FRANKLIN INVESTORS SECURITIES TRUST, N-14AE, 1999-01-12

FRANKLIN INVESTORS SECURITIES TRUST
N-14AE, 1999-01-12

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File Nos. 811-4986
33-11444
AS FILED JANUARY 12, 1999

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No.
(Check appropriate box or boxes)

FRANKLIN INVESTORS SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)

(650) 312-2000
(Area Code and Telephone Number)

777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94403-7777
(Address of Principal Executive Offices
Number, Street, City, State, Zip Code)

HARMON E. BURNS
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94403-7777
(Name and Address of Agent for Service,
Number, Street, City, State, Zip Code)

Copies to:

BRUCE G. LETO, ESQUIRE
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PA 19103

Approximate Date of Proposed Public Offering: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
UNDER THE SECURITIES ACT OF 1933.

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE
PREVIOUSLY BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT
COMPANY ACT OF 1940. A RULE 24F-2 NOTICE FOR THE REGISTRANT'S FISCAL YEAR
ENDED OCTOBER 31, 1998 WAS FILED ON SEPTEMBER 24, 1998.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON FEBRUARY 11, 1999,
PURSUANT TO RULE 488.

FRANKLIN INVESTORS SECURITIES TRUST

CROSS REFERENCE SHEET
(Pursuant to rule 481(a) under the
Securities Act of 1933)

N-14 ITEM NO. AND CAPTION LOCATION IN PROSPECTUS
PART A
1. Beginning of Registration Facing Page of Registration Statement;
Statement and Outside Front Cover Front Cover Page of Prospectus
Page of Prospectus
2. Beginning and Outside Back Cover Table of Contents
Page of Prospectus
3. Fee Table, Synopsis Information Summary; Comparisons of Some Important
and Risk Factors Features
4. Information About the Transaction Summary; Reasons for the Transaction;
Information About the Transaction
5. Information About the Registrant Prospectus Cover Page; Summary;
Comparisons of Some Important
Features; Comparison of Investment
Objectives and Policies; Information
About the Funds
6. Information About the Company Prospectus Cover Page; Comparisons of
Being Acquired Some Important Features; Comparison of
Investment Objectives and Policies;
Information About the Funds
7. Voting Information Prospectus Cover Page; Notice of
Special Shareholders Meeting; Voting
Information; Principal Stockholders
8. Interest of Certain Persons and None
Experts
9. Additional Information Required Not Applicable
for Reoffering by Persons Deemed to
be Underwriters

PART B
10. Cover Page Cover Page of Statement of Additional
Information
11. Table of Contents Not Applicable
12. Additional Information about the Incorporation of Documents by
Registrant Reference in the Statement of
Additional Information
13. Additional Information about the Incorporation of Documents by
Company being Acquired Reference in the Statement of
Additional Information
14. Financial Statements Incorporation of Documents by
Reference in the Statement of
Additional Information

PART C - OTHER INFORMATION

Part C contains the information required by Items 15-17 under the items set
forth in the form.

Dear Shareholder:

Enclosed is a Notice of Meeting for a Special Shareholders Meeting.
The Meeting has been called for April 9, 1999 at 3:00 p.m. Pacific time, at
the offices of Franklin Investors Securities Trust at 777 Mariners Island
Blvd., San Mateo, CA 94404. The accompanying Proxy Statement/Prospectus
describes a proposal being presented for your consideration and requests your
prompt attention and vote via the enclosed proxy card.

PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND

RETURN THE ENCLOSED PROXY CARD!

This meeting is critically important. You are being asked to consider
and approve a Plan of Reorganization which would result in your shares of the
Franklin Adjustable Rate Securities Fund (the "Adjustable Rate Fund") being
exchanged for those of a fund called the Franklin Adjustable U.S. Government
Securities Fund (the "Adjustable USG Fund"). If shareholders approve the
proposal, you will receive shares of Adjustable USG Fund equal in value to
your investment in shares of the Adjustable Rate Fund. You will no longer be
a shareholder of the Adjustable Rate Fund, and you will instead be a
shareholder of Adjustable USG Fund.

The proposed transaction is intended to be a tax-free reorganization
under the Internal Revenue Code of 1986, as amended, as further described in
the accompanying Prospectus/Proxy Statement.

The transaction is being proposed because the projected growth in
assets of Adjustable Rate Fund is not sufficient to continue to offer a fund
with competitive performance and high quality service to shareholders over
the long term. Adjustable USG Fund has investment objectives and investment
policies substantially similar to Adjustable Rate Fund's, as outlined in the
combined proxy statement and prospectus. Adjustable USG Fund is administered
by Franklin Advisers, Inc., the current administrator of Adjustable Rate
Fund. The underlying investment portfolios for both Funds are also managed
by the same team of managers within Franklin Advisers, Inc. Adjustable USG
Fund is a larger fund that should be better able to diversify its investments
and to obtain certain savings in costs for shareholders.

Please take the time to review this document and VOTE NOW!

o To ensure that your vote is counted, indicate your
position on the enclosed proxy card.

o Sign and return your card promptly.

o If you determine at a later date that you wish to
attend this meeting, you may revoke your proxy and vote
in person.

Thank you for your attention to this matter.

Sincerely,

/s/ Deborah R. Gatzek
Secretary

PRELIMINARY COPY
FRANKLIN INVESTORS SECURITIES TRUST
777 Mariners Island Blvd.
San Mateo, CA 94404

NOTICE OF SPECIAL SHAREHOLDERS MEETING
To Be Held on April 9, 1999

To the Shareholders of Franklin Adjustable Rate Securities Fund:

NOTICE IS HEREBY GIVEN that a Special Shareholders Meeting of the
Franklin Investors Securities Trust (the "Trust") will be held at the offices
of the Trust, 777 Mariners Island Blvd., San Mateo, CA 94404 on April 9, 1999
at 3:00 p.m. Pacific time. The Meeting is being called for the following
reasons:

1. To approve or disapprove a Plan of Reorganization between the
Franklin Adjustable Rate Securities Fund (the "Adjustable Rate Fund") and the
Franklin Adjustable U.S. Government Securities Fund (the "Adjustable USG
Fund") that provides for: (i) the acquisition of substantially all of the
assets of Adjustable Rate Fund in exchange for shares of Adjustable USG Fund,
(ii) the distribution of shares of Adjustable USG Fund to the shareholders of
shares of Adjustable Rate Fund, and (iii) the liquidation and dissolution of
Adjustable Rate Fund.

2. To vote upon any other business as may properly come before the
Meeting or any adjournment thereof.

The transaction contemplated by the Plan of Reorganization is described
in the attached Prospectus/Proxy Statement. A copy of the Plan of
Reorganization is attached as Exhibit A thereto.

Shareholders of record as of the close of business on January 29, 1999
are entitled to notice of, and to vote at, the Meeting or any adjournment
thereof.

By Order of the Board of Trustees,

/s/ Deborah R. Gatzek
Secretary

February 16, 1999

IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON. IF YOU
DO NOT EXPECT TO ATTEND THE MEETING, THE BOARD OF TRUSTEES URGES YOU TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE. IT IS IMPORTANT THAT YOU RETURN YOUR SIGNED
PROXY PROMPTLY SO THAT A QUORUM MAY BE ENSURED.

COMBINED PROXY STATEMENT AND PROSPECTUS

When reading this Proxy/Prospectus Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our
glossary section.

TABLE OF CONTENTS

COVER PAGE PAGE
SUMMARY
On what proposal am I being asked to vote?
What are the general tax consequences of the Transaction?
COMPARISONS OF SOME IMPORTANT FEATURES
How do the investment objectives and policies of the two Funds compare?
Who manages the two Funds?
What are the fees and expenses of each Fund and what might they be
after the Transaction?
Where can I find more financial information about the two Funds?
What are other key features of the two Funds?
Transfer Agency, Custody and Administrative Services
Fees and Expenses
Distribution Services
Purchases and Redemptions
Dividends and Distributions
What are the risks of an investment in Adjustable USG Fund?
Master/Feeder Fund Structure
Interest Rates
Mortgage Securities, Adjustable Rate Securities, and
Asset-Backed Securities
REASONS FOR THE TRANSACTION
INFORMATION ABOUT THE TRANSACTION
How will the Transaction be carried out?
Who will pay the expenses of the Transaction?
What are the tax consequences of the Transaction?
What should I know about the Class I Shares of the Adjustable USG Fund?
What are the capitalizations of the two Funds and what might the
capitalization
be after the Transaction?
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Are there any significant differences between the investment objectives
and strategies of the two Funds?
How do the investment policies of the two Funds compare?
What are the fundamental investment restrictions of the two Funds?
VOTING INFORMATION
How many votes are necessary to approve the Agreement and Plan?
How do I ensure my vote is accurately recorded?
Can I revoke my proxy?
What other matters will be voted upon at the Meeting?
Who is entitled to vote?
What other solicitations will be made?
Are there dissenters' rights?
INFORMATION ABOUT THE FUNDS
PRINCIPAL STOCKHOLDERS
GLOSSARY
USEFUL TERMS AND DEFINITIONS

PRELIMINARY COPY

COMBINED PROXY STATEMENT AND PROSPECTUS

Dated February ___, 1999

Acquisition of the Assets of
FRANKLIN ADJUSTABLE RATE SECURITIES FUND,
a series of Franklin Investors Securities Trust

By and in exchange for Shares of
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND,
a series of the Franklin Investors Securities Trust

This Prospectus/Proxy Statement solicits proxies to be voted at a
Special Shareholders Meeting (the "Meeting") to approve or disapprove a Plan
of Reorganization (the "Plan"). If shareholders vote to approve the Plan,
the net assets of the Franklin Adjustable Rate Securities Fund ("Adjustable
Rate Fund") will be acquired by and in exchange for shares of Franklin
Adjustable U.S. Government Securities Fund ("Adjustable USG Fund"). The
Meeting will be held at the principal offices of Franklin Investors
Securities Trust (the "Trust") at 777 Mariners Island Blvd. San Mateo, CA
94403-7777 on April 9, 1999 at 3:00 p.m. Pacific time. The Board of Trustees
of the Trust is soliciting these proxies. This Prospectus/Proxy Statement
will first be sent to shareholders on or about February 16, 1999.

