall include any natural person, partnership, corporation,
association or other legal entity).

2.2 Capital Accounts. The accounts maintained for
each Partner in accordance with Section 10.5 hereof.

2.3 General Partner. Each of the initial General
Partners designated in the Preamble and any other person or
entity who shall hereafter become a General Partner.

2.4 Holder of Record or Holder of a Share.

(a) a General Partner;

(b) a Limited Partner if he or it has not
redeemed or transferred all of his (its) Shares of the
Partnership pursuant to Sections 8 or 11;

(c) a purchaser of a Share or Shares of the
Partnership who has made good payment to the Partnership and who
has not redeemed all his Shares; or

(d) the successor in interest of a Partner under
Section 11.

2.5 Limited Partner. The original Limited Partner and
all other persons who shall hereafter be admitted to the
Partnership as additional Limited Partners or Substituted Limited
Partners, except those persons who:

(a) have redeemed all Shares of the Partnership
owned by them and such redemption has been reflected in the
Partnership List; or

(b) have been replaced by a Substituted Limited
Partner to the extent of their entire Limited Partnership
Interest. Reference to a "Limited Partner" shall mean any one of
the Limited Partners.

2.6 Majority Vote. The affirmative vote of the lesser
of (i) 67% or more of the Shares represented at a meeting and
entitled to vote if more than 50% of the then outstanding shares
are present or represented by proxy, or (ii) more than 50% of the
then outstanding Shares entitled to vote.

2.7 Managing General Partner. Each General Partner
who is an individual.

2.8 Net Asset Value (per Share). The value (in U.S.
Dollars) of a Share as determined in accordance with Section 7.2
hereof.

2.9 Non-Managing General Partner. Each General
Partner that is not an individual (i.e., any General Partner that
is a corporation, association, partnership, joint venture or
trust).

2.10 Officers. Those persons designated by the
Managing General Partners to perform administrative and
operational functions on behalf of the Managing General Partners.

2.11 Person. An individual, partnership, joint
venture, association, corporation or trust.

2.12 Partners. Collectively, the General Partners and
the Limited Partners. "Partner" means any one of the Partners.

2.13 Partnership. The limited partnership created and
continued by this Partnership Agreement.

2.14 Partnership Act. The California Revised Limited
Partnership Act (Chapter 3 of Title 2 of the Corporations Code of
California) as such Act may be amended from time to time.

2.15 Partnership Group. All other limited partnerships
organized under the Partnership Act of which Franklin Resources,
Inc. or any parent, subsidiary or affiliate of Franklin
Resources, Inc. is a General Partner and which are registered
under the 1940 Act as open-end management investment companies.

2.16 Partnership List. A current list of all the
Partners containing the information specified in Section
13.1(a)(i) hereof.

2.17 Registration Statement. The Registration
Statement on Form N-1A, registering the Shares of the Partnership
under the Securities Act of 1933 and the 1940 Act, as such
Registration Statement may be amended from time to time.

2.18 Secretary of State. The Secretary of State of the
State of California.

2.19 Share (including fractional Shares). A
partnership interest in the Partnership. Reference to "Shares"
shall be to more than one Share.

2.20 Substituted Limited Partner. A successor in
interest of a Limited Partner who has complied with the
conditions set forth in Section 11.

2.21 Tax Code. The Internal Revenue Code of 1986 or
corresponding provisions of subsequent revenue laws, and all
regulations, rulings and other promulgations or judicial
decisions thereunder.

2.22 Transfer Agent. The person appointed by the
Managing General Partners to be primarily responsible for
maintaining the Partnership List and certain other records of the
Partnership.

2.23 1940 Act. The Investment Company Act of 1940, as
amended, or as it may hereafter be amended, and the Rules and
Regulations thereunder.

3. ACTIVITIES AND PURPOSE

3.1 Operating Policy. The Partnership will be
authorized and empowered to operate and will operate as an open-
end, diversified management investment company registered
pursuant to the 1940 Act.

3.2 Investment Objectives. Subject to the limitations
set forth in this Partnership Agreement, the investment objective
of the Partnership shall be to invest and reinvest its assets in
investment securities which shall consist primarily, but not
necessarily exclusively, of debt securities.

3.3 Investment and Operating Limitations. The
following additional fundamental policies and investment
restrictions have been adopted by the Partnership and cannot be
changed except by Majority Vote. These investment restrictions
provide that the Partnership may not:

(a) With respect to at least 75% of its total
assets, invest in the securities of any one issuer (other than
the U.S. Government and its agencies and instrumentalities), if
immediately after and as a result of such investment (i) more
than 5% of the total assets of the Partnership would be invested
in such issuer or (ii) more than 10% of the outstanding voting
securities of such issuer would be owned by the Partnership.

(b) Make loans to others, except through the
purchase of debt securities in accordance with its investment
objectives and policies or to the extent the entry into a
repurchase agreement is deemed to be a loan.

(c) (i) borrow money, except temporarily from a
bank for extraordinary or emergency purposes and then not in
excess of 5% of its total assets (at the lower of cost or fair
market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least
300% of all borrowings.

(ii) Mortgage, pledge or hypothecate any of
its assets except in connection with any such borrowings.

(d) Purchase securities on margin, sell
securities short, participate on a joint or joint and several
basis in any securities trading account, or underwrite
securities.(Does not preclude the Partnership from obtaining such
short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.)

(e) Buy or sell interests in oil, gas or mineral
exploration or development programs, or real estate. (Does not
preclude investments in marketable securities of companies
engaged in such activities.)

(f) Purchase or hold securities of any issuer,
if, at the time of purchase or thereafter, any of the General
Partners or Officers of the Partnership or its investment
adviser(s) own beneficially more than of 1%, and such General
Partners or Officers holding more than of 1% together own
beneficially more than 5% of the issuer's securities.

(g) Invest more than 5% of the value of its total
assets in securities of any issuer which has not had a record,
together with predecessors, of at least three years of continuous
operation.

(h) Purchase or sell commodities or commodity
contracts or invest in puts, calls, straddles or spread options.
(Does not preclude authorized transactions in foreign
currencies.)

(i) Invest in securities of other investment
companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets.

(j) Invest more than 10% of its assets in
securities with legal or contractual restrictions or which are
not readily marketable (except for permissible transactions in
repurchase agreements).

(k) Invest in any issuer for purposes of
exercising control or management.

3.4 Other Authorized Activities. Subject to the
limitations set forth in this Partnership Agreement, the
Partnership shall have the power to purchase and sell securities,
issue evidences of indebtedness in connection with Partnership
business, to join or become a partner in limited or general
partnerships and to do any and all other things and acts, and to
exercise any and all of the powers that a natural person could do
or exercise and which now or hereafter may be lawfully done or
exercised by a limited partnership.

4. GENERAL PARTNERS

4.1 Identity and Number. The names of the General
Partners and their last known business or residence address shall
be set forth in the Certificate of Limited Partnership, as it may
be amended from time to time; this same information, together
with the amounts of the contributions of each General Partner and
their current Share ownership, shall be set forth in alphabetical
order in the Partnership List. The General Partners shall be
identified as such on the Partnership List and also shall be
identified separately as Managing General Partners or Non-
Managing General Partners. The Managing General Partners may from
time to time recommend to the Partners that additional persons be
admitted as General Partners; provided, however, that if at any
time following the effective date of the Partnership's
Registration Statement the number of Managing General Partners is
reduced to less than three, the remaining Managing General
Partners shall, within 120 days, call a meeting of Partners for
the purpose of electing an additional Managing General Partner or
Managing General Partners so as to restore the number of Managing
General Partners to at least three.

4.2 Managing and Non-Managing General Partners. Only
individuals may act as Managing General Partners, and all General
Partners who are individuals shall act as Managing General
Partners. Any General Partner that is a corporation, association,
partnership, joint venture or trust shall act as a Non-Managing
General Partner. Except as provided in Section 4.4 hereof, a Non-
Managing General Partner as such shall take no part in the
management, conduct or operation of the Partnership's activities
and shall have no authority to act on behalf of the Partnership
or to bind the Partnership. All General Partners, including
Managing and Non-Managing General Partners, shall be subject to
election and removal by the Partners as hereinafter provided.

4.3 General Partners' Contributions.

(a) Each General Partner, as such, shall make a
contribution of cash to the Partnership sufficient to purchase at
least one Share and shall continue to own unencumbered at least
one such Share at all times while serving as a General Partner.
The amount contributed by each General Partner shall be the
amount actually invested in Shares of the Partnership at their
Net Asset Value, which amount shall not include any sales
charges. The amount of such contributions and the number of
Shares owned by each General Partner shall be set forth in the
Partnership List.

(b) The Non-Managing General Partner shall, in
its capacity as such Non-Managing General Partner, be obligated
to contribute to the Partnership through the purchase of Shares
from time to time amounts sufficient to enable the General
Partners in the aggregate, to maintain in their capacities as
General Partners an interest in each material item of Partnership
income, gain, loss, deduction or credit equal to at least 1% of
each such item at all times during the existence of the
Partnership. If upon termination of the Partnership, the General
Partners have a negative balance in their Capital Accounts, they
shall in their capacity as General Partners be obligated to make
additional capital contributions in cash equal to the lesser of
(i) the negative balance in their Capital Accounts or (ii) the
amount, if any, by which 1.01% of the total capital contributions
of the Limited Partners exceeds the total capital contributions
of the General Partners prior to such termination. For as long as
the Non-Managing General Partner retains its status as such, it
shall not redeem or assign Shares held by it in its capacity as
the Non-Managing General Partner or otherwise accept
distributions in cash or property if such action would result in
the failure of the General Partners to maintain such an interest.
In the event that the Non-Managing General Partner is removed or
stands for re-election and is not re-elected by the Partners
pursuant to Section 9 hereof, the Non-Managing General Partner
may, upon not less than thirty (30) days' written notice, redeem
its Shares in the same manner as is provided in Section 8 hereof.
In the event that the Non-Managing General Partner voluntarily
withdraws or declines to stand for re-election, the Non-Managing
General Partner may, upon not less than thirty (30) days' written
notice following the occurrence of an event described in (i),
(ii) or (v) in Section 4.8(a), redeem its Shares in the same
manner as provided in Section 8. In the event that the Non-
Managing General Partner is removed, stands for re-election and
is not re-elected, voluntarily withdraws or declines to stand for
re-election, the Managing General Partners shall cause the
Certificate of Limited Partnership to be amended as provided in
Section 14.4 hereof to reflect such withdrawal.