If the shareholders vote to approve the Plan, you will receive shares
of Adjustable USG Fund equal in value to your investment in shares of
Adjustable Rate Fund. Adjustable Rate Fund will then be liquidated.

Like Adjustable Rate Fund, Adjustable USG Fund is a diversified series
of the Trust, an open-end management investment company. Adjustable USG
Fund's investment objective is to seek a high level of income, consistent
with a low volatility of principal. The Adjustable USG Fund seeks to achieve
its objective by investing all of its assets in shares of the U.S. Government
Adjustable Rate Mortgage Portfolio (the "Mortgage Portfolio"). The Mortgage
Portfolio, which has the same investment objective as the Adjustable USG
Fund, seeks to achieve its investment objective by investing at least 65% of
its total assets in adjustable rate mortgage securities or other securities
collateralized by or representing an interest in mortgages (collectively,
"Mortgage Securities") and having interest rates that reset at periodic
intervals. All mortgage securities that the Mortgage Portfolio invests in
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities.

This Prospectus/Proxy Statement gives the information about the shares
of Adjustable USG Fund that you should know before investing. You should
retain it for future reference. The prospectus of Adjustable USG Fund and
Adjustable Rate Fund dated March 1, 1998, as supplemented, is attached to,
and considered a part of, this Prospectus/Proxy Statement. You may find more
information about Adjustable USG Fund, Adjustable Rate Fund, the Trust and
the proposed reorganization in the following documents. You may request a
free copy of each document by calling 1-800-DIAL-BEN(R) or by writing the Fund
at 777 Mariners Island Boulevard, San Mateo, CA 94403-7777.

o The Statement of Additional Information dated February ___,
1999, relating to this Prospectus/Proxy Statement

o Adjustable USG Fund's and Adjustable Rate Fund's Prospectus, as
supplemented, and their Statement of Additional Information dated
March 1, 1998

o The Trust's Annual Report for the fiscal year ended October 31,
1997 and its Annual Report for the fiscal year ended October 31,
1998

Each of these documents is on file with the Securities and Exchange
Commission ("SEC") and is incorporated by reference herein.

As with other funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus/proxy statement. Any representation to the contrary is a criminal
offense.

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

SUMMARY

This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in
the rest of this Prospectus/Proxy Statement, including the Plan (attached as
Exhibit A) and the Prospectus of the Adjustable USG Fund and Adjustable Rate
Fund (attached as Exhibit B).

ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?

At a meeting held on December 15, 1998, the Board of Trustees of the
Trust approved the Plan (attached as Exhibit A) and recommended that
shareholders of the Adjustable Rate Fund vote to approve the Plan. If
shareholders vote to approve the Plan, the Adjustable Rate Fund's net assets
will be transferred to the Adjustable USG Fund, in exchange for an equal
value of shares of Adjustable USG Fund. The shares of Adjustable USG Fund
will then be distributed to Adjustable Rate Fund's shareholders and
Adjustable Rate Fund will be liquidated. (The proposed transaction is
referred to in this Prospectus/Proxy Statement as the "Transaction.") As a
result of the Transaction, you will cease to be a shareholder of Adjustable
Rate Fund and will become a shareholder of Adjustable USG Fund. This
exchange will occur on the Closing Date of the Transaction.

Adjustable USG Fund, like the Adjustable Rate Fund, is a series of the
Trust, which is a mutual fund in the Franklin Templeton Group of Funds. It
is administered by Franklin Advisers, Inc. It has investment objectives and
policies which are substantially similar but not identical to those of the
Adjustable Rate Fund. For the reasons set forth in the "Reasons for the
Transaction" section, the Board of Trustees of the Trust has determined that
the Transaction is in the best interests of the shareholders of both Funds.
The Board of Trustees concluded that no dilution in value would result to the
shareholders of either Fund as a result of the Transaction.

THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE TO APPROVE THE PLAN

WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?

It is expected that shareholders of Adjustable Rate Fund will not
recognize any gain or loss for federal income tax purposes, as a result of
the exchange of their shares for shares of Adjustable USG Fund. However, you
should consult your tax advisor regarding the effect, if any, of the
Transaction regarding your individual circumstances. In addition, you should
consult your tax advisor about state and local tax consequences. For further
information about the tax consequences of the Transaction, please see the
"Information About the Transaction - What are the consequences of the
Transaction?"

COMPARISONS OF SOME IMPORTANT FEATURES

HOW DO THE INVESTMENT OBJECTIVES AND POLICIES OF THE TWO FUNDS COMPARE?

The investment objectives of the Adjustable USG Fund and the Adjustable
Rate Fund are the same: both seek a high level of current income, consistent
with lower volatility of principal. The Adjustable USG Fund seeks to achieve
its investment objective by investing all of its assets in the U.S.
Government Adjustable Rate Mortgage Portfolio (the "Mortgage Portfolio").
The Adjustable Rate Fund seeks to achieve its investment objective by
investing all of its assets in shares of the Adjustable Rate Securities
Portfolio (the "Securities Portfolio"). The investment objective of each
underlying portfolio is the same as the Funds'.

The Mortgage Portfolio seeks to achieve its investment objective by
investing at least 65% of its total assets in adjustable rate mortgage
securities ("ARMS") or other securities collateralized by or representing an
interest in mortgages (collectively, "mortgage securities") and having
interest rates that reset at periodic intervals. The Mortgage Portfolio will
only invest in mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.

Similarly, the Securities Portfolio seeks to achieve its investment
objective by investing at least 65% of its total assets in mortgage
securities, including ARMS, issued or guaranteed by private institutions or
by the U.S. government, its agencies or instrumentalities, and other
adjustable-rate asset-backed securities (collectively "ARS"). Unlike the
Mortgage Portfolio, the Securities Portfolio may invest in ARMS issued by
private institutions, such as commercial banks, savings and loan
institutions, insurance companies, private mortgage insurance companies,
mortgage bankers, mortgage conduits of investment banks, finance companies,
real estate companies, private corporations and others, as long as they are
consistent with the Securities Portfolio's investment objective.

In addition, both the Mortgage Portfolio and the Securities Portfolio
may invest up to 35% of total assets in (a) notes, bonds, and discount notes
of the Federal Home Loan Banks, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC"), and Small Business Administration; (b)
obligations of or guaranteed by the full faith and credit of the U.S.
government and repurchase agreements collateralized by such obligations; (c)
time and savings deposits (including CDs) in commercial or savings banks or
in institutions whose accounts are insured by the Federal Deposit Insurance
Corporation; and (d) with respect to the Securities Portfolio only,
asset-backed and mortgage-backed securities issued by private and government
entities.

For further information about the investment objectives and policies of
the two funds, see "Comparison Of Investment Objectives and Policies."

WHO MANAGES THE TWO FUNDS?

The management of the business and affairs of both Funds is the
responsibility of the Board of Trustees. Both the Adjustable USG Fund and
the Adjustable Rate Fund are series of the Trust, an open-end management
investment company, commonly referred to as a "mutual fund." The Trust was
organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.

Franklin Advisers, Inc. ("Advisers") manages the assets of both the
Mortgage Portfolio and Securities Portfolio in which the Adjustable USG Fund
and Adjustable Rate Fund, respectively, invest. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"). Resources is a
publicly owned holding company engaged in various aspects of the financial
services industry through its subsidiaries. Together, Advisers and its
affiliates serve as investment manager or administrator to 54 registered
investment companies, with approximately 168 U.S. based funds or series.
Together, they have over $216 billion in assets under management for more
than 6 million U.S. mutual fund shareholder and other accounts. Resources'
principal shareholders are Charles B. Johnson and Rupert H. Johnson, Jr., who
own approximately 19% and 15%, respectively, of Resources' outstanding shares.

The team responsible for the day-to-day management of the Funds,
Mortgage Portfolio and Securities Portfolio is T. Anthony Coffey, Roger
Bayston and Jack Lemein. Information regarding these individuals and their
business experience for the last five years is given in the accompanying
prospectus of the Adjustable USG Fund and the Adjustable Rate Fund, under the
heading "Who Administers the Fund?"

WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?

PRO FORMA FEE TABLE FOR
ADJUSTABLE RATE FUND AND ADJUSTABLE USG FUND
FOR THE 12 MONTH PERIOD ENDED [OCTOBER 31, 1998]

ACTUAL
ADJUSTABLE ADJUSTABLE PRO FORMA
RATE USG AFTER
FUND FUND TRANSACTION
(UNAUDITED) (UNAUDITED) (UNAUDITED)
SHAREHOLDER TRANSACTION EXPENSES*

Maximum Sales Charge (as a
percentage of Offering Price)... 2.25% 2.25% 2.25%
Paid at time of purchase1....... 2.25% 2.25% 2.25%
Paid at redemption2............. None None None
Exchange Fee (per transaction)3 $5.00 $5.00 $5.00

ANNUAL FUND OPERATING EXPENSES
(as percentage of average net
assets at [DATE]:
Management and Administration
Fees4 ......................... 0.50% 0.50% 0.50%
Rule 12b-1 Fees5 ............... 0.25% 0.25% 0.25%
Other Expenses.................. 0.28% 0.18% 0.18%
Total Fund Operating Expenses... 1.03% 0.93% 0.93%

* IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE.

1 THERE IS NO FRONT-END SALES CHARGE IF YOU INVEST $1 MILLION OR MORE.

2 A CONTINGENT DEFERRED SALES CHARGE OF 1% MAY APPLY TO PURCHASES OF $1
MILLION OR MORE IF YOU SELL THE SHARES WITHIN ONE YEAR. A CDSC MAY ALSO
APPLY TO PURCHASES BY CERTAIN RETIREMENT PLANS THAT QUALIFY TO BUY SHARES
WITHOUT A FRONT-END SALES CHARGE. THE CHARGE IS 1% OF THE VALUE OF THE
SHARES SOLD OR THE NET ASSET VALUE AT THE TIME OF PURCHASE, WHICHEVER IS
LESS. SEE "HOW DO I SELL SHARES? - CONTINGENT DEFERRED SALES CHARGE" IN
THE FUNDS' PROSPECTUS FOR DETAILS.

3 $5.00 FEE FOR BOTH FUNDS IS ONLY FOR MARKET TIMERS AS DEFINED IN THE
GLOSSARY AND UNDER "EXCHANGE PRIVILEGE" IN THE FUNDS' PROSPECTUS. WE
PROCESS ALL OTHER EXCHANGES WITHOUT A FEE.

4 FOR THE PERIOD SHOWN, ADVISERS AGREED IN ADVANCE TO LIMIT ITS MANAGEMENT
FEES. WITH THIS REDUCTION, MANAGEMENT FEES OF THE SECURITIES PORTFOLIO AND
MORTGAGE PORTFOLIO WERE 0.21% AND 0.23%, RESPECTIVELY, AND ADMINISTRATION
FEES OF THE FUNDS WERE 0.10%. TOTAL OPERATING EXPENSES OF THE ADJUSTABLE
RATE FUND AND THE ADJUSTABLE USG FUND WERE 0.84% AND 0.76%, RESPECTIVELY.

5 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 THE NASD'S RULES.

EXAMPLE:

Assume the annual return for each class is 5% and operating expenses are as
described above. For each $10,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Adjustable Rate Fund $328** $545 $781 $1,456
Adjustable USG Fund $318** $515 $728 $1,.342
Pro Forma Adjustable USG Fund
(after proposed transaction) $318** $515 $728 $1,.342

**Assumes a Contingent Deferred Sales Charge will not apply.

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.

WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE TWO FUNDS?

The current prospectus of the Adjustable USG Fund and Adjustable Rate
Fund contains further financial information regarding per share income and
capital charges, under the heading "Financial Highlights."

WHAT ARE OTHER KEY FEATURES OF THE FUNDS?

MASTER/FEEDER FUND STRUCTURE. The Funds' structure, whereby they
invest all of their assets in a corresponding Portfolio, is sometimes known
as a "Master/Feeder Fund Structure." This is a relatively new format that
often results in certain operational and other complexities. The Franklin
organization was one of the first mutual fund complexes in the country to
implement this structure, and the Board does not believe the additional
complexities outweigh the potential benefits to be gained by shareholders.

The Funds' investment of all of their assets in a corresponding
Portfolio was previously approved by shareholders of each Fund. Whenever a
Fund, as an investor in the corresponding Portfolio, is asked to vote on a
matter relating to the Portfolio, such Fund will hold a meeting of
shareholders and will cast its votes in the same proportion as such Fund's
shareholders have voted.

The Franklin Templeton Funds have one other fund that invests in the
Mortgage Portfolio. It is designed for institutional investors only. In the
future, other funds may be created that may likewise invest in the
Portfolios, or existing funds may be restructured so that they may invest in
the Portfolios.

INVESTMENT MANAGEMENT, ADMINISTRATOR, AND FEES -- Advisers is the
investment manager for both the Mortgage Portfolio and Securities Portfolio.
Under its management agreement each Portfolio pays Advisers a management fee
equal to an annual rate of 40/100 of 1% of average daily net assets up to and
including $5 billion; 35/100 of 1% of net assets in excess of $5 billion up
to and including $10 billion; 33/100 of 1% of net assets in excess of $10
billion up to and including $15 billion; and 30/100 of 1% of net assets in
excess of $15 billion. The fee is computed at the close of business on the
last business day of each month.

Advisers also serves as administrator for both Adjustable USG Fund and
Adjustable Rate Fund. Under its administration agreement, each Fund pays
Advisers an administration fee equal to an annual rate of 10/100 of 1% of the
value of the Fund's average daily net assets up to and including $5 billion;
9/100 of 1% of net assets in excess of $5 billion up to and including $10
billion; and 8/100 of 1% of net assets in excess of $10 billion. The fee is
computed at the close of business of the last business day of each month.

TRANSFER AGENCY AND CUSTODY SERVICES -- Both Funds receive shareholder
accounting and other clerical services from Investor Services, Inc.
("Investor Services") in its capacity as transfer agent and dividend paying
agent. Investor Services is a wholly-owned subsidiary of Resources.

Bank of New York, located at 90 Washington Street, New York, New York,
10286, acts as custodian for the cash, securities and other assets of the
Adjustable USG Fund and the Adjustable Rate Fund.

DISTRIBUTION SERVICES -- Pursuant to an underwriting agreement,
Franklin/Templeton Distributors, Inc. ("Distributors") acts as principal
underwriter in a continuous public offering of shares of both the Adjustable
USG Fund and the Adjustable Rate Fund. The Board of Trustees has adopted
Plans of Distribution pursuant to Rule 12b-1 under the 1940 Act on behalf of
each Fund. Under the distribution plans each Fund may pay up to a maximum of
0.25% per year of its average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of its shares.
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. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.

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

OPERATING EXPENSES -- The ratio of operating expenses to average net
assets for the Adjustable USG Fund for its most recent fiscal year ended
October 31, 1998 was 0.76%. The ratio of operating expenses for the
Adjustable Rate Fund for its most recent fiscal year ended October 31, 1998
was 0.84%.

PURCHASES AND REDEMPTIONS -- Each Fund sells its shares on a continuous
basis at the current Offering Price. The current Offering Price is equal to
the Fund's net asset value plus any applicable sales charge. The maximum
front-end sales charge for the Adjustable USG Fund and the Adjustable Rate
Fund is 2.25%. The sales charge is reduced on sales of $100,000 or more.
Additionally, there are no sales charges on investments of $1 million or more
for either Fund. A contingent deferred sales charge of 1% may apply to
purchases of $1 million or more if you sell the shares of either Fund within
one year.

Both Funds require a minimum initial investment of $1,000 and
subsequent investments of at least $50. The minimums may be waived when
shares are purchased through retirement plans. Shares of both Funds may be
redeemed at their respective net asset value per share. Shares of each Fund
may be exchanged for shares of other Franklin Templeton Funds, subject to
certain restrictions. Additional information and specific instructions
explaining how to purchase and redeem shares of the Adjustable USG Fund and
the Adjustable Rate Fund are outlined in the current prospectus of the Funds,
under the heading "About Your Account." The prospectus for the Funds also
lists phone numbers for you to call if you have any questions regarding your
account, under the heading "What If I Have Questions About My Account?"

DIVIDENDS AND DISTRIBUTIONS -- Both Funds distribute substantially all
of their net investment income and net capital gains to their shareholders.
Such distributions are normally taxable to shareholders as income or capital
gains. Each Fund notifies its shareholders annually of the amount and nature
of such income or gains.

The Adjustable USG Fund declares dividends from its net investment
income monthly to shareholders of record on the first business day before the
15th of the month and pays them on or about the last day of that month. The
Adjustable Rate Fund declares dividends from its net investment income daily
and pays them monthly on or about the last day of the month. Capital gains,
if any, may be distributed annually by each Fund, usually in December. Both
Funds automatically reinvest dividend and capital gains distributions in
additional shares of each respective Fund, unless you select a different
option.

WHAT ARE THE RISKS OF AN INVESTMENT IN THE ADJUSTABLE USG FUND?

As with most investments, investments in the Adjustable USG Fund and
Adjustable Rate Fund involve risks. There can be no guarantee against losses
resulting from an investment in either Fund, nor can there be any assurance
that either Fund will achieve its investment objective. Because the
investment objectives and policies of the Adjustable USG Fund and the
Adjustable Rate Fund are substantially similar, the investment risks
associated with an investment in the Adjustable USG Fund are generally the
same as those of the Adjustable Rate Fund. There are, however, some
distinctions in the investment program of the Adjustable USG Fund and the
Adjustable Rate Fund. For example, the Adjustable USG Fund seeks to achieve
its investment objective by investing all of its investable assets in the
Mortgage Portfolio which will substantially invest in mortgage securities
that are only issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Adjustable Rate Fund seeks to achieve its investment
objective by investing all of its investable assets in the Securities
Portfolio which invests in a broader range of adjustable rate and mortgage
securities, including privately-issued mortgage securities and pass-through
pools. For information about the investment objectives and policies of the
two Funds, see "Comparison of Investment Objectives and Policies."