4.4 Management and Control. Subject to the terms of
the Partnership Agreement and the 1940 Act, the Partnership will
be managed by the Managing General Partners, who will have
complete and exclusive control over the management, conduct and
operation of the Partnership's activities, and, except as
otherwise specifically provided in this Partnership Agreement,
the Managing General Partners shall have the rights, powers and
authority, on behalf of the Partnership and in its name, to
exercise all of the rights, powers and authority of partners of a
partnership without limited partners. The Managing General
Partners may contract on behalf of the Partnership in conformity
with the 1940 Act with one or more banks, trust companies or
investment advisers for the performance of such functions as the
Managing General Partners may determine, but subject always to
their continuing supervision, including, without limitation, the
investment and reinvestment of all or part of the Partnership's
assets and execution of portfolio transactions, the distribution
of Shares, and any or all administrative functions. The Managing
General Partners may appoint officers or agents to perform such
duties on behalf of the Partnership and the Managing General
Partners as the Managing General Partners deem desirable. Such
officers or agents need not be General or Limited Partners. The
Managing General Partners may also employ persons to perform
various duties on behalf of the Partnership as employees of the
Partnership. The Managing General Partners shall devote
themselves to the affairs of the Partnership to the extent they
may determine necessary for the efficient conduct thereof, which
need not, however, occupy their full time. The General Partners
may also engage in other activities or businesses, whether or not
similar in nature to the activities of the Partnership, subject
to the limitations of the 1940 Act.

In the event that no Managing General Partner shall
remain for the purpose of managing and conducting the operations
of the Partnership, the Non-Managing General Partner shall
promptly call a meeting of the Limited Partners to be held within
sixty (60) days of the date the last Managing General Partner
ceases to act in such capacity to elect new Managing General
Partners up to a maximum number of Managing General Partners
theretofore admitted to the Partnership (but no fewer than
three). For the period of time during which no Managing General
Partner shall remain, the Non-Managing General Partner, subject
to the terms and provisions of this Partnership Agreement, shall
be permitted to engage in the management, conduct and operation
of the activities of the Partnership.

4.5 Action by the Managing General Partners. Unless
otherwise required by the 1940 Act with respect to any particular
action, the Managing General Partners shall act only by the vote
of a majority of the Managing General Partners at a meeting duly
called at which a quorum of the Managing General Partners is
present or by unanimous written or telephonic consent of the
Managing General Partners without a meeting. At any meeting of
the General Partners, a majority of the Managing General Partners
shall constitute a quorum. If there shall be more than one
Managing General Partner, no single Managing General Partner
shall have authority to act on behalf of the Partnership or to
bind the Partnership. The Managing General Partners shall appoint
one of their number to be Chairman. Meetings of the Managing
General Partners may be called orally or in writing by the
Chairman or by any two Managing General Partners. Notice of the
time, date and place of all meetings of the Managing General
Partners shall be given by an Officer or by the party calling the
meeting to each Managing General Partner by telephone or telegram
sent to his home or business address at least twenty-four hours
in advance of the meeting or by written notice mailed to his home
or business address at least seventy-two hours in advance of the
meeting. Notice need not be given to any Managing General Partner
who attends the meeting without objecting to the lack of notice
or who executes a written waiver of notice with respect to the
meeting. The Chairman, if present, shall preside at all meeting
of Partners.

4.6 Limitations of the Authority of the Managing
General Partners. The Managing General Partners shall have no
authority without the vote or written consent or ratification of
the Limited Partners to:

(a) do any act in contravention of this
Partnership Agreement, as it may be amended from time to time;

(b) do any act which would make it impossible to
carry on the ordinary operations of the Partnership;

(d) possess Partnership property, or assign their
rights in specific property, for other than a partnership
purpose;

(e) admit a person as a General Partner except in
accordance with Section 9 hereof; or

(f) admit a person as a Limited Partner, except
in accordance with Section 5 hereof.

4.7 Right of General Partners to Become Limited
Partners. A General Partner may also own Shares as a Limited
Partner without obtaining the consent of the Limited Partners and
thereby become entitled to all the rights of a Limited Partner to
the extent of the Limited Partnership interest so acquired. Such
event shall not, however, be deemed to reduce or otherwise affect
any of the General Partners' liability hereunder as a General
Partner. If a General Partner shall also become a Limited
Partner, the contributions and Share ownership of such General
Partner shall be separately designated in the Partnership List to
reflect his interest in each capacity.

4.8 Termination of a General Partner.

(a) The interest of a General Partner shall
terminate and such party shall have no further right or power to
act as a General Partner (except to execute any amendment to this
Partnership Agreement to evidence his termination):

(i) upon death of the General Partner;

(ii) upon an adjudication of incompetency of
the General Partner;

(iii) if such Partner is removed or stands
for re-election and is not re-elected by the Partners, as
provided in Section 9 below;

(iv) in the case of the Non-Managing General
Partner, upon the filing of a certificate of dissolution, or its
equivalent, or voluntary or involuntary petition in bankruptcy
for such Non-Managing General Partner; or

(v) if such Partner voluntarily retires
upon not less than ninety (90) days' written notice to the other
General Partners.

(b) Notwithstanding the foregoing, the Non-
Managing General Partner shall not voluntarily withdraw or
otherwise voluntarily terminate its status as the Non-Managing
General Partner until the earliest of (i) 180 days from the date
that the Non-Managing General Partner gives the other General
Partners its written notice of its intention to withdraw as a Non-
Managing General Partner, (ii) the date that a successor Non-
Managing General Partner, who has agreed to assume the
obligations of Section 4.3(b) hereof, is elected by the Partners
pursuant to Section 9 hereof, or (iii) the date that another
General Partner assumes the obligations imposed upon the Non-
Managing General Partner pursuant to Section 4.3(b) hereof. The
failure of the Non-Managing General Partner to seek re-election
at any meeting of the Partners called for such purpose shall be
deemed to constitute a voluntary withdrawal as of the date of
notice of such meeting and shall constitute written notice as at
the date of such meeting of its intention to withdraw as a Non-
Managing General Partner, unless it has delivered written notice
at an earlier date.

(c) In the event a General Partner ceases to be a
General Partner, the remaining General Partners shall have the
right to continue the operations of the Partnership.

(d) Termination of a person's status as a General
Partner shall not affect his status, if any, as a Limited
Partner. A General Partner may retain Shares owned in his
capacity as a Limited Partner provided such General Partner has
been or is admitted to Partnership as a Limited Partner in
accordance with Section 5.2.

(e) A person who ceases to be a General Partner
shall nevertheless be deemed to be acting as a General Partner
with respect to a third party doing business with the Partnership
until an amended Certificate of Limited Partnership is filed with
the Secretary of State.

4.9 Additional or Successor General Partners. A
person may be added or substituted as a General Partner only upon
his admission by the Partners at a meeting of Partners or by
written consent without a meeting as provided in Section 9
hereof. Each General Partner, by becoming a General Partner,
consents to the admission as an added or substituted General
Partner of any person elected by the Partners in accordance with
this Partnership Agreement. Any person who is elected to be
admitted as a General Partner at a meeting of the Partners or by
written consent in accordance with Section 9 hereof and who shall
not be serving as a General Partner at the time of such election,
shall be admitted to the Partnership as a General Partner
effective as of the date of such election. Any General Partner
who is not re-elected at any such meeting in the manner specified
in Section 9 shall be deemed to have withdrawn as of the date of
such meeting.

4.10 Liability to Limited Partners. The General
Partners shall not be personally liable for the repayment of any
amounts standing in the account of a Limited Partner or holder of
Shares including, but not limited to, contributions with respect
to such Shares, except by reason of their wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office. Any payment, other than
in the event of wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
his office by a General Partner, which results in a personal
liability to Limited Partners or holders of Shares, shall be
solely from the Partnership's assets.

So long as the General Partners have acted in good
faith and in a manner reasonably believed to be in the best
interests of the Limited Partners, the General Partners shall not
have any personal liability to any holder of Shares or to any
Limited Partner by reason of (1) any failure to withhold income
tax under Federal or state tax laws with respect to income
allocated to Limited Partners or (2) any change in the Federal or
state tax laws or in interpretation thereof as they apply to the
Partnership, the holders of the Shares or the Limited Partners,
whether such change occurs through legislative, judicial or
administrative action.

4.11 Assignment and Substitution. Each Share held by a
General Partner in his capacity as a General Partner shall be
designated as such, and each such Share shall be nonassignable,
except to another person who already is a General Partner, and
then only with the consent of the Managing General Partners, and
shall be redeemable by the Partnership only in the event that (i)
the holder thereof has ceased to be a General Partner of the
Partnership or (ii) in the opinion of counsel for the Partnership
redemption of Shares held by a General Partner would not
jeopardize the status of the Partnership as a partnership for
Federal income tax purposes.

4.12 No Agency. Except as provided in Section 15.9
below, nothing in this Partnership Agreement shall be construed
as establishing any General Partner as an agent of any Limited
Partner.

4.13 Reimbursement and Compensation. Managing General
Partners may receive reasonable compensation for their services
as Managing General Partners and will be reimbursed for all
reasonable out-of-pocket expenses incurred in performing their
duties hereunder.

4.14 Indemnification.

(a) Subject to the exceptions and limitations
contained in Subsection (b) below:

(i) Every person who is, or has been, a
General Partner, an officer and/or Director of a corporate
General Partner or Officer of the Partnership (hereinafter
referred to as "Covered Person") shall be indemnified by the
Partnership to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of
his being or having been a General Partner, an officer and/or
Director of a Corporate General Partner or officer of the
Partnership and against amounts paid or incurred by him in the
settlement thereof;

(ii) the words "claim", "action", "suit", or
"proceeding" shall include, without limitation, any
administrative inquiry, audit, investigation or other form of
regulatory actions and shall apply to all claims, actions, suits
or proceedings (civil, criminal or other, including appeals),
actual or threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.

(b) No indemnification shall be provided
hereunder to a Covered Person who shall have been finally
adjudicated by a court or other body before which the proceeding
was brought (i) to be liable to the Partnership or its Partners
by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office or (ii) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the
Partnership.

(c) In the event of a settlement, or other
disposition not involving a final adjudication as provided
insubsection (b), indemnification shall be provided unless there
has been a determination that such Covered Person did engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office,

(i) by the court or other body approving
the settlement or other disposition;

(ii) by vote of at least a majority of those
Managing General Partners who are neither interested persons (as
defined in the 1940 Act) of the Partnership nor are parties to
the matter based upon a review of readily available facts (as
opposed to a full trial-type inquiry); or

(iii) by written opinion of independent legal
counsel, based upon a review of readily available facts (as
opposed to a full trial-type inquiry); provided, however, that
any Partner may, by appropriate legal proceedings, challenge any
such determination by the Managing General Partners, or by
independent counsel.

(d) The rights of indemnification herein provided
may be insured against by policies maintained by the Partnership,
shall be severable, shall not be exclusive of or affect any other
rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be such
General Partner, officer and/or Director of a Corporate General
Partner or officer of the Partnership and shall inure to the
benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to
indemnification to which Partnership personnel, other than
Covered Persons, and other persons may be entitled by contract or
otherwise under law.

(e) Expenses incurred in connection with the
preparation and presentation of a defense to any claim, action,
suit or proceeding of the character described in subsection (a)
of this Section 4.14 shall be paid by the Partnership from time
to time in advance prior to final disposition thereof upon
receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Partnership if
it is ultimately determined that he is not entitled to
indemnification under this Section 4.14; provided, however, that
either (i) such Covered Persons shall have provided appropriate
security for such undertaking, (ii) the Partnership is insured
against losses arising out of any such advance payments, or (iii)
either a majority of the Managing General Partners who are
neither interested persons (as defined in the 1940 Act) of the
Partnership nor are parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a
review of readily available facts (as opposed to a full trial-
type inquiry), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this
Section 4.14.

5. LIMITED PARTNERS

5.1 Identity of Limited Partners. The names of the
Limited Partners and their last known business or residence
addresses, together with the amounts of their contributions and
their current Share ownership, shall be set forth in alphabetical
order in the Partnership List.

5.2 Admission of Limited Partners. The Managing
General Partners may admit a purchaser of Shares as a Limited
Partner, upon (i) the execution by such purchaser of such
subscription documents and other instruments as the Managing
General Partners may deem necessary or desirable to effectuate
such admission, which documents, if any shall be required, shall
be described in the Partnership's Registration Statement, (ii)
the purchaser's acceptance of all the terms and provisions of
this Partnership Agreement, including the power of attorney set
forth in Section 15.9 hereof, as the same may have been amended
in such manner as shall be specified by the Managing General
Partners, and (iii) the addition of such purchaser to the
Partnership List. The admission of a purchaser as a Limited
Partner shall be effective upon his addition to the Partnership
List provided good payment has been received by the Partnership
for the purchased Shares. The Managing General Partners shall
cause the Partnership List to be amended daily on each day that
its Transfer Agent is open for business to reflect the admission
of new Limited Partners. In no event shall the consent or
approval of any of the Limited Partners be required to effectuate
such admission. Each purchaser of a Share of the Partnership who
becomes a Limited Partner shall be bound by all the terms and
conditions of this Partnership Agreement including, without
limitation, the allocation of income, gains, losses, deductions
and credits as provided in Section 10.3. Notwithstanding anything
in this Partnership Agreement to the contrary, the Managing
General Partners reserve the right to refuse to admit any Person
as a Limited Partner who has not completed, signed and furnished
to the Partnership or its designated agent an account
application, a Certificate of Foreign Status on Form W-8 or such
other required documents as may be described in the Registration
Statement, and any other Person if, in their judgment, it would
not be in the Partnership's best interests to admit such Person.

5.3 Contributions of the Limited Partners. The amount
contributed by each Limited Partner to the Partnership shall be
the amount actually invested in Shares of the Partnership at
their Net Asset Value, which amount shall not include any sales
charges and which amount may be less than the offering price paid
by such Limited Partner for his Shares to the extent the offering
price includes any sales charges. All contributions shall be made
in U.S. dollars, which shall be invested in Shares of the
Partnership at Net Asset Value. The amount of such contributions
and the number of Shares owned by each Partner shall be set forth
in the Partnership List.

5.4 Additional Contributions of Limited Partners. No
Limited Partner shall be required to make any additional
contributions to (or investments in) or lend additional funds to
the Partnership, and no Limited Partner shall be liable for any
additional assessment therefor. A Limited Partner may make an
additional contribution (or investment), however, at his option
through the purchase of additional Shares subject to the same
terms and conditions as his initial contribution.

5.5 Use of Contributions. The aggregate of all
capital contributions shall be, and hereby are agreed to be,
available to the Partnership to carry out the objects and
purposes of the Partnership.

5.6 Redemption by Limited Partners. A Limited Partner
may redeem his Shares at any time in accordance with Section 8.
The Managing General Partners shall cause the Partnership List to
be amended daily on each day that its Transfer Agent is open for
business to reflect the redemption of Shares by any Limited
Partner and the withdrawal or return through such redemption, in
whole or in part, of the contribution of any Limited Partner.
Except as provided in Sections 8.1, 10.04 and 12.2 hereof, a
Limited Partner shall have no right to the return or withdrawal
of his contribution.

5.7 Minimum Contribution and Mandatory Redemption.
The Managing General Partners shall determine the minimum amounts
required for the initial or additional contributions of a Limited
Partner, which amounts may, from time to time, be changed by the
Managing General Partners. Additionally, the Managing General
Partners may, from time to time, establish a minimum total
investment for Limited Partners, and there is reserved to the
Partnership the right to redeem automatically the interest of any
Limited Partner the value of whose investment, due to
redemptions, is less than such minimum upon the giving of at
least 30 days' notice to such Limited Partner, provided that such
minimum total investment is not greater than the investment of
any Limited Partner at the time the new minimum total investment
becomes effective. The amounts which the Managing General
Partners shall fix from time to time for initial or additional
contributions and the amount of the minimum total investment
shall be stated in the Partnership's current Registration
Statement.

5.8 Limited Liability.

(a) No Limited Partner shall be liable for any
debts or obligations of the Partnership and each Limited Partner
shall be indemnified by the Partnership against any such
liability; provided, however, that contributions of a Limited
Partner and his share of any undistributed assets of the
Partnership shall be subject to the risks of the operations of
the Partnership and subject to the claims of the Partnership's
creditors, and provided further, that after any Limited Partner
has redeemed his Shares or otherwise received the return of any
part of his contribution or any distribution of assets of the
Partnership, he will be liable to the Partnership for:

(i) any money or other property wrongfully
distributed to him; and

(ii) any sum, not in excess of the amount of
such distribution, necessary to discharge any liabilities of the
Partnership to creditors who extended credit or whose claims
arose before such returns or distributions were made, but only to
the extent that the assets of the Partnership are not sufficient
to discharge such liabilities.

The obligation of a Limited Partner to return all
or any part of a distribution made to him shall be the sole
obligation of such Limited Partner and not of the General
Partners.

(b) If an action is brought against a Limited
Partner to satisfy an obligation of the Partnership, the
Partnership, upon notice from the Limited Partner about the
action, will either pay the claim itself or, if the Partnership
believes the claim to be without merit, will undertake the
defense of the claim itself.

(c) The General Partners shall not have any
personal liability to any Holder of Shares or to any Limited
Partner for the repayment of any amounts standing in the account
of a Limited Partner including, but not limited to, contributions
with respect to such Shares. Any such payment shall be solely
from the assets of the Partnership. The General Partners shall
not be liable to any Holder of Shares or to any Limited Partner
by reason of any change in the Federal income tax laws or any
State or local income or franchise tax laws as they apply to the
Partnership or the Limited Partners, whether such change occurs
through legislative, judicial or administrative action, so long
as the General Partners have acted in good faith and in a manner
reasonably believed to be in the best interests of the Limited
Partners.

5.9 No Power to Control Operations. A Limited Partner
shall have no right to and shall take no part in control of the
Partnership's operations or activities but may exercise the
rights and powers of a Limited Partner under this Partnership
Agreement, including without limitation, the voting rights and
the giving of consents and approvals provided for in Section 9
hereof. The exercise of such rights and powers are deemed to be
matters affecting the basic structure of the Partnership and not
the control of its operations or activities.

5.10 Tax Responsibility. Each Limited Partner shall
(a) provide the Managing General Partners with any tax
information which may be required under applicable law, (b) pay
any penalties imposed on such Limited Partner for any non-
compliance with applicable tax laws, and (c) be subject to
withholding of income tax by the Partnership to the extent
required by law.

6. SHARES OF PARTNERSHIP INTEREST

All interests in the Partnership, including
contributions by the General Partners, pursuant to Section 4.3
and by the Limited Partners, pursuant to Section 5.3, shall be
expressed in units of participation herein referred to as
"Shares" (which term includes fractional Shares). Each Share
shall represent an equal proportionate interest in the income and
assets of the Partnership with each other Share outstanding.

7. PURCHASE AND EXCHANGE OF SHARES

7.1 Purchase of Shares. The Partnership may offer
Shares on a continuing basis to investors. Except for the initial
purchase of Shares by the initial Limited Partner and the General
Partners, all Shares issued shall be issued and sold at the Net
Asset Value (plus such sales charge or other charge as may be
applicable to the purchase of the Shares) next computed after
receipt of a purchase order in accordance with the Partnership's
Registration Statement in effect at the time the order is
received. Only investors who agree to be admitted, and who are
eligible for admission, as Limited Partners pursuant to Section
5.2 shall be eligible to purchase Shares (unless such investor
has already been admitted as a Partner). Orders for the purchase
of Shares shall be accepted on any day that the Partnership's
Transfer Agent is open for business (which shall normally be
limited to those days when the New York Stock Exchange is open
for business). The form in which purchase orders may be presented
shall be as set forth in the Partnership's Registration Statement
in effect at the time the order is received. The Managing General
Partners on behalf of the Partnership reserve the right to reject
any specific order and to suspend the Partnership's offering of
new Shares at any time. Payment for all Shares must be made in
U.S. dollars.

7.2 Net Asset Value. The Net Asset Value per Share of
the Partnership shall be determined as of the close of the New
York Stock Exchange on each day the Exchange is open for trading
or as of such other time or times as the Managing General
Partners may determine in accordance with the provisions of the
1940 Act. The Net Asset Value per Share shall be expressed in
U.S. dollars and shall be computed by dividing the value of all
the assets of the Partnership, less its liabilities, by the
number of Shares outstanding (including Shares held by General
Partners). Portfolio securities will be valued at their fair
value using methods determined in good faith by the Managing
General Partners in accordance with the 1940 Act. The Partnership
may suspend the determination of the Net Asset Value during any
period when the New York Stock Exchange is closed, other than
customary weekend and holiday closings, during periods when
trading on the Exchange is restricted as determined by the
Securities and Exchange Commission (the "Commission") or during
any emergency as determined by the Commission which makes it
impracticable for the Partnership to dispose of its securities or
value its assets, or during any other period permitted by order
of the Commission for the protection of investors.

7.3 Exchange of Shares. Shares of the Partnership may
be exchanged for (i.e., redeemed and reinvested in) shares of
other investment companies as provided in the Partnership's
Registration Statement in effect at the time of the exchange.