MASTER/FEEDER FUND STRUCTURE. An investment in each Fund may be
subject to certain risks due to each Fund's structure. These risks include
the potential that if other shareholders, if any, in the underlying Mortgage
Portfolio or Securities Portfolio, as applicable, sell their shares, the
corresponding Fund's expenses may increase or the economies of scale that
have been achieved as a result of the structure may diminish. Institutional
investors in an underlying Portfolio that have a greater pro rata ownership
interest in such Portfolio than the corresponding Fund could also have
effective voting control over the operation of that Portfolio. Furthermore,
if a Portfolio changes its objective or any of its fundamental policies and
shareholders of the corresponding Fund do not approve the change for the
Fund, the Fund may be forced to withdraw its investment from the Portfolio
and seek another investment company with the same objective and policies.

INTEREST RATES. Changes in interest rates will affect the value of the
Mortgage Portfolio and the Securities Portfolio and thus the corresponding
Fund's portfolio and their share prices. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of each Portfolio and the corresponding Fund's
shares. Interest rates have increased and decreased in the past, and these
changes are unpredictable.

MORTGAGE SECURITIES. The mortgage securities in which the Mortgage
Portfolio and the Securities Portfolio invest differ from conventional bonds
in that principal is paid over the life of the mortgage security rather than
at maturity. As a result, the holder of the mortgage securities receives
monthly scheduled payments of principal and interest and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal its receives, it may receive a rate of interest that
is lower than the rate on the existing mortgage securities. For this reason,
mortgage securities may be less effective than other types of U.S. government
securities as a means of "locking in" long-term interest rates. In general,
fixed-rate mortgage securities have greater exposure to this "prepayment
risk" than ARMS.

The market value of mortgage securities will generally vary inversely
with changes in market interest rates, declining when interest rates rise and
rising when interest rates decline. An unexpected rise in interest rates
could extend the life of a mortgage security because of a lower than expected
level of prepayments, potentially reducing the security's value and
increasing its volatility. ARMS, however, have less risk of a decline in
value during periods of rapidly rising rates but, like other mortgage
securities, may also have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. To the extent market
interest rates increase beyond applicable caps or maximum rates on ARMS or
beyond the coupon rates of fixed-rate mortgage securities, the market value
of the mortgage security would likely decline to the same extent as a
conventional fixed-rate security.

To the extent mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the holder's principal investment to the extent of the premium paid. If
mortgage securities are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current
and total returns and will accelerate the recognition of income that, when
distributed to shareholders, will be taxable as ordinary income.

Some of the CMOs in which the Mortgage Portfolio and the Securities
Portfolio may invest have less liquidity than other types of mortgage
securities. As a result, it may be difficult or impossible to sell the
securities at an advantageous price or time under certain circumstances.

With respect to pass-through mortgage pools issued by private issuers,
there is no assurance that private issuers of the securities will be able to
meet their obligations. Although the market for privately issued mortgage
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Mortgage Portfolio
may not invest in the private issuer pass-through mortgage assets that are
available to the Securities Portfolio. These securities are subject to the
Securities Portfolio's limit with respect to illiquid investments.

ADJUSTABLE RATE SECURITIES. The Mortgage Portfolio (and therefore, the
Adjustable USG Fund) only invests in ARS that are collateralized by or
represent an interest in underlying mortgages (i.e., ARMS), however, the
Securities portfolio (and therefore the Adjustable Rate Fund) invests in a
broader range of ARS that include both ARMS and non-mortgage debt
securities. As indicated above, the interest rate reset features of ARS held
by the Securities Portfolio will reduce the effect on the Securities
Portfolio's net asset value per share caused by changes in market interest
rates. The market value of ARS and therefore, the Securities Portfolio's and
Adjustable Rate Fund's net asset value may vary, however, to the extent that
the current interest rate on ARS differs from market interest rates during
periods between the interest rate reset dates. These variations in value
occur inversely to changes in the market interest rates. Thus, if market
interest rates rise above the current rates on the securities, the value of
the securities will decrease, and if market interest rates fall below the
current rate on the securities, the value of the securities will rise. The
longer the adjustment intervals of ARS held by the Securities Portfolio, the
greater the potential for fluctuations in the Securities Portfolio's and
Adjustable Rate Fund's net asset value.

ASSET-BACKED SECURITIES. The Mortgage Portfolio does not invest in
asset-backed securities and therefore the risks associated with those
securities are not present in the Adjustable USG Fund. Asset-backed
securities entail certain risks not present with mortgage-backed securities,
because they do not have the benefit of the same type of security interests
in the underlying collateral. Credit card receivables are generally
unsecured, and a number of state and federal customer credit laws give
debtors the right to set off certain amounts owned on credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables,
there is a risk that the holders may not have either a proper or first
security interest in all of the obligations backing the receivables due to
the large number of vehicles involved in a typical issuance and the technical
requirements imposed under state laws. Therefore, recoveries on repossessed
collateral may not always be available to support payments on securities
backed by these receivables.

Investments in fixed-rate securities generally decline in value during
periods of rising interest rates and increase in value when interest rates
fall. To the extent the Portfolios invest in fixed-rate securities, the
value of the Portfolios' and thus the Funds' shares will be more sensitive to
interest rate changes than if the Portfolios were fully invested in
adjustable-rate securities.

REASONS FOR THE TRANSACTION

The Board of Trustees of the Franklin Investors Securities Trust, on
behalf of the Adjustable Rate Fund and the Adjustable USG Fund, recommends
the Transaction in order to combine the Adjustable Rate Fund with the larger
Adjustable USG Fund. The larger Adjustable USG Fund should be better able to
diversify its investments and to obtain certain savings in costs for
Adjustable Rate Fund and its shareholders. The Board of Trustees recommends
the Transaction in order to combine two similar funds within the Franklin
Templeton Group to eliminate duplication of expenses and internal competition.

Because of the relatively low demand for Adjustable Rate Fund, Advisers
recommended to the Board of Trustees that Adjustable Rate Fund's assets be
sold to a larger fund that has similar investment objectives and policies.

The Plan was presented to Adjustable Rate Fund's Board of Trustees at a
meeting held on December 15, 1998. At the meeting the Board questioned
management about the potential benefits and costs to shareholders of the
Funds. In deciding whether to recommend approval of the Transaction to
shareholders, the Board considered, among other things: the expense ratios of
Adjustable Rate Fund and Adjustable USG Fund; the comparative investment
performance of Adjustable Rate Fund and Adjustable USG Fund; the
compatibility of the investment objectives, policies, restrictions and
portfolios of Adjustable Rate Fund with Adjustable USG Fund; the tax
consequences of the Transaction; and the significant experience of Advisers.
During the course of its deliberations, the Board of Trustees also considered
that the expenses of the Transaction will be shared equally by Adjustable
Rate Fund, Adjustable USG Fund and Advisers.

The Board of Trustees concluded that the Transaction is in the best
interests of the shareholders of both Funds and that no dilution of value
would result to the shareholders of either Fund from the Transaction. It
then decided to approve the Plan and to recommend that shareholders of
Adjustable Rate Fund vote to approve the Transaction. (As required by law,
the Trustees approving the Plan included a majority of the Trustees who are
not interested persons of the Trust.)

The Board's conclusion was based on a number of factors, including that
the Transaction would permit shareholders to pursue their investment goals in
a larger fund, the Adjustable USG Fund. This larger fund should have an
enhanced ability to effect portfolio transactions on more favorable terms and
should have greater investment flexibility. Generally, a fund with higher
aggregate net assets may also be able to reduce or eliminate certain
duplicate costs and expenses. This may result in lower overall expense
ratios through the spreading of fixed costs of fund operations over a larger
asset base. However, variable expenses that are based on the value of assets
or the number of shareholder accounts, such as custody and transfer agent
fees, would be largely unaffected by the Transaction.

FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES RECOMMENDS THAT
YOU VOTE FOR THE PLAN. If the Plan is not approved, the Board of Trustees
will consider other possible courses of action for the Adjustable Rate Fund,
including dissolution and liquidation.

INFORMATION ABOUT THE TRANSACTION

This is only a summary of the Plan. You should read the actual Plan.
It is attached as Exhibit A.

HOW WILL THE TRANSACTION BE CARRIED OUT?

If the shareholders of Adjustable Rate Fund approve the Plan, the
Transaction will take place after the Funds satisfy various conditions,
including the delivery of certain documents. Adjustable USG Fund and
Adjustable Rate Fund will agree on a specific date for the actual Transaction
to take place. This is called the Closing Date. If the shareholders of
Adjustable Rate Fund do not approve the Plan, the Transaction will not take
place.

If the shareholders approve the Plan, Adjustable Rate Fund will deliver
to Adjustable USG Fund substantially all of its assets on the Closing Date.
In exchange, Adjustable Rate Fund will receive shares of Adjustable USG Fund
which have a value equal to the dollar value of the assets delivered to
Adjustable USG Fund. The stock transfer books of Adjustable Rate Fund will
be permanently closed as of 1:00 p.m. Pacific time on the Closing Date.
Adjustable Rate Fund only will accept requests for redemption received in
proper form before 1:00 p.m. on the Closing Date. Requests received after
that time will be considered requests to redeem shares of Adjustable USG
Fund.

To the extent permitted by law, the Funds may agree to amend the Plan
without shareholder approval. They may also agree to terminate and abandon
the Transaction at any time before or, to the extent permitted by law, after
the approval of shareholders of Adjustable Rate Fund.

WHO WILL PAY THE EXPENSES OF THE TRANSACTION?

The expenses resulting from the Transaction will be split equally by
the following three parties: Adjustable Rate Fund, Adjustable USG Fund and
Advisers. As described above, Advisers is the investment adviser for the
Funds involved in the Transaction.

WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?

The Transaction is intended to qualify as a tax-free reorganization for
Federal income tax purposes under Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended. Based on certain assumptions and representations
received from Adjustable Rate Fund and Adjustable USG Fund, it is the opinion
of Stradley, Ronon, Stevens & Young, LLP, counsel to the Funds, that
shareholders of Adjustable Rate Fund will not recognize any gain or loss for
federal income tax purposes as a result of the exchange of their shares of
Adjustable Rate Fund for shares of Adjustable USG Fund and that Adjustable
USG Fund will not recognize any gain or loss upon receipt of the assets of
the Adjustable Rate Fund.

You should consult your tax advisor regarding the effect, if any, of
the Transaction in light of your individual circumstances. You should also
consult your tax adviser as to state and local tax consequences, if any, of
the Transaction, because the above discussion only relates to the federal
income tax consequences.

WHAT SHOULD I KNOW ABOUT SHARES OF ADJUSTABLE USG FUND?

Shares of Adjustable USG Fund will be distributed to shareholders of
the Adjustable Rate Fund. Each share will be fully paid and nonassessable
when issued with no personal liability attaching to the ownership thereof,
will have no preemptive or conversion rights and will be transferable upon
the books of Adjustable USG Fund. The shares of Adjustable USG Fund will be
recorded electronically in each shareholder's account. Adjustable USG Fund
will then send a confirmation to each shareholder. As described in its
prospectus, Adjustable USG Fund does not issue share certificates unless
requested. Former shareholders of the Adjustable Rate Fund whose shares are
represented by outstanding share certificates will not be allowed to redeem
shares of the Adjustable USG Fund until the certificates have been returned.

Both Adjustable Rate Fund and Adjustable USG Fund have non-cumulative
voting rights. This gives the holders of more than 50% of the shares voting
the ability to elect 100% of the Trustees.

Like Adjustable Rate Fund, Adjustable USG Fund does not routinely hold
annual shareholders meetings.

WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION
BE AFTER THE TRANSACTION?

The following table sets forth as of October 31, 1998 (i) the
capitalization of Adjustable Rate Fund, (ii) the capitalization of Adjustable
USG Fund, and (iii) the pro forma capitalization of Adjustable USG Fund as
adjusted to give effect to the proposed Transaction. The capitalization of
Adjustable USG Fund is likely to be different when the Transaction is
consummated.

ADJUSTABLE ADJUSTABLE ADJUSTABLE
RATE FUND USG FUND USG FUND -
PRO FORMA
AFTER
REORGANIZATION
(UNAUDITED)

Net assets.. $28,892,380 $298,297,591 $327,189,971
Shares outstanding 2,903,576 31,854,776 34,941,569
Net asset value per share $9.95 $9.36 $9.36

COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES

This section describes key investment policies of the Adjustable USG
Fund and the Adjustable Rate Fund, and certain noteworthy differences between
the investment objectives and policies of the two Funds. For a complete
description of the Funds' investment policies and risks please review the
prospectus dated March 1, 1998, which is attached to this Prospectus/Proxy
Statement (Exhibit B).

ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT OBJECTIVES AND
STRATEGIES OF THE TWO FUNDS?

Both the Adjustable USG Fund's and the Adjustable Rate Fund's
investment objective is to seek a high level of current income, consistent
with lower volatility of principal. The Adjustable USG Fund seeks to achieve
its investment objective by investing all of its assets in the Mortgage
Portfolio. The Adjustable Rate Fund seeks to achieve its investment
objective by investing all of its assets in shares of the Securities
Portfolio. The investment objective of each Portfolio is the same as the
Funds'.

The Securities Portfolio seeks to achieve its investment objective by
investing at least 65% of its total assets in mortgage securities including
ARMS, issued or guaranteed by private institutions or by the U.S. government,
its agencies or instrumentalities, and other adjustable-rate asset-backed
securities (collectively "ARS") which have interest rates that reset at
periodic intervals. The Securities Portfolio may invest in ARMS issued by
private institutions, such as commercial banks, savings and loan
institutions, insurance companies, private mortgage insurance companies,
mortgage bankers, mortgage conduits of investment banks, finance companies,
real estate companies, private corporations and others, as long as they are
consistent with the Securities Portfolio's investment objective. The
Securities Portfolio will only invest in securities rated at least AA by S&P(R)
or Aa by Moody's. The Securities Portfolio may also invest in unrated
securities if the Adviser determines that they are of comparable quality to
the ratings above.

The Mortgage Portfolio and the Securities Portfolio may also invest up
to 35% of their respective total assets in (a) notes, bonds, and discount
notes of the Federal Home Loan Banks, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC"), and Small Business Administration; (b)
obligations of or guaranteed by the full faith and credit of the U.S.
government and repurchase agreements collateralized by such obligations; (c)
time and savings deposits (including CDs) in commercial or savings banks or
in institutions whose accounts are insured by the Federal Deposit Insurance
Corporation; and (d) with respect to the Securities Portfolio only,
asset-backed and mortgage-backed securities issued by private and government
entities. Investments in time deposits such investments will not exceed 10%
of the Portfolio's total assets.

HOW DO THE INVESTMENT POLICIES OF THE PORTFOLIOS COMPARE?

In seeking to achieve their investment objectives and those of the
Funds, both the Mortgage Portfolio and Securities Portfolio invest a
substantial percentage of their assets in mortgage securities. In addition
to mortgage securities, both Portfolios also invest in collateralized
mortgage obligations ("CMOs"), real estate mortgage investment conduits
("REMICs") and multi-class pass-throughs. The primary difference between the
Adjustable USG Fund and Adjustable Rate Fund is the broader range of
adjustable rate securities that the Securities Portfolio may invest in as
compared to the Mortgage Portfolio. Specifically, the Securities Portfolio
will invest primarily in adjustable rate mortgage securities and may invest
in stripped mortgage securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, floaters and asset-backed securities. In
addition, the Securities Portfolio is able to invest in a broad range of
mortgage securities which include mortgage securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or private
institutions in contrast to the Mortgage Portfolio which only invests in
mortgage securities issued or guaranteed by the U.S. governments, its
agencies or instrumentalities.

The Securities Portfolio may invest in both rated and unrated
securities, while the Mortgage Portfolio is limited to mortgage securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Securities Portfolio will invest in securities rated
at least AA by S&P(R) or Aa by Moody's, as well as unrated securities if
determined by Advisers to be of comparable quality. Both Portfolios may
engage in covered and uncovered mortgage dollar rolls, repurchase agreements
and when-issued and delayed-delivery transactions. Each Portfolio will
engage in when-issued and delayed-delivery securities for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies and not for the purpose of investment leverage. The Portfolios are
not subject to any percentage limitation on the amount of assets that may be
invested in when-issued purchase obligations.

For temporary defensive purposes, both Portfolios may invest up to 100%
of their assets in U.S. government securities, certificates of deposit of
banks having total assets in excess of $5 billion, and repurchase agreements.

To generate additional income, both Portfolios may lend their portfolio
securities if such loans do not exceed 10% of the value of the Portfolio's
total assets at the time of the most recent loan. In addition, both
Portfolios may also invest up to 10% of their total assets in illiquid
securities. Illiquid securities are generally securities that cannot be sold
within seven days in the normal course of business at approximately the
amount at which the Portfolio has valued them.

The Securities Portfolio may increase its investment portfolio through
borrowing in amounts up to 33 1/3% of its total assets. When the Securities
Portfolio leverages its assets in this manner, the Portfolio's net asset
value may increase or decrease at a greater rate than if the Portfolio was
not leveraged. Conversely, the Mortgage Portfolio may only borrow money for
temporary or emergency purposes from banks in an amount up to 20% of total
asset value. The Mortgage Portfolio is not permitted to make additional
purchases of investment securities while its borrowings are in excess of 5%
of total assets. The Adjustable USG Fund and Adjustable Rate Fund may only
borrow for temporary or emergency purposes from banks in an amount up to 20%
of the Fund's total asset value.

WHAT ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS?

Both the Funds have adopted certain investment restrictions governing
their activities. Unless otherwise noted, these restrictions cannot be
changed without shareholder approval. Many of the restrictions are the same
for both Funds, although there are differences as described below. If a
percentage restriction is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a
violation of any of the following restrictions.

The Funds may not borrow money or mortgage or pledge any of the assets
of the Trust, except that each Fund may borrow (and pledge assets therefor)
for temporary or emergency purposes from banks in an amount up to 20% of its
total asset value.

The Funds may not buy any securities on "margin" or sell any securities
"short." In addition, both Funds are restricted from acting as an
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, and except that all
or substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and
policies of that Fund.

The Funds may not lend any funds or other assets, except by the
purchase of publicly distributed bonds, debentures, notes or other debt
securities, and except that securities of each Fund may be loaned to
securities dealers or other institutional investors if at least 102% cash
collateral is pledged and maintained by the borrower, provided such loans may
not be made if, as a result, the aggregate of such loans exceeds 10% of the
value of that Fund's total assets at the time of the most recent loan. The
entry into repurchase agreements is not considered a loan for purposes of
this restriction.

Both Funds are limited in the extent to which they may purchase the
securities of any single issuer. The Funds may not invest more than 5% of the
value of their respective gross assets in the securities of any one issuer
(other than obligations of the U.S. ) or own more than 10% of any class of
the outstanding voting securities of such issuer, except that all or
substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and
policies. To the extent permitted by exemptions granted under the 1940 Act,
the Funds may invest in shares of one or more money market funds managed by
Franklin Advisers, Inc. or its affiliates. Additionally, both Funds are
restricted from investing in companies for the purpose of exercising control
or management, except that, to the extent this restriction is applicable, all
or substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and
policies of that Fund.