8. REDEMPTION OR REPURCHASE OF SHARES

8.1 Redemption of Shares.

(a) The Partnership will redeem from any Partner
all or any portion of the Shares owned by him provided that the
Partner delivers to the Partnership or its designated agent
notice of such redemption, stating the number of Shares to be
redeemed, together with a properly endorsed Share certificate(s)
where certificate(s) have been issued, in good order for transfer
and in proper form as determined by the Managing General Partners
and the Partnership's Transfer Agent. The Partner shall be
entitled to payment in U.S. Dollars of the Net Asset Value of his
Shares (as set forth in Section 7.2 hereof). Any such redemption
shall be in accordance with Section 4 with respect to General
Partners or Section 5 with respect to Limited Partners. Any
distribution upon redemption pursuant to this Section 8.1 shall,
in accordance with Section 10.4 below, constitute a return in
full of the redeeming Partner's contribution attributable to the
Shares which are redeemed regardless of the amount distributed
with respect to such Shares. No consent of any of the Partners
shall be required for the withdrawal or return of a Limited
Partner's contribution. The Managing General Partners shall have
sole discretion to determine the amount of cash to be distributed
to a withdrawing Partner. All redemptions shall be recorded on
the Partnership List, which shall be amended daily on each day
that the Partnership's Transfer Agent is open for business.

(b) The Managing General Partners may suspend
redemptions and defer payment of the redemption price at any
time, subject to the Rules and Regulations of the Securities and
Exchange Commission. The Partnership may suspend or withhold
redemptions or repurchases of shares (including exchanges
pursuant to Section 7.3) or redeem shares for the purpose of
satisfying any tax withholding obligations under Federal or state
tax laws.

8.2 Payment for Redeemed Shares. Payments for Shares
redeemed or repurchased by the Partnership will be made in U.S.
Dollars within seven days after receipt by the Partnership's
Transfer Agent of a written redemption request in proper form as
specified in Section 8.1 above. If a redemption request is
received with respect to Shares for which the Partnership has not
yet received good payment, the Partnership may delay the mailing
of a redemption check until such time as it has assured itself
that good payment has been collected for the purchase of such
Shares.

9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE

9.1 Rights of Limited Partners.

(a) As provided in the Partnership Act, the
Limited Partners shall have the right to vote together with the
General Partners in accordance with the provisions of this
Section 9 only upon the following matters affecting the basic
structure of the Partnership, which include the voting, approval,
consent or similar rights required under the 1940 Act for voting
security holders:

(i) the right to remove General Partner(s);

(ii) the right to elect new General
Partner(s), except in the circumstance where the last remaining
or surviving General Partner has been removed;

(iii) the right to approve or terminate
investment advisory, underwriting and distribution contracts and
plans;

(iv) the right to ratify or reject the
appointment and to terminate the employment of the independent
public accountants of the Partnership;

(v) the right to approve or disapprove the
sale of all or substantially all of the assets of the
Partnership;

(vi) the right to approve the incurrence of
indebtedness by the Partnership other than in the ordinary course
of its operations;

(vii) the right to approve transactions in
which the General Partners have an actual or potential conflict
of interest with the Limited Partners or the Partnership;

(viii) the right to terminate the
Partnership, as provided in Section 12 hereof;

(ix) the right to elect to continue the
operations of the Partnership, except in circumstances where the
last remaining or surviving General Partner has been removed; and

(x) the right to amend this Partnership
Agreement, including, without limitation, the right to approve or
disapprove proposed changes in the investment and operating
limitations set forth in Section 3.3 and the right to approve or
disapprove proposed changes in the nature of the Partnership's
activities as such activities are described herein; provided,
however, that no such amendment shall conflict with the 1940 Act
so long as the Partnership intends to remain registered
thereunder, nor affect the liability of the General Partners
without their consent nor the limited liability of the Limited
Partners as provided under Section 5.8 above.

Notwithstanding the foregoing, the right of
Limited Partners to vote on matters affecting the basic structure
of the Partnership as designated herein shall not be construed as
a requirement that all such matters be submitted to the Limited
Partners for their approval or be so approved to the extent such
approval is not required by the Partnership Act, the 1940 Act or
this Partnership Agreement.

(b) Notwithstanding the foregoing, no vote,
approval or other consent shall be required of the Limited
Partners with respect to any matter not affecting the basic
structure of the Partnership, including, without limitation, the
following:(i) any change in the amount or character of the
contribution of any Limited Partner; (ii) any change in the
procedures for the purchase or redemption of Shares, (iii) the
substitution or deletion of a Limited Partner; (iv) the admission
of any additional Limited Partner; (v) the retirement,
resignation, death or incompetency of a Managing General Partner;
(vi) any addition to the duties or obligations of the General
Partners, or any reduction in the rights or powers granted to the
General Partners herein, for the benefit of the Limited Partners;
(vii) the correction of any false or erroneous statement, or
change in any statement in order to make such statement
accurately represent the agreement among the General and Limited
Partners, in this Partnership Agreement; (viii) the addition of
any omitted provision or amendment of any provision to cure,
correct or supplement any ambiguous, defective or inconsistent
provision hereof; or (ix) such amendments as may be necessary to
conform this Partnership Agreement to the requirements of the
Partnership Act, the 1940 Act, the Tax Code or any other law or
regulation applicable to the Partnership.

(c) The Limited Partners shall have no right or
power to cause the termination and dissolution of the Partnership
except as set forth in this Partnership Agreement. No Limited
Partner shall have the right to bring an action for partition
against the Partnership.

9.2 Action of the Partners. Actions which require the
vote of the Limited Partners under Section 9.1 of this
Partnership Agreement shall be taken at a meeting of both the
General and Limited Partners, or by consent without a meeting as
provided in Section 9.10. All Partners' meetings shall be held at
such place as the Managing General Partners shall designate. The
Partners may vote at any such meeting in person or by proxy.

9.3 Meetings. Meetings of the Partnership for the
purpose of taking any action which the Limited Partners are
permitted to take under this Partnership Agreement may be called
by a majority vote of the Managing General Partners or by Limited
Partners representing 10% or more of the outstanding Shares.
Written notice of such meeting shall be given in accordance with
Section 9.4.

9.4 Notices.

(a) Whenever Partners are required or permitted
to take any action at a meeting, a written notice of the meeting
shall be given not less than ten (10), nor more than sixty (60),
days before the date of the meeting to each Partner entitled to
vote at the meeting. The notice shall state the place, date, and
hour of the meeting and the general nature of the business to be
transacted, and no other business may be transacted.

(b) Notice of a Partners' meeting or any report
shall be given either personally or by mail or other means of
written communication, addressed to the Partner at the address of
the Partner appearing on the books of the Partnership or given by
the Partner to the Partnership for the purpose of notice, or, if
no address appears or is given, at the place where the principal
executive office of the Partnership is located or by publication
at least once in a newspaper of general circulation in the county
in which the principal executive office is located. The notice or
report shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other
means of written communication. An affidavit of mailing of any
notice or report in accordance with the provisions of this
subsection, executed by a General Partner, shall be prima facie
evidence of the giving of the notice or report.

If any notice or report addressed to the Partner
at the address of the Partner appearing on the books of the
Partnership is returned to the Partnership marked to indicate
that the notice or report to the Partner could not be delivered
at such address, all future notices or reports shall be deemed to
have been duly given without further mailing if they are
available for the Partner at the principal executive office of
the Partnership for a period of one year from the date of the
giving of the notice or report to all other Partners.

(c) Upon written request to the General Partners
by any person entitled to call a meeting of Partners, the General
Partners immediately shall cause notice to be given to the
Partners entitled to vote that a meeting will be held at a time
requested by the person calling the meeting, not less than ten
(10), nor more than sixty (60), days after the receipt of the
request. If the notice is not given within twenty (20) days
after receipt of the request, the person entitled to call the
meeting may give the notice.

9.5 Validity of Vote for Certain Matters. Any Partner
approval at a meeting, other than unanimous approval by those
entitled to vote, with respect to the matters set forth in
Section 9.1(a) shall be valid only if the general nature of the
proposal so approved was stated in the notice of meeting or in
any written waiver of notice.

9.6 Adjournment. When a Partners' meeting is
adjourned to another time or place, notice need not be given of
the adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the
adjourned meeting the Partnership may transact any business which
might have been transacted at the original meeting. If the
adjournment is for more than forty-five (45) days or if after the
adjournment a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each Partner
of record entitled to vote at the meeting in accordance with
Section 9.4.

9.7 Waiver of Notice and Consent to Meeting. The
transactions of any meeting of Partners, however called and
noticed, and wherever held, are as valid as though had at a
meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or
after the meeting, each of the persons entitled to vote, not
present in person or by proxy, signs a written waiver of notice
or a consent to the holding of the meeting or an approval of the
minutes thereof. All waivers, consents, and approvals shall be
filed with the Partnership records or made a part of the minutes
of the meeting. Attendance of a person at a meeting shall
constitute a waiver of notice of the meeting, except when the
person objects, at the beginning because the meeting is not
lawfully called or convened and except that attendance at a
meeting is not a waiver of any right to object to the
consideration of matters required to be included in the notice of
the meeting but not so included, if the objection is expressly
made at the meeting. Neither the business to be transacted at nor
the purpose of any meeting of Partners need be specified in any
written waiver of notice, except as provided in Section 9.6.

9.8 Quorum. The presence in person or by proxy of
more than forty percent (40%) of the outstanding Shares on the
record date for any meeting constitutes a quorum at such meeting.
The Partners present at a duly called or held meeting at which a
quorum is present may continue to transact business until
adjournment notwithstanding the withdrawal of enough Partners to
leave less than a quorum, if any action taken (other than
adjournment) is approved by Partners holding a majority of the
Shares then represented at such meeting (except as otherwise may
be required by the 1940 Act or the Partnership Act). In the
absence of a quorum, any meeting of Partners may be adjourned
from time to time by the vote of a majority in interest of the
Limited Partners represented either in person or by proxy, but no
other business may be transacted except as provided in this
Section 9.8. The Managing General Partners may adjourn such
meeting to such time or times as determined by the Managing
General Partners.

9.9 Required Vote. Any action which requires the vote
of the Limited Partners may be taken by the General Partners with
(i) the Majority Vote of the then outstanding Shares or (ii) if
at a meeting, with a majority vote of those Shares present if the
quorum requirements of Section 9.8 hereof have been satisfied
(except as otherwise may be required by the 1940 Act or the
Partnership Act); provided, however, that the admission of a
General Partner shall require the affirmative vote of at least a
majority of the then outstanding Shares, and provided further,
that the admission of a General Partner or an election to
continue the operations of the Partnership after a General
Partner ceases to be a General Partner (other than by removal)
when there is no remaining or surviving General Partner shall
require the affirmative vote of all the Limited Partners.

9.10 Action by Consent Without a Meeting. Any action
which may be taken at any meeting of the Partners may be taken
without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by Partners having not less than
the minimum number of votes that would be necessary to authorize
or take that action at a meeting. In the event the Limited
Partners are requested to consent on a matter without a meeting,
each Partner shall be given notice of the matter to be approved
in the same manner as described in Section 9.4. In the event any
General Partner, or Limited Partners representing 10% or more of
the outstanding Shares request a meeting for the purpose of
discussing or voting on the matter, notice of such meeting shall
be given in accordance with Section 9.4 and no action shall be
taken until such meeting is held. Unless delayed in accordance
with the provisions of the preceding sentence, any action taken
without a meeting will be effective ten (10) days after the
required minimum number of voters have signed the consent;
however, the action will be effective immediately if the General
Partners and Limited Partners representing at least 90% of the
Shares of the Partners have signed the consent.

9.11 Record Date.

(a) In order that the Partnership may determine
the Partners of record entitled to notices of any meeting or to
vote, or entitled to receive any distribution or to exercise any
rights in respect of any other lawful action, the Managing
General Partners, or Limited Partners representing more than 10%
of the Shares then outstanding, may fix, in advance, a record
date which is not more than sixty (60) or less than ten (10)
days prior to the date of the meeting and not more than sixty
(60) days prior to any other action. If no record date is fixed,
the record date shall be determined as provided in the
Partnership Act.

(b) The determination of Partners of record
entitled to notice of or to vote at a meeting of Partners shall
apply to any adjournment of the meeting unless the Managing
General Partners, or the Limited Partners who called the meeting,
fix a new record date for the adjourned meeting, but the Managing
General Partners, or the Limited Partners who called the meeting,
shall fix a new record date if the meeting is adjourned for more
than forty-five (45) days from the date set for the original
meeting.

(c) Any Holder of a Share prior to the record
date for a meeting shall be entitled to vote at such meeting,
provided such person becomes a Partner prior to the date of the
meeting.

9.12 Proxies. A Partner may vote at any meeting of the
Partnership by a proxy executed in writing by the Partner. All
such proxies shall be filed with the Partnership before or at the
time of the meeting. The law of California pertaining to
corporate proxies will be deemed to govern all Partnership
proxies as if they were proxies with respect to shares of a
California corporation. A proxy may be revoked by the person
executing the proxy in a writing delivered to the Managing
General Partners at any time prior to its exercise.
Notwithstanding that a valid proxy is outstanding, powers of the
proxy holder will be suspended if the person executing the proxy
is present at the meeting and elects to vote in person.

9.13 Number of Votes. All Shares have equal voting
rights. Each Partner shall have the right to vote the number of
Shares standing of record in such Partner's name as of the record
date set forth in the notice of meeting.

10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES

10.1 Fees of General Partners. As compensation for
services rendered to the Partnership, each Managing General
Partner may be paid a fee during each year, which fee shall be
fixed by the Managing General Partners. All the General Partners
shall be entitled to reimbursement of reasonable expenses
incurred by them in connection with their performance of their
duties as General Partners. Neither payment of compensation or
reimbursement of expenses to a General Partner hereunder nor
payment of fees to any Affiliate of a General Partner for the
performance of services to the Partnership shall be deemed a
distribution for purposes of Section 10.2, nor shall any such
payment affect such person's right to receive any distribution to
which he would otherwise be entitled as a Holder of Shares.

10.2 Distributions of Income and Gains. Subject to the
provisions of the Partnership Act and the terms of Section 10.4
hereof, the Managing General Partners in their sole discretion
shall determine the amounts, if any, to be distributed to Holders
of Shares, the record date for purposes of such distributions and
the time or times when such distributions shall be made.
Distributions of income may be in cash (U.S. Dollars) or in
additional full and fractional Shares of the Partnership, at the
option of the Holder of Shares, valued at the Net Asset Value on
the record date, which amount may be less than the offering price
to the extent it includes any sales charges. With respect to
capital gains, the Managing General Partners may determine at
least annually what portion, if any, of the Partnership's capital
gains will be distributed and any such distribution may be in
cash or in additional full and fractional Shares of the
Partnership at the Net Asset Value on the record date.
Notwithstanding the foregoing, the Managing General Partners
shall not be required to make any distribution of income or
capital gains for any taxable year. The Managing General Partners
may require that such distributions be reinvested in additional
shares of the Partnership, determine that no withdrawal should be
made from an account, or institute withholding of taxes pursuant
to Federal or state tax laws on distributions to the extent
required by law.

10.3 Allocation of Income, Gains, Losses, Deductions
and Credits. The net income, gains, losses, deductions and
credits of the Partnership shall be allocated equally among the
outstanding Shares of the Partnership on a regular basis to be
determined by the Managing General Partners. The net income
earned by the Partnership shall consist of the interest accrued
on portfolio securities, less expenses, since the most recent
determination of income. Original issue discount will be
amortized as an income item. Market discount and premiums will be
treated as capital items except as otherwise required for Federal
income tax purposes. Expenses of the Partnership will be accrued
on a regular basis to be determined by the Managing General
Partners. A Holder of a Share shall be allocated the
proportionate part of such items actually realized by the
Partnership for each such full accrual period during which such
Share was owned by such Holder. A person shall be deemed to be a
Holder of a Share on a specific day if he is the record holder of
such Share on such day (regardless of whether or not such record
holder has yet been admitted as a Partner).

10.4 Returns of Contributions. Except upon dissolution
of the Partnership by expiration of its terms or otherwise
pursuant to Section 12 hereof (which shall be the time for return
to each Partner of the value of the Shares acquired by his
contributions, subject to the priorities therein), and except
upon redemption of Shares of the Partnership as provided in
Section 8, no Partner has the right to demand return of any part
of his contribution. The Managing General Partners may, however,
from time to time, elect to permit partial returns of the value
of the Shares acquired by his contributions to Holders of Shares,
provided that:

(a) all liabilities of the Partnership to persons
other than General and Limited Partners have been paid or, in the
good faith determination of the Managing General Partners, there
remains property of the Partnership sufficient to pay them; and

(b) the Managing General Partners cause the
Partnership List to be amended to reflect a reduction in
contributions.

In the event that the Managing General Partners
elect to make a partial return of the value of Shares acquired by
contributions to Holders of Shares, such distribution shall be
made pro rata to all of the Holders of Shares in accordance with
the number of Shares held by each. Each General and Limited
Partner, by becoming such, consents to any such pro rata
distribution therefore or thereafter duly authorized and made in
accordance with such provisions and to any distribution through
redemption of Shares pursuant to Section 8 above.

10.5 Capital Accounts. In addition to any capital
accounts required to be maintained for accounting purposes in
accordance with generally accepted accounting principles, the
Partnership shall maintain two Capital Accounts for each Partner,
one for book purposes and the other for tax purposes. Each such
Capital Account shall be maintained in accordance with the
requirements of Treasury Regulations Section 1.704-1(b). Each
such Capital Account shall be credited with the Partner's capital
contributions and share of profits, shall be charged with such
Partner's share of losses, distributions and withholding taxes
(if any) and shall otherwise appropriately reflect transactions
of the Partnership and the Partners. At the end of each day, the
book Capital Accounts of all Partners shall be adjusted to
reflect unrealized appreciation or depreciation in the value of
the Partnership's assets which accrued on that day. Further
adjustments shall then be made to reflect any purchases and
redemptions of Shares by the Partners. The intent of these
adjustments is to achieve consistency and equivalence between
book Capital Accounts and the Net Asset Value per Share used to
determine the value of the Shares purchased, redeemed or
liquidated in accordance with industry practice for investment
partnerships such as the Partnership. Adjustments to tax Capital
Accounts to take into account allocations of gains and losses
realized by the Partnership for tax purposes shall be made in the
manner described in Section 10.6. A Substituted Limited Partner
shall be deemed to succeed to the book and tax Capital Accounts
of the Partner whom such Substituted Limited Partner replaced.

10.6 Allocations for Tax Purposes.

(a) General. For each fiscal year, items of
income, deduction, loss or credit from normal operations (other
than from the disposition or deemed disposition of assets of the
Partnership) shall be allocated for income tax purposes among the
Partners in proportion to the amounts distributed to them during
such year pursuant to Sections 10.3 and 10.4 hereof. The
Partners' tax Capital Accounts shall be adjusted to reflect
allocations of such items of income, deduction, loss or credit.

(b) Special Allocations. Allocations of gains
and losses from the disposition or deemed disposition of assets
of the Partnership to Partners for tax purposes shall be made in
accordance with the following method which is intended to ensure
that allocations for tax purposes reflect the economic experience
of the Partners with respect to their interests in the
Partnership:

(i) With respect to each Partner, a daily
account of unrealized appreciation/depreciation and realized
gain/loss shall be maintained. Each day's net unrealized
appreciation/depreciation in the assets of the Partnership and
each day's net realized gains/losses of the Partnership shall be
allocated to the Partners in proportion to their book Capital
Account balances at the beginning of such day. Any entry of
realized gain or loss into any Partner's account for net realized
gains/losses shall result in an equal and offsetting adjustment
to the Partner's account for net unrealized appreciation/
depreciation for that day. Purchases of Shares and partial or
complete redemptions of Shares shall be regarded as occurring at
the end of each day, after entries and adjustments in the
Partners' accounts for net unrealized appreciation/depreciation
and net realized gains/losses have been made. The amounts for
each Partner's share of net unrealized appreciation/depreciation
and net realized gains/losses, together with adjustments made to
reflect purchases or redemptions of Shares, shall be combined to
arrive at each Partner's ending book Capital Account balance for
the day.

(ii) At the end of each year, the daily
amounts of net unrealized appreciation/depreciation and net
realized gains/losses shall be aggregated to arrive at a total
amount for net unrealized appreciation/depreciation and a total
amount for net realized gains/losses for each Partner for the
year. These two amounts shall be combined to arrive at each
Partner's "Investment Experience." Net gains realized by the
Partnership shall be allocated among the Partners whose
Investment Experience is positive, and each such Partner's
allocable share of such gains for tax purposes shall be equal to
a fraction the numerator of which is the Partner's Investment
Experience and the denominator of which is the total Investment
Experience of the Partners whose Investment Experience is
positive. Net losses realized by the Partnership shall be
allocated among the Partners whose Investment Experience is
negative, and each such Partner's allocable share of such losses
shall be computed in the manner described in the previous
sentence, except that the word "negative" shall be substituted
for the word "positive." Each Partner's tax Capital Account shall
then be adjusted to reflect such Partner's allocable share of
Partnership realized gains or losses for such year. The Partners'
accounts for unrealized appreciation/depreciation and net
realized gains/losses, adjusted appropriately to reflect the
allocation of the net gain realized or the net loss realized,
shall be carried over to the next year.