The Funds may not purchase from or sell to their officers and trustees,
or any firm of which any officer or trustee is a member, as principal, any
securities, but may deal with such persons or firms as brokers and pay a
customary brokerage commission, or retain securities of any issuer if, to the
knowledge of the Trust, one or more of its officers, trustees, or investment
advisor own beneficially more than 1/2 of 1% of the securities of such issuer
and all such officers and trustees together own beneficially more than 5% of
such securities.

The Funds are prohibited from purchasing any securities issued by a
corporation which has not been in continuous operation for three years.
Calculation of this period includes the operation of a predecessor, except
that, to the extent this restriction is applicable, all or substantially all
of the assets of each Fund may be invested in another registered investment
company having the same investment objective and policies of that Fund.

Neither of the Funds may acquire, lease or hold real estate.

The Funds may not invest in commodities and commodity contracts, puts,
calls, straddles, spreads, or any combination thereof or interests in oil,
gas or other mineral exploration or development programs.

The Funds may not issue senior securities, as defined in the 1940 Act,
except that this restriction will not prevent the Funds from entering into
repurchase agreements or making borrowings, mortgages and pledges as
permitted by the restriction discussing borrowings.

With respect to investments in other investment companies, the Funds
may not purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization,
except that all or substantially all of the assets of each Fund may be
invested in another registered investment company having the same investment
objective and policies as each respective Fund. In addition, the Funds may
invest their uninvested daily cash balances in shares of the Franklin Money
Fund and other money market funds in the Franklin Funds provided (i) the
purchase and redemptions of such money fund shares may not be subject to any
purchase or redemption fees, (ii) the investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the Fund's shares (as determined under Rule 12b-1 under federal
securities laws) and (iii) provided aggregate investments by a Fund in any
such money fund do not exceed (A) the greater of (i) 5% of the Fund's total
net assets or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money fund.

The investment restrictions of the Mortgage Portfolio and the
Securities Portfolio are the same as Adjustable USG Fund's and Adjustable
Rate Fund's, respectively, except as indicated below and as necessary to
reflect the policy of the Funds to invest all their assets in shares of the
Mortgage Portfolio or Securities Portfolio.

The Mortgage Portfolio may not borrow money or mortgage or pledge any
of its assets, except that borrowings (and a pledge of assets therefor) for
temporary or emergency purposes may be made from banks in an amount up to 20%
of total asset value. The Mortgage Portfolio will not purchase additional
investment securities while borrowings in excess of 5% of total assets are
outstanding. The Securities Portfolio may not borrow money or mortgage or
pledge any of its assets in an amount exceeding 33 1/3% of the value of the
Securities Portfolio's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time the
borrowing was made.

Neither the Mortgage Portfolio nor the Securities Portfolio may buy any
securities on "margin" or sell any securities "short," except for any delayed
delivery or when-issued securities as described in the Prospectus.

Neither the Mortgage Portfolio nor the Securities Portfolio may
purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may
be granted under the 1940 Act, the Mortgage Portfolio and the Securities
Portfolio may invest in shares of one or more money market funds managed by
Advisers or its affiliates.

VOTING INFORMATION

HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?

The affirmative vote of the holders of a majority of the total number
of shares of Adjustable Rate Fund outstanding and entitled to vote is
necessary to approve the Plan. Each shareholder will be entitled to one vote
for each full share, and a fractional vote for each fractional share of
Adjustable Rate Fund held on the Record Date. If sufficient votes to approve
the proposal are not received by the date of the Meeting, the Meeting may be
adjourned to permit further solicitation of proxies. The holders of a
majority of shares entitled to vote at the Meeting and present in person or
by proxy (whether or not sufficient to constitute a quorum) or any officer
present entitled to preside or act as Secretary of the Meeting may adjourn
the Meeting.

HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?

You can vote in any one of four ways:

o By mail, with the enclosed proxy card.
o In person at the Meeting.
o Through Shareholder Communications Corporation ("SCC"), a proxy
solicitor, by calling 1-800/733-8481, ext. 420 or faxing your
completed ballot to SCC at 1-800/733-1885.

A proxy card is, in essence, a ballot. If you simply sign and date the proxy
but give no voting instructions, your shares will be voted IN FAVOR of the
Plan and in accordance with the views of management upon any unexpected
matters that come before the Meeting or adjournment of the Meeting.

CAN I REVOKE MY PROXY?

Yes. You may revoke your proxy at any time before it is voted (i) by
sending a written notice to Adjustable Rate Fund expressly revoking your
proxy, (ii) by signing and forwarding to Adjustable Rate Fund a later-dated
proxy, or (iii) by attending the Meeting and voting in person.

WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?

The Board of Trustees does not intend to bring any matters before the
Meeting other than those described in this proxy. It is not aware of any
other matters to be brought before the Meeting by others. If any other
matters legally come before the Meeting, proxies for which discretion has
been granted will be voted in accordance with the views of management.

WHO IS ENTITLED TO VOTE?

Shareholders of record of Adjustable Rate Fund at the close of business
on January 29, 1999 (the "Record Date") will be entitled to vote at the
meeting. On the Record Date, there were ______________ outstanding shares of
Adjustable Rate Fund. Under relevant state law and the Trust's charter
documents, abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at the Meeting, but will be treated
as votes not cast and, therefore, will not be counted for purposes of
determining whether the matters to be voted upon at the Meeting have been
approved.

WHAT OTHER SOLICITATIONS WILL BE MADE?

Adjustable Rate Fund will request broker-dealer firms, custodians,
nominees and fiduciaries to forward proxy material to the beneficial owners
of the shares of record. The Adjustable Rate Fund may reimburse
broker-dealer firms, custodians, nominees and fiduciaries for their
reasonable expenses incurred in connection with such proxy solicitation. In
addition to solicitations by mail, officers and employees of Adjustable Rate
Fund and Adjustable USG Fund, without extra pay, may conduct additional
solicitations by telephone, telegraph and personal interviews. Adjustable
Rate Fund has engaged Shareholder Communications Corporation to solicit
proxies from brokers, banks, other institutional holders and individual
shareholders for an approximate fee, including out-of-pocket expenses ranging
between $4,277 and $5,272. The costs of any such additional solicitation and
of any adjourned session will be shared equally by Adjustable Rate Fund,
Adjustable USG Fund and Advisers.

ARE THERE DISSENTERS' RIGHTS?

No. It is the position of the Division of Investment Management
of the SEC that shareholders of Adjustable Rate Fund will not be entitled to
any "dissenters' rights" since the proposed Transaction involves two series
of an open-end investment company registered under the 1940 Act. Although no
dissenters' rights may be available, you have the right to redeem your shares
at net asset value until the Closing Date. After the Closing Date, you may
redeem your Adjustable USG Fund shares or exchange them into shares of
certain other funds in the Franklin Templeton Funds, subject to the terms of
the prospectus of the fund being acquired.

INFORMATION ABOUT THE FUNDS

Information about the Adjustable USG Fund and Adjustable Rate Fund is
included in their current Prospectus dated March 1, 1998 which is attached
to, and considered a part of, this Prospectus/Proxy Statement. Additional
information about Adjustable USG Fund and Adjustable Rate Fund is included in
their SAI dated March 1, 1998, which has been filed with the SEC and is
incorporated by reference herein. You may request a free copy of the Funds'
SAI and other information by calling 1-800-DIAL-BEN or by writing to the Fund
at 777 Mariners Island Boulevard, San Mateo, CA 94403-7777. The Funds also
file proxy materials, reports and other information with the SEC in
accordance with the informational requirements of the Securities and Exchange
Act of 1934 and the Investment Company Act of 1940. These materials can be
inspected and copied at: the Public Reference Facilities maintained by the
SEC at 450 Fifth Street NW, Washington, DC 20549, and the Regional Office of
the SEC at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, CA 90036.
Also, copies of such materials can be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, DC 20549, at prescribed rates.

PRINCIPAL STOCKHOLDERS

As of the Record Date, the officers and Trustees of the Trust, as a
group, owned less than 1% of the outstanding voting shares of Adjustable
Rate Fund and the Adjustable USG Fund. No person owned (beneficially or of
record) 5% or more of the outstanding shares of Adjustable Rate Fund or the
Adjustable USG Fund.

GLOSSARY

USEFUL TERMS AND DEFINITIONS

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

ADVISERS -- Franklin Advisers, Inc., 777 Mariners Island Boulevard, San Mateo,
CA 94403-7777, Adjustable Rate Fund's and Adjustable USG Fund's administrator
and investment manager for the Mortgage Portfolio and Securities Portfolio.

BOARD -- The Board of Trustees of Franklin Investors Securities Trust

DISTRIBUTORS -- Franklin/Templeton Distributors, Inc., the principal
underwriter of Adjustable USG Fund and Adjustable Rate Fund, located at 777
Mariners Island Boulevard, San Mateo, CA 94404.
FRANKLIN TEMPLETON FUNDS -- The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund

FRANKLIN TEMPLETON GROUP -- Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries

FRANKLIN TEMPLETON GROUP OF FUNDS -- All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds

INVESTOR SERVICES -- Franklin/Templeton Investor Services, Inc., the
shareholder servicing and transfer agent to Adjustable Rate Fund and
Adjustable USG Fund, located at 777 Mariners Island Boulevard, San Mateo, CA
94404

MARKET TIMERS -- Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.

MOODY'S -- Moody's Investors Service, Inc.

NASD -- National Association of Securities Dealers, Inc.

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.

OFFERING PRICE -- The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge, if
applicable. The maximum front-end sales charge is 2.25%.