(iii) In the event of a partial or complete
redemption of Shares which results in a distribution in excess of
a Partner's tax Capital Account, the Partnership may make an
election to adjust the basis of Partnership assets under Section
754 of the Code, and the Partnership may increase the tax basis
of its Partnership assets in accordance with Section 743(b) and
755 of the Code by the difference between the amount of the
distribution made to the redeeming Partner in redemption of his
Shares and his tax Capital Account.

(c) Minimum Gain Chargeback. A Partner's share
of Minimum Gain shall be computed in accordance with Treasury
Department Regulations Section 1.704-1(b)(4)(iv)(f). In the event
that there is a net decrease in the Partnership's Minimum Gain
during any taxable year and any Partner has a negative book
Capital Account (after taking into account reductions for items
described in paragraphs (4), (5) and (6) of book Treasury
Department Regulations Section 1.704-1(b)(2)(ii)(d)) and such
negative balance exceeds the sum of (i) the amount that such
Partner is obligated to restore upon liquidation of the
Partnership and (ii) such Partner's share of the Minimum Gain at
the end of such taxable year, such Partner shall be allocated
Partnership profits for such year (and, if necessary, subsequent
years) in an amount necessary to eliminate such excess negative
balance as quickly as possible. Allocations of profits to such
Partners having such excess negative book Capital Accounts shall
be made in proportion to the amounts of such excess negative book
Capital Account balances. The term "Minimum Gain" means the
excess of the outstanding balances of all nonrecourse
indebtedness which is secured by property of the Partnership over
the adjusted basis of such property for federal income tax
purposes, as computed in accordance with the provisions of
Treasury Department Regulations Section 1.704-1(b)(4)(iv)(c).

(d) Qualified Income Offset. Notwithstanding
anything in Sections 10.3 and 10.6 to the contrary, in the event
any Partner unexpectedly receives any adjustments, allocations or
distributions described in Treasury Department Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(d)(5) or 1.704-
1(b)(2)(ii)(d)(6), items of Partnership income (including gross
income) and gain shall be specially allocated to such Partner in
an amount and manner sufficient to eliminate the deficit balance
in his book Capital Account (in excess of (i) the amount he is
obligated to restore upon liquidation of the Partnership or upon
liquidation of his interest in the Partnership and (ii) his share
of the Minimum Gain) created by such adjustments, allocations or
distributions as quickly as possible.

11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST;
SUBSTITUTION OF PARTNERS

11.1 Prohibition on Assignment. Except for
redemptions as provided in Section 8, a Partner shall not have
the right to sell, transfer or assign his Shares to any other
person, but may pledge them as collateral.

11.2 Rights of the Holders of Shares as Collateral or
Judgment Creditor. In the event that any person who is holding
Shares as collateral or any judgment creditor becomes the owner
of such Shares due to foreclosure or otherwise, such person shall
not have the right to be substituted as a Limited Partner, but
shall only have the rights, upon the presentation of evidence
satisfactory to the Managing General Partners of his right to
succeed to the interests of the Limited Partner, set forth
immediately below:

(a) To redeem the Shares in accordance with the
provisions of Section 8 hereof; and

(b) To receive any subsequent distributions made
with respect to such Shares.

Upon receipt by the Partnership of evidence
satisfactory to the Managing General Partners of his ownership of
Shares, the owner shall become a Holder of Record of the subject
Shares and his name shall be recorded on the books of record of
the Partnership maintained for such purpose either by the
Partnership or its Transfer Agent. Such owner shall be liable to
return any excess distributions pursuant to Section 5.8(a).
However, although such owner shall own an equity interest in the
Partnership in the form of Shares, such owner shall have none of
the rights or obligations of a Substituted Limited Partner unless
and until he is admitted as such.

11.3 Death, Incompetency, Bankruptcy or Termination of
the Existence of a Partner. In the event of the death or an
adjudication of incompetency or bankruptcy of an individual
Partner (or, in the case of a Partner that is a corporation,
association, partnership, joint venture or trust, an adjudication
of bankruptcy, dissolution or other termination of the existence
of such Partner), the successor in interest of such Partner
(including without limitation the Partner's executor,
administrator, guardian, conservator, receiver or other legal
representative), upon the presentation of evidence satisfactory
to the Managing General Partners of his right to succeed to the
interests of the Partner, shall have the rights set forth below:

(a) to redeem the Shares of the Partner in
accordance with the provisions of Section 8 hereof;

(b) to receive any subsequent distributions made
with respect to such Shares; and

(c) to be substituted as a Limited Partner upon
compliance with the conditions of the admission of a Limited
Partner as provided in Sections 5 and 11 hereof.

Upon receipt by the Partnership of evidence
satisfactory to the Managing General Partners of his right to
succeed to the interests of the Partner, the successor in
interest shall become a Holder of Record of the subject Shares
and his name shall be recorded on the books of record of the
Partnership maintained for such purpose either by the Partnership
or its Transfer Agent.

11.4 Substituted Limited Partners.

(a) A person shall not become a Substituted
Limited Partner unless the Managing General Partners consent to
such substitution (which consent may be withheld in their
absolute discretion) and receive such instruments and documents
(including those specified in Section 5.2), and a reasonable
transfer fee as the Managing General Partners shall require.

(b) The original Limited Partner shall cease to
be a Limited Partner, and the person to be substituted shall
become a Substituted Limited Partner, as of the date on which the
person to be substituted has satisfied the requirements set forth
above and as of the date the Partnership List is amended to
reflect his admission as a Substituted Limited Partner. The
Managing General Partners agree to cause such amendments to the
Partnership List to be processed daily on each day that its
Transfer Agent shall be open for business. Thereafter the
original Limited Partner shall have no rights or obligations with
respect to the Partnership insofar as the Shares transferred to
the Substituted Limited Partner are concerned other than
liabilities which the original Limited Partner may have had to
the Partnership on the date of transfer, and the Substituted
Limited Partners shall be liable to return any excess
distributions pursuant to Section 5.8(a) hereof.

(c) Unless and until a person becomes a
Substituted Limited Partner, his status and rights shall be
limited to the rights of a Holder of Shares pursuant to Sections
11.3(a) and 11.3(b). A Holder of Shares who does not become a
Substituted Limited Partner shall have no right to inspect the
Partnership's books or to vote on any of the matters on which a
Limited Partner would be entitled to vote. A Holder of Shares who
has become a Substituted Limited Partner has all the rights and
powers, and is subject to the restrictions and liabilities of a
Limited Partner under this Agreement.

(d) Any person admitted to the Partnership as a
Substituted Limited Partner shall be subject to and bound by the
provisions of this Partnership Agreement as if originally a party
to this Partnership Agreement.

12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP

12.1 Dissolution. The Partnership shall be dissolved
and its affairs shall be wound up upon the happening of the first
to occur of the following:

(a) the stated term of the Partnership has
expired unless the Partners by a Majority Vote have previously
amended the Partnership Agreement to state a different term;

(b) the Partnership has disposed of all of its
assets;

(c) A General Partner has ceased to be a General
Partner and the remaining General Partners do not elect to
continue the operations of the Partnership;

(d) There is only one General Partner remaining
and such General Partner has ceased to be a General Partner as
set forth in Section 4.8; provided, however, that if the last
remaining or surviving General Partner ceases to be a General
Partner other than by removal, the Limited Partners may agree by
unanimous vote to continue the operations of the Partnership and
to admit one or more General Partners in accordance with the
Partnership Agreement;

(e) a decree of judicial dissolution has been
entered by a court of competent jurisdiction; or

(f) the Partners by a Majority Vote have voted to
dissolve the Partnership.

12.2 Liquidation.

(a) In the event of dissolution as provided in
Section 12.1, the assets of the Partnership shall be distributed
as follows:

(i) all of the Partnership's debts and
liabilities to persons (including Partners to the extent
permitted by law) shall be paid and discharged, and any reserve
deemed necessary by the Managing General Partners for the payment
of such debts shall be set aside; and

(ii) the balance of the assets of the
Partnership (and any reserves not eventually used to satisfy
debts of the Partnership) shall be liquidated and distributed pro
rata to the Partners in accordance with the number of Shares held
by each.

(b) Upon dissolution, each Partner shall look
solely to the assets of the Partnership for the return of his
capital contribution and shall be entitled to receive only a
distribution of a pro rata share of Partnership property and
assets, as provided in Section 12.2 (a). If the Partnership
property remaining after the payment or discharge of the debts
and liabilities of the Partnership is insufficient to return the
capital contribution of each Limited Partner, such Limited
Partner shall have no recourse against any General Partner, the
assets of any other partnership of which any General Partner is a
partner, or any other Limited Partner. The winding up of the
affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the Managing General Partners,
who are authorized to do any and all acts and things authorized
by law for these purposes. In the event of dissolution where
there is no remaining General Partner, and there is a failure to
appoint a new General Partner, the winding up of the affairs of
the Partnership and the distribution of its assets shall be
conducted by such person as may be selected by Majority Vote,
which person is hereby authorized to do any and all acts and
things authorized by law for these purposes.

12.3 Termination. Upon the completion of the
distribution of Partnership assets as provided in this Section
and the termination of the Partnership, the General Partner(s) or
other person acting as liquidator (or the Limited Partners, if
necessary) shall cause the Certificate of Limited Partnership of
the Partnership to be cancelled and shall take such other actions
as may be necessary to legally terminate the Partnership.

13. BOOKS, RECORDS, ACCOUNTS AND REPORTS

13.1 Books and Records.

(a) The Partnership shall continuously maintain
an office in the State of California, at which the following
books and records shall be kept:

(i) A Partnership List (or copy thereof)
which shall be a current list of the full name and last known
business or residence address of each Partner, set forth in
alphabetical order together with the contribution and the share
in profits and losses of each Partner, which list shall
separately identify the interests of General and Limited
Partners.

(ii) A copy of the Certificate of Limited
Partnership and all certificates of amendments thereto, together
with executed copies of any powers of attorney pursuant to which
any such certificate has been executed.

(iii) Copies of the Partnership's Federal,
state and local income tax or information returns and reports, if
any, for the six most recent taxable years.

(iv) Copies of this Partnership Agreement
and all amendments thereto.

(v) Financial statements of the Partnership
for the six most recent fiscal years.

(vi) The Partnership's books and records for
at least the current and past three fiscal years.

(b) The Partnership shall also maintain at its
principal office such additional books and records as are
necessary for the operation of the Partnership.

13.2 Limited Partners' Rights to Records.

(a) Upon the request of a Limited Partner, the
Managing General Partners shall promptly deliver to the Limited
Partner, at the Partnership's expense, a copy of the items set
forth in Section 13.1(a)(i), (ii) and (iv), provided, however,
that such books and records and the information contained therein
shall be treated as confidential and that such access shall be
for proper Partnership purposes only and not for the private or
commercial use of any Partner and further provided that the
Partnership may require a Partner to enter into an undertaking to
that effect.

(b) Each Limited Partner shall have the right
upon reasonable request to each of the following:

(i) To inspect and copy during normal
business hours, at the Limited Partner's expense, any of the
Partnership's records required to be kept pursuant to the
Partnership Act.

(ii) To obtain from the Managing General
Partners promptly after becoming available, at the Limited
Partner's expense, a copy of any Federal, state and local income
tax or information returns required to be filed by the
Partnership for each year.

(c) The Managing General Partners shall promptly
furnish to a Limited Partner a copy of any amendment to this
Partnership Agreement executed by the Managing General Partners
pursuant to a power of attorney from the Limited Partner.

(d) The Managing General Partners shall send to
each Partner within ninety (90) days after the end of each
taxable year such information as is necessary to complete Federal
and state income tax or information returns or such information
as is required by the Tax Code.

(e) At any time that the Partnership shall have
more than 35 Limited Partners:

(i) The Managing General Partners shall
cause an annual report to be sent to each of the Partners not
later than 120 days after the close of the Partnership's fiscal
year. That report shall contain a balance sheet as of the end of
the fiscal year and an income statement and statement of changes
in financial position for the fiscal year.

(ii) Limited Partners representing at least
5% of the outstanding Shares of the Partnership may make a
written request to the Managing General Partners for an income
statement of the Partnership for the initial three-month, six-
month or nine-month period of the current fiscal year ended more
than thirty (30) days prior to the date of the request and a
balance sheet of the Partnership as of the end of that period.
The statement shall be delivered or mailed to the Limited
Partners within thirty (30) days thereafter.

(iii) The financial statements referred to in
this subsection shall be accompanied by the report thereon, if
any, of the independent accountants engaged by the Partnership
or, if there is no such report, the certificate of the Managing
General Partners that such financial statements were prepared
without audit from the books and records of the Partnership.

(f) The Managing General Partners shall cause to
be transmitted to each Partner such other reports and information
as shall be required by the 1940 Act, the Partnership Act or the
Tax Code.

13.3 Accounting Basis and Fiscal Year. The
Partnership's books and records (i) shall be kept on a basis
chosen by the Managing General Partners in accordance with the
accounting methods followed by the Partnership for Federal income
tax purposes and otherwise in accordance with generally accepted
accounting principles applied in a consistent manner, (ii) shall
reflect all Partnership transactions, (iii) shall be appropriate
and adequate for the Partnership's business and for the carrying
out of all provisions of this Partnership Agreement, and (iv)
shall be closed and balanced at the end of each Partnership
fiscal year. The fiscal year of the Partnership shall be the
calendar year.

13.4 Tax Returns. The Managing General Partners, at
the Partnership's expense, shall cause to be prepared any income
tax or information returns required to be made by the
Partnership and shall further cause such returns to be timely
filed with the appropriate authorities.

13.5 Filings with Regulatory Agencies. The Managing
General Partners, at the Partnership's expense, shall cause to be
prepared and timely filed with appropriate Federal and state
regulatory and administrative bodies, all reports required to be
filed with such entities under then current applicable laws,
rules and regulations.

13.6 Tax Matters and Notice Partner. The Managing
General Partners shall designate one or more General Partners as
the "Tax Matters Partner" and the "Notice Partner" of the
Partnership in accordance with Sections 6231(a)(7) and (8) of the
Tax Code, and each such Partner shall have no personal liability
arising out of his good faith performance of his duties in such
capacity. The "Tax Matters Partner" is authorized, at the
Partnership's sole cost and expense, to represent and to retain
legal counsel and accounting assistance to represent the
Partnership and each Limited Partner in connection with all
examinations of the Partnership affairs by tax authorities,
including any resulting administrative and judicial proceedings.
Each Limited Partner agrees to cooperate with the Managing
General Partners and to do or refrain from doing any and all
things reasonably required by the Managing General Partners to
conduct such proceeding. The Managing General Partners shall have
the right to settle any audits without the consent of the Limited
Partners.

14. AMENDMENTS OF PARTNERSHIP DOCUMENTS

14.1 Amendments in General. Except as otherwise
provided in this Partnership Agreement, the Partnership Agreement
may be amended only by the General Partners.

14.2 Amendments Without Consent of Limited Partners.
In addition to any amendments otherwise authorized herein and
except as otherwise provided, amendments may be made to this
Partnership Agreement from time to time by the General Partners
without the consent of any of the Limited Partners, including,
without limitation, amendments: (i) to reflect the retirement,
resignation, death or incompetency of a Managing General Partner;
(ii) to add to the duties or obligations of the General Partners,
or to surrender any right or power granted to the General
Partners herein, for the benefit of the Limited Partners; (iii)
to correct any false or erroneous statement, or to make a change
in any statement in order to make such statement accurately
represent the agreement among the General and Limited Partners;
(iv) to supply any omission or to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or (v) to
make such amendments as may be necessary to conform this
Partnership Agreement to the requirements of the Partnership
Act, the 1940 Act, the Tax Code or any other law or regulation
applicable to the Partnership, as now or hereafter in effect.

14.3 Amendments Needing Consent of Affected Partners.
Notwithstanding any other provision of this Partnership
Agreement, without the consent of the Partner or Partners to be
affected by any amendment to this Agreement, this Agreement may
not be amended to (i) convert a Limited Partner's interest into a
General Partner's interest, (ii) modify the limited liability of
a Limited Partner, (iii) alter the interest of a Partner in
income, gain, loss, deductions, credits, and distributions other
than by purchase or redemption of Shares, or (iv) increase, add
or alter any obligation of any Limited Partner.

14.4 Amendments to Certificate of Limited Partnership.

(a) The Managing General Partners shall cause to
be filed with the Secretary of State, within thirty (30) days
after the happening of any of the following events, an amendment
to the Certificate of Limited Partnership reflecting the
occurrence of any of the following events:

(i) A change in the name of the
Partnership.

(ii) A change in either of the following:

(A)The street address of the
Partnership's principal executive office.

(B)If the principal executive office is
not in California, the street address of an office in California.

(iii) A change in the address of or the
withdrawal of any of the General Partners, or a change in the
address of the agent for service of process, unless a corporate
agent is designated, or appointment of a new agent for service of
process.

(iv) The admission of a new General Partner
and that Partner's address.

(v) The discovery by the General Partner of
any false or erroneous material statement contained in the
Certificate of Limited Partnership.

(b) Any Certificate of Limited Partnership filed
or recorded in jurisdictions other than California shall be
amended as required by applicable law.

(c) The Certificate of Limited Partnership may
also be amended at any time in any other manner deemed
appropriate by the General Partner.

14.5 Amendments After Change of Law. This Agreement
and any other Partnership documents may be amended and refiled,
if necessary, by the Managing General Partners without the
consent of the Limited Partners if there occurs any change that
permits or requires an amendment of this Agreement under the Act
or of any other Partnership document under applicable law, so
long as no Partner is adversely affected (or consent is given by
such Partner).

15. MISCELLANEOUS PROVISIONS

15.1 Notices.

(a) Any written notice, offer, demand or
communication required or permitted to be given by any provision
of this Partnership Agreement, unless otherwise specified herein,
shall be deemed to have been sufficiently given for all purposes
if delivered personally to the party to whom the same is directed
or if sent by first class mail addressed (i) if to a General
Partner, to the principal place of business and office of the
Partnership specified in this Agreement and (ii) if to a Limited
Partner, to such Limited Partner's address as set forth in the
Partnership List; provided, however, that notice given by any
other means shall be deemed sufficient if actually received by
the party to whom it is directed.

(b) Any such notice that is sent by first class
mail shall be deemed to be given two (2) days after the date on
which the same is mailed.

(c) The Managing General Partners may change the
Partnership's address for purposes of this Partnership Agreement
by giving written notice of such change to the Limited Partners,
and any Limited Partner may change his address for purposes of
this Partnership Agreement by giving written notice of such
change to the Managing General Partners, in the manner herein
provided for the giving of notices.

15.2 Section Headings. The Section headings in this
Partnership Agreement are inserted for convenience and
identification only and are in no way intended to define or limit
the scope, extent or intent of this Partnership Agreement or any
of the provisions hereof.

15.3 Construction. Whenever the singular number is
used herein, the same shall include the plural; and the neuter,
masculine and feminine genders shall include each other, as
applicable. If any language is stricken or deleted from this
Partnership Agreement, such language shall be deemed never to
have appeared herein and no other implication shall be drawn
therefrom. The language in all parts of this Partnership
Agreement shall be in all cases construed according to its fair
meaning and not strictly for or against the General Partners or
the Limited Partners.

15.4 Severability. If any covenant, condition, term or
provision of this Partnership Agreement is illegal, or if the
application thereof to any person or in any circumstance shall to
any extent be judicially determined to be invalid or
unenforceable, the remainder of this Partnership Agreement, or
the application of such covenant, condition, term or provision to
persons or in circumstances other than those to which it is held
invalid or unenforceable, shall not be affected thereby, and each
remaining covenant, condition, term and provision of this
Partnership Agreement shall be valid and enforceable to the
fullest extent permitted by law.

15.5 Governing Law. This Partnership Agreement shall
be construed and enforced in accordance with, and governed by,
California law.

15.6 Counterparts. This Partnership Agreement may be
executed in one or more counterparts, each of which shall, for
all purposes, be deemed an original and all of such counterparts,
taken together, shall constitute one and the same Partnership
Agreement.

15.7 Entire Agreement. This Partnership Agreement and
the separate subscription agreements of each Limited Partner and
General Partner constitute the entire agreement of the parties as
to the subject matter hereof. All prior agreements among the
parties as to the subject matter hereof, whether written or oral,
are merged herein and shall be of no force or effect. This
Partnership Agreement cannot be changed, modified or discharged
orally but only by an agreement in writing. There are no
representations, warranties, or agreements other than those set
forth in this Partnership Agreement and such separate
subscription agreements, if any.

15.8 Cross-References. All cross-references in this
Partnership Agreement, unless specifically directed to another
agreement or document, refer to provisions in this Partnership
Agreement.