RESOURCES -- Franklin Resources, Inc.

SAI -- Statement of Additional Information

S&P(R) -- Standard & Poor's(R) Corporation

SEC -- U.S. Securities and Exchange Commission

SECURITIES DEALER -- A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.

U.S. -- United States

WE/OUR/US -- Unless the context indicates a different meaning, these terms
refer to the Funds and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources

EXHIBITS TO COMBINED PROXY
STATEMENT AND PROSPECTUS

EXHIBIT

A Plan of Reorganization between Franklin Adjustable Rate
Securities Fund and Franklin Adjustable U.S. Government
Securities Fund.

B Prospectus dated March 1, 1998, as supplemented January 1, 1999,
of Franklin Adjustable U.S. Government Securities Fund and
Franklin Adjustable Rate Securities Fund.

C Annual Report of Franklin Investors Securities Trust dated
October 31, 1998.

EXHIBIT A
FRANKLIN ADJUSTABLE RATE SECURITIES FUND

FORM OF PLAN OF REORGANIZATION

PLAN OF REORGANIZATION (the "Plan"), made by Franklin Investors
Securities Trust (the "Trust") as of this ____ day of ______, 1999, on behalf
of its series FRANKLIN ADJUSTABLE RATE SECURITIES FUND ("Adjustable Rate
Fund") and FRANKLIN ADJUSTABLE U.S. GOVERNMENT FUND ("Adjustable USG Fund")
(collectively, the "Funds"), with principal place of business at 777 Mariners
Island Boulevard, San Mateo, California 94404.

The Plan will consist of (i) the acquisition by Adjustable USG Fund of
substantially all of the property, assets and goodwill of Adjustable Rate
Fund in exchange solely for shares of common stock, par value $0.01 per
share, of Adjustable USG Fund ("Adjustable USG Fund Shares"); (ii) the
distribution of Adjustable USG Fund Shares to the shareholders of Adjustable
Rate Fund according to their respective interests; and (iii) the subsequent
dissolution of Adjustable Rate Fund as soon as practicable after the closing
(as defined in Section 3, hereinafter called the "Closing"), all upon and
subject to the terms and conditions of this Plan hereinafter set forth.

PLAN

In order to consummate the Plan and in consideration of the promises
and of the covenants hereinafter set forth, and intending to be legally
bound, the parties hereto covenant and agree as follows:

1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF ADJUSTABLE
RATE FUND.

(a) Subject to the terms and conditions of this Plan, and in reliance
on the representations and warranties of the Trust herein contained, and in
consideration of the delivery by the Trust on behalf of Adjustable USG Fund
of the number of its Adjustable USG Fund Shares hereinafter provided, the
Trust on behalf of the Adjustable Rate Fund agrees that it will convey,
transfer and deliver to Adjustable USG Fund at the Closing all of its then
existing assets, free and clear of all liens, encumbrances, and claims
whatsoever (other than shareholders' rights of redemption), except for cash,
bank deposits, or cash equivalent securities in an estimated amount necessary
to (i) pay the costs and expenses of carrying out this Plan (including, but
not limited to, fees of counsel and accountants, and expenses of its
liquidation and dissolution contemplated hereunder), which costs and expenses
shall be established on Adjustable Rate Fund's books as liability reserves;
(ii) discharge its unpaid liabilities on its books at the closing date (as
defined in Section 3, hereinafter called the "Closing Date"), including, but
not limited to, its income dividends and capital gains distributions, if any,
payable for the period prior to, and through, the Closing Date; and (iii) pay
such contingent liabilities as its Board of Directors shall reasonably deem
to exist against Adjustable Rate Fund, if any, at the Closing Date, for which
contingent and other appropriate liability reserves shall be established on
Adjustable Rate Fund's books (hereinafter "Net Assets"). Adjustable Rate
Fund shall also retain any and all rights that it may have over and against
any person that may have accrued up to and including the close of business on
the Closing Date.

(b) Subject to the terms and conditions of this Plan, and in
consideration of such sale, conveyance, transfer, and delivery, the Trust on
behalf of Adjustable USG Fund shall at the Closing deliver to Adjustable Rate
Fund the number of Adjustable USG Fund Shares, determined by dividing the
aggregate Net Assets of Adjustable Rate Fund on the Closing Date by the net
asset value per share of Adjustable USG Fund Shares, as of 1:00 P.M. Pacific
time on the Closing Date. All such values shall be determined in the manner
and as of the time set forth in Section 2 hereof.

(c) Immediately following the Closing, the Trust shall dissolve the
Adjustable Rate Fund and distribute pro rata to its shareholders of record as
of the close of business on the Closing Date Adjustable USG Fund Shares
received by Adjustable Rate Fund pursuant to this Section 1. Such
liquidation and distribution shall be accomplished by the establishment of
accounts on the share records of the Trust on behalf of the Adjustable USG
Fund of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Adjustable USG Fund Shares shall be carried to the [third decimal
place]. At the time of merger, all outstanding certificated shares of
Adjustable Rate Fund will be deemed canceled. Holders in possession of
certificated shares of Adjustable Rate Fund will not be required to surrender
their certificates to complete the acquisition by Adjustable USG Fund. After
the acquisition, holders may request a certificate representing the number of
whole Adjustable USG Fund Shares they own. Certificates for fractional
Adjustable USG Fund Shares will not be issued, but shall continue to be
carried for the open account of such shareholder.

2. VALUATION.

(a) The value of Adjustable Rate Fund's Net Assets to be acquired by
Adjustable USG Fund hereunder shall be computed as of 1:00 P.M. Pacific time
on the Closing Date using the valuation procedures set forth in Adjustable
Rate Fund's currently effective prospectus.

(b) The net asset value of a share of Adjustable USG Fund shall be
determined to the nearest full cent as of 1:00 P.M. Pacific time on the
Closing Date using the valuation procedures set forth in Adjustable USG
Fund's currently effective prospectus.

(c) The net asset value of a share of Adjustable Rate Fund shall be
determined to the nearest full cent as of 1:00 P.M. Pacific time on the
Closing Date using the valuation procedures set forth in Adjustable Rate
Fund's currently effective prospectus.

3. CLOSING AND CLOSING DATE.

The Closing Date shall be ______________, 1999, or such later date as
determined by the Trust's officers. The Closing shall take place at the
principal office of the Trust at 2:00 P.M. Pacific time on the Closing Date.
The Trust on behalf of the Adjustable Rate Fund shall have provided for
delivery as of the Closing of those Net Assets to be transferred to the
Trust's Custodian, Bank of New York, Mutual Funds Division, 90 Washington
Street, New York, NY 10286. Also, the Trust on behalf of Adjustable Rate
Fund shall deliver at the Closing a list of names and addresses of the
shareholders of record of its shares and the number of shares owned by each
such shareholder, indicating thereon which such shares are represented by
outstanding certificates and which by book-entry accounts, all as of 1:00
P.M. Pacific time on the Closing Date, certified by its transfer agent or by
its President to the best of its or his knowledge and belief. The Trust on
behalf of Adjustable USG Fund shall issue and deliver a certificate or
certificates evidencing the shares of the Adjustable USG Fund to be delivered
to said transfer agent registered in such manner as the Trust on behalf of
Adjustable Rate Fund may request, or provide evidence satisfactory to
Adjustable Rate Fund that such Adjustable USG Fund Shares have been
registered in an account on the books of Adjustable USG Fund in such manner
as the Trust on behalf of Adjustable Rate Fund may request.

4. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF ADJUSTABLE
RATE FUND.

The Trust on behalf of the Adjustable Rate Fund represents and warrants
to Adjustable USG Fund that:

(a) Adjustable Rate Fund is a series of the Trust, a business trust
organized under the laws of the Commonwealth of Massachusetts on December 22,
1986 and validly existing and in good standing under the laws of that state.
The Trust is duly registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a diversified, open-end, management investment
company and all its shares sold were sold pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended
(the "1933 Act"), [EXCEPT FOR THOSE SHARES SOLD PURSUANT TO THE PRIVATE
OFFERING EXEMPTION FOR THE PURPOSE OF RAISING THE REQUIRED INITIAL CAPITAL.]

(b) Adjustable Rate Fund is authorized to issue an unlimited number
of shares, par value $0.01 per share, each outstanding share of which is
fully paid, non-assessable, fully transferable and has full voting rights.

(c) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended October 31, 199[8], audited by
PricewaterhouseCoopers LLP, fairly present the financial position of
Adjustable Rate Fund as of such date and the results of its operations for
the periods indicated in conformity with generally accepted accounting
principles applied on a consistent basis.

(d) The books and records of Adjustable Rate Fund made available to
Adjustable USG Fund and/or its counsel accurately summarize the accounting
data represented and contain no material omissions with respect to the
business and operations of Adjustable Rate Fund.

(e) Adjustable Rate Fund has the necessary power and authority to
conduct its business as such business is now being conducted.

(f) Adjustable Rate Fund is not a party to or obligated under any
provision of the Trust's Agreement and Declaration of Trust, By-Laws, or any
contract or any other commitment or obligation, and is not subject to any
order or decree that would be violated by its execution of or performance
under this Plan.

(g) Adjustable Rate Fund has elected to be treated as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
has qualified as a RIC for each taxable year since its inception, and will
qualify as a RIC as of the Closing Date.

5. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF ADJUSTABLE USG
FUND.