15.9 Power of Attorney to the General Partners.

(a) Each Partner hereby makes, constitutes and
appoints each Managing General Partner and any person designated
by the Managing General Partners, with full substitution, his
agent and attorney-in-fact in his name, place and stead, to take
any and all actions and to make, execute, swear to and
acknowledge, amend, file, record and deliver the following
documents and any other documents deemed by the Managing General
Partners necessary for the operations of the Partnership: (i) any
Certificate of Limited Partnership or Certificate of Amendment
thereto, required or permitted to be filed on behalf of the
Partnership, and any and all certificates as necessary to qualify
or continue the Partnership as a limited partnership or
partnership wherein the Limited Partners thereof have limited
liability in the states where the Partnership may be conducting
activities, and all instruments which effect a change or
modification of the Partnership in accordance with this
Partnership Agreement; (ii) this Partnership Agreement and any
amendments thereto in accordance with this Partnership Agreement;
(iii) any other instrument which is now or which may hereafter be
required or advisable to be filed for or on behalf of the
Partnership; (iv) any document which may be required to effect
the continuation of the Partnership, the admission of an
additional Limited Partner or Substituted Limited Partner, or the
dissolution and termination of the Partnership (provided such
continuation, admission or dissolution and termination is in
accordance with the terms of this Partnership Agreement), or to
reflect any reductions or additions in the amount of the
contributions of Partners, in each case having the power to
execute such instruments on his behalf, whether the undersigned
approved of such action or not; (v) any document containing any
investment representations and/or representations relating to
citizenship, residence and tax status required by any state or
Federal law or regulation in connection with an investment by the
Partnership; and (iv) any tax elections.

(b) This Power of Attorney is a special Power of
Attorney coupled with an interest, and shall not be revoked and
shall survive the transfer by any Limited Partner of all or part
of his interest in the Partnership and, being coupled with an
interest, shall survive the death or disability or cessation of
the existence as a legal entity of any Limited Partner; except
that where the successor in interest has been approved by said
attorney for admission to the Partnership as a Substituted
Limited Partner, this Power of Attorney shall survive the
transfer for the sole purpose of enabling said attorney to
execute, acknowledge and file any instrument necessary to
effectuate such substitution.

(c) Each Limited Partner hereby gives and grants
to his said attorney under this Power of Attorney full power and
authority to do and perform each and every act and thing
whatsoever requisite, necessary or appropriate to be done in or
in connection with this Power of Attorney as fully to all intents
and purposes as he might or could do if personally present,
hereby ratifying all that his said attorney shall lawfully do or
cause to be done by virtue of this Power of Attorney.

(d) The existence of this Power of Attorney shall
not preclude execution of any such instrument by the undersigned
individually on any such matter. A person dealing with the
Partnership may conclusively presume and rely on the fact that
any such instrument executed by such agent and attorney-in-fact
is authorized, regular and binding without further inquiry.

(e) The appointment of each Managing General
Partner and each designee of that General Partner as attorney-in-
fact pursuant to this power of attorney automatically shall
terminate as to such person at such time as he ceases to be a
General Partner and from such time shall be effective only as to
the substitute General Partner admitted in accordance with this
Partnership Agreement and his designees.

15.10 Further Assurances. The Limited Partners will
execute and deliver such further instruments and do such further
acts and things as may be required to carry out the intent and
purposes of this Partnership Agreement.

15.11 Successors and Assigns. Subject in all respects
to the limitations on transferability contained herein, this
Partnership Agreement shall be binding upon, and shall inure to
the benefit of, the heirs, administrators, personal
representatives, successors and assigns of the respective parties
hereto.

15.12 Waiver of Action for Partition. Each of the
parties hereto irrevocably waives during the term of the
Partnership and during the period of its liquidation following
any dissolution, any right that he may have to maintain any
action for partition with respect to any of the assets of the
Partnership.

15.13 Creditors. None of the provisions of this
Partnership Agreement shall be for the benefit of or enforceable
by any of the creditors of the Partnership or the Partners.

15.14 Remedies. The rights and remedies of the
Partners hereunder shall not be mutually exclusive, and the
exercise by any Partner of any right to which he is entitled
shall not preclude the exercise of any other right he may have.

15.15 Custodian. All assets of the Partnership shall
be held by a custodian meeting the requirements of the 1940 Act,
and may be registered in the name of the Partnership or such
custodian or nominee. The terms of the custodian agreement shall
be determined by the Managing General Partners.

15.16 Use of Name "Franklin. "Franklin Partners, Inc.,
as the initial Non-Managing General Partner, on behalf of its
parent, Franklin Resources, Inc., hereby consents to the use by
the Partnership of the name "Franklin" as part of the
Partnership's name; provided, however, that such consent shall be
conditioned upon the employment of Franklin Resources, Inc. or
one of its affiliates as an investment adviser of the
Partnership. The name "Franklin" or any variation thereof may be
used from time to time in other connections and for other
purposes by Franklin Resources, Inc. and its affiliates and other
investment companies that have obtained consent to use the name
"Franklin." Franklin Resources, Inc. and its affiliates shall
have the right to require the Partnership to cease using the name
"Franklin" as part of the Partnership's name if the Partnership
ceases, for any reason, to employ Franklin Resources, Inc. or one
of its affiliates as its investment adviser. Future names adopted
by the Partnership for itself, insofar as such names include
identifying words requiring the consent of Franklin Resources,
Inc. or one of its affiliates, shall be the property of Franklin
Resources, Inc. and its affiliates and shall be subject to the
same terms and conditions.

15.17 Authority. Each individual executing this
Agreement on behalf of a partnership, corporation, or other
entity warrants that he is authorized to do so and that this
agreement will constitute the legal binding obligation of the
entity which he represents.

15.18 Signatures. The signature of a Managing General
Partners or an Officer or agent of the Partnership duly appointed
by the Managing General Partners shall be sufficient to bind the
Partnership to any agreement or on any document, including, but
not limited to, documents drawn or agreements made in connection
with the acquisition or disposition of any assets.

15.19 Arbitration. The parties hereby submit all
controversies, claims and matters of difference to arbitration
before a single arbitrator in San Francisco, California,
according to the rules and practices of the American Arbitration
Association from time to time in force. This submission and
agreement to arbitrate shall be specifically enforceable. Without
limiting the generality of the foregoing, the following shall be
considered controversies for this purpose: (a) all questions
relating to the breach of any obligation, warranty, agreement or
condition hereunder; (b) failure of any party to deny or reject a
claim or demand of any other party; and (c) all questions as to
whether the right to arbitrate any question exists. Arbitration
may proceed in the absence of any party if written notice
(pursuant to the American Arbitration Association's rules and
regulations) of the proceedings has been given to such party. The
parties agree to abide by all awards rendered in such
proceedings. Such awards shall be final and binding on all
parties to the extent and in the manner provided by California
statute. All awards may be filed with the Clerk of the Superior
Court in San Francisco, California, as a basis of judgment and of
the issuance of execution for its collection and, at the election
of the party making such filing, with the clerk of one or more
other courts, state or Federal, having jurisdiction over the
party against whom such an award is rendered or his property.

The attached Agreement of Limited Partnership reflects the
amendments thereto duly adopted by the Managing General Partners
on April 23, 1991.

May 1, 1991
/s/ Charles B. Johnson
Charles B. Johnson, Managing
General Partner on behalf of
all Partners pursuant to Power
of Attorney

FRANKLIN TAX-ADVANTAGED
HIGH YIELD SECURITIES FUND
(A CALIFORNIA LIMITED PARTNERSHIP)

AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
Dated May 1, 1987
as amended April 28, 1988 and May 1, 1991

APPENDIX "B"

TABLE OF CONTENTS

1. GENERAL PROVISIONS
1.1 Formation
1.2 Name and Place of Business
1.3 Term
1.4 Agent for Service of Process
1.5 Certificate of Limited Partnership
1.6 Other Acts/Filings

3. ACTIVITIES AND PURPOSE
3.1 Operating Policy
3.2 Investment Objectives
3.3 Investment and Operating Limitations
3.4 Other Authorized Activities

6. SHARES OF PARTNERSHIP INTEREST

7. PURCHASE AND EXCHANGE OF SHARES
7.1 Purchase of Shares
7.2 Net Asset Value
7.3 Exchange of Shares

8. REDEMPTION OR REPURCHASE OF SHARES
8.1 Redemption of Shares
8.2 Payment for Redeemed Shares

11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION OF
PARTNERS
11.1 Prohibition on Assignment
11.2 Rights of the Holders of Shares as Collateral or Judgment
Creditor
11.3 Death, Incompetency, Bankruptcy or Termination of the
Existence of a Partner
11.4 Substituted Limited Partners

12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
12.1 Dissolution
12.2 Liquidation
12.3 Termination

15. MISCELLANEOUS PROVISIONS
15.1 Notices
15.2 Section Headings
15.3 Construction
15.4 Severability
15.5 Governing Law
15.6 Counterparts
15.7 Entire Agreement
15.8 Cross-References
15.9 Power of Attorney to the General Partners
15.10 Further Assurances
15.11 Successors and Assigns
15.12 Waiver of Action for Partition
15.13 Creditors
15.14 Remedies
15.15 Custodian
15.16 Use of Name "Franklin"
15.17 Authority
15.18 Signatures
15.19 Arbitration

FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND
(a California limited partnership)

This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
("Partnership Agreement") is entered into as of this 1st day of
May, 1987 by and among the undersigned individuals, as Managing
General Partners; FRANKLIN PARTNERS, INC., a California
corporation, as Non-Managing General Partner (collectively, the
"General Partners"); and each of the persons identified on the
Partnership List of the Partnership as limited partners (the
"Limited Partners").

This Partnership Agreement amends and restates in its
entirety the Agreement of Limited Partnership dated as of January
20, 1987.

1. GENERAL PROVISIONS

1.2 Name and Place of Business. The name of the
Partnership is Franklin Tax-Advantaged High Yield Securities Fund
(a California limited partnership), or such other name as shall
be selected from time to time by the Managing General Partners
upon notice to the Limited Partners. The principal place of
business of the Partnership shall be 777 Mariners Island
Boulevard, San Mateo, California 94404, or such other place or
places as the Managing General Partners may deem necessary or
desirable to the conduct of the Partnership's activities,
including places or the conduct of activities relating to its
investments, the location and holding of its assets, the
execution of its portfolio transactions and other operations.

2. DEFINITIONS

When used in this Partnership Agreement the following terms
shall have the meanings set forth below:

2.1 Affiliate. "Affiliate" shall mean: (i) any person
directly or indirectly controlling, controlled by or under common
control with another person; (ii) a person owning or controlling
10% or more of the outstanding securities of that other person;
(iii) any officer, director or partner of that other person; and
(iv) if that other person is an officer, director or partner, any
company for which that person acts in any such capacity (person
shall include any natural person, partnership, corporation,
association or other legal entity).