The Trust on behalf of Adjustable USG Fund represents and warrants to
Adjustable Rate Fund that:

(a) Adjustable USG Fund is a series of the Trust, a business trust
organized under the laws of the Commonwealth of Massachusetts on December 22,
1986, and is validly existing and in good standing under the laws of that
state. The Trust is duly registered under the 1940 Act as a diversified,
open-end, management investment company and all its shares sold have been
sold pursuant to an effective registration statement filed under the 1933
Act, [EXCEPT FOR THOSE SHARES SOLD PURSUANT TO THE PRIVATE OFFERING EXEMPTION
FOR THE PURPOSE OF RAISING THE REQUIRED INITIAL CAPITAL.]

(b) Adjustable USG Fund is authorized to issue an unlimited number of
shares, par value $.01 per share, each outstanding share of which is fully
paid, non-assessable, fully transferable, and has full voting rights.
Adjustable USG Fund Shares to be issued pursuant to this Plan will be fully
paid, non-assessable, freely transferable and have full voting rights.

(c) At the Closing, Adjustable USG Fund Shares will be eligible for
offering to the public in those states of the United States and jurisdictions
in which the shares of Adjustable Rate Fund are presently eligible for
offering to the public, and there are a sufficient number of Adjustable USG
Fund Shares registered under the 1933 Act to permit the transfers
contemplated by this Plan to be consummated.

(d) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended October 31, 199[8], audited by
PricewaterhouseCoopers LLP, fairly present the financial position of
Adjustable USG Fund as of such date and the results of its operations for the
periods indicated in conformity with generally accepted accounting principles
applied on a consistent basis.

(e) Adjustable USG Fund has the necessary power and authority to
conduct its business as such business is now being conducted.

(f) Adjustable USG Fund is not a party to or obligated under any
provision of the Trust's Agreement and Declaration of Trust, By-Laws, or any
contract or any other commitment or obligation, and is not subject to any
order or decree, that would be violated by its execution of or performance
under this Plan.

(g) Adjustable USG Fund has elected to be treated as a RIC for
federal income tax purposes under Part I of Subchapter M of the Code, has
qualified as a RIC for each taxable year since its inception, and will
qualify as a RIC as of the Closing Date.

6. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF THE FUNDS.

The Trust on behalf of each Fund represents and warrants that:

(a) The statement of assets and liabilities to be furnished by the
Trust for each of the Funds as of 1:00 P.M. Pacific time on the Closing Date
for the purpose of determining the number of Adjustable USG Fund Shares to be
issued pursuant to Section 1 of this Plan will accurately reflect its Net
Assets in the case of Adjustable Rate Fund and its net assets in the case of
Adjustable USG Fund, and outstanding shares, as of such date, in conformity
with generally accepted accounting principles applied on a consistent basis.

(b) At the Closing, the Funds will have good and marketable title to
all of the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.

(c) Except as disclosed in the current effective prospectus, there is
no material suit, judicial action, or legal or administrative proceeding
pending or threatened against the Funds.

(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by the Funds.

(e) The execution, delivery and performance of this Plan have been
duly authorized by all necessary corporate action of the Trust's Board of
Trustees on behalf of the Funds, and this Plan constitutes a valid and
binding obligation enforceable in accordance with its terms.

(f) It anticipates consummation of this Plan will not cause the Funds
to fail to conform to the requirements of Subchapter M of the Code for
Federal income taxation as a RIC at the end of each of the fiscal year.

(g) Each Fund has the necessary power and authority to conduct its
business as such business is now being conducted.

7. COVENANTS OF THE TRUST ON BEHALF OF THE FUNDS.

(a) The Trust convenants that each Fund will operate their respective
businesses as presently conducted between the date hereof and the Closing.

(b) The Trust covenants that the Adjustable Rate Fund will not
acquire the Adjustable USG Fund Shares for the purpose of making
distributions thereof to anyone other than Adjustable Rate Fund's
shareholders.

(c) The Trust covenants that, by the Closing, all of the Funds
Federal and other tax returns and reports required by law to be filed on or
before such date shall have been filed, and all Federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.

(d) At the Closing, the Trust will provide a copy of the shareholder
ledger accounts, certified by its transfer agent or its President to the best
of its or his knowledge and belief, for all the shareholders of record of the
Adjustable Rate Fund as of 1:00 P.M. Pacific time on the Closing Date who are
to become shareholders of Adjustable USG Fund as a result of the transfer of
assets that is the subject of this Plan.

(e) The Trust covenants that the Adjustable Rate Fund will mail to
each shareholder of record entitled to vote at the meeting of its
shareholders at which action on this Plan is to be considered, in sufficient
time to comply with requirements as to notice thereof, a Combined Proxy
Statement and Prospectus that complies in all material respects with the
applicable provisions of Section 14(a) of the Securities Exchange Act of
1934, as amended, and Section 20(a) of the 1940 Act, and the rules and
regulations, respectively, thereunder.

(f) The Trust covenants that it will file with the U.S. Securities
and Exchange Commission a registration statement on Form N-14 under the 1933
Act relating to the Adjustable USG Fund Shares issuable hereunder
("Registration Statement"), and will use its best efforts to provide that the
Registration Statement becomes effective as promptly as practicable. At the
time it becomes effective, the Registration Statement will (i) comply in all
material respects with the applicable provisions of the 1933 Act, and the
rules and regulations promulgated thereunder; and (ii) not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
At the time the Registration Statement becomes effective, at the time the
Trust's shareholders' meeting, and at the Closing Date, the prospectus and
statement of additional information included in the Registration Statement
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

8. CONDITIONS PRECEDENT TO BE FULFILLED BY TRUST ON BEHALF OF THE FUNDS.

The obligations of the Trust on behalf of the Funds to effectuate this
Plan hereunder shall be subject to the following respective conditions:

(a) That: (i) all the representations and warranties contained
herein shall be true and correct as of the Closing with the same effect as
though made as of and at such date; (ii) performance of all obligations
required by this Plan to be performed by the Trust and the Funds shall occur
prior to the Closing; and (iii) the Trust on behalf of each Fund shall
deliver to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.

(b) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan under Section 25(c) of the 1940 Act. And, further,
no other legal, administrative or other proceeding shall have been instituted
or threatened that would materially affect the financial condition of either
party or would prohibit the transactions contemplated hereby.

(c) That this Plan contemplated hereby shall have been adopted and
approved by the appropriate action of the shareholders of Adjustable Rate
Fund at an annual or special meeting or any adjournment thereof.

(d) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 P.M.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.

(e) That there shall be delivered to the Trust on behalf of
Adjustable Rate Fund and Adjustable USG Fund an opinion from Messrs.
Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust, to the effect
that, provided the acquisition contemplated hereby is carried out in
accordance with this Plan and based upon certificates of the officers of the
Trust with regard to matters of fact:

(1) The acquisition by Adjustable USG Fund of substantially all
the assets of Adjustable Rate Fund as provided for herein in exchange for
Adjustable USG Fund Shares will qualify as a reorganization within the
meaning of Section 368(a)(1)(c) of the Code, and Adjustable Rate Fund and
Adjustable USG Fund will each be a party to the respective reorganization
within the meaning of Section 368(b) of the Code;

(2) No gain or loss will be recognized by Adjustable Rate Fund
upon the transfer of substantially all of its assets to Adjustable USG Fund
in exchange solely for voting shares of Adjustable USG Fund (Sections 361(a)
and 357(a)). No opinion, however, will be expressed as to whether any
accrued market discount will be required to be recognized as ordinary income
pursuant to Section 1276 of the Code;

(3) No gain or loss will be recognized by Adjustable USG Fund
upon the receipt of substantially all of the assets of Adjustable Rate Fund
in exchange solely for voting shares of Adjustable USG Fund (Section 1032(a));

(4) The basis of the assets of Adjustable Rate Fund received by
Adjustable USG Fund will be the same as the basis of such assets to
Adjustable Rate Fund immediately prior to the exchange (Section 362(b));

(5) The holding period of the assets of Adjustable Rate Fund
received by Adjustable USG Fund will include the period during which such
assets were held by Adjustable Rate Fund (Section 1223(2));

(6) No gain or loss will be recognized to the shareholders of
Adjustable Rate Fund upon the exchange of their shares in Adjustable Rate
Fund for voting shares of Adjustable USG Fund (Section 354(a));

(7) The basis of the Adjustable USG Fund Shares received by
Adjustable Rate Fund's shareholders shall be the same as the basis of the
shares of Adjustable Rate Fund exchanged therefor (Section 358(a)(1));

(8) The holding period of Adjustable USG Fund Shares received
by Adjustable Rate Fund's shareholders (including fractional shares to which
they may be entitled) will include the holding period of Adjustable Rate
Fund's shares surrendered in exchange therefor, provided that Adjustable Rate
Fund's shares were held as a capital asset on the date of the exchange
(Section 1223(1)); and

(9) Adjustable USG Fund will succeed to and take into account
as of the date of the proposed transfer (as defined in Section 1.381(b)-1(b)
of the Income Tax Regulations) the items of Adjustable Rate Fund described in
Section 381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.

(f) That the Trust on behalf of the Adjustable USG Fund shall have
received an opinion in form and substance satisfactory to it from Messrs.
Stradley Ronon Stevens & Young, LLP, counsel to the Trust, to the effect
that, subject in all respects to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other laws now or
hereafter affecting generally the enforcement of creditors' rights:

(1) Adjustable Rate Fund is a series of the Trust, which was
organized as a business trust under the laws of the Commonwealth of
Massachusetts on December 22, 1986, and is validly existing and in good
standing under the laws of that state;

(2) Adjustable Rate Fund is authorized to issue an unlimited
number of shares, par value, $0.01 per share. Assuming that the initial
shares were issued in accordance with the 1940 Act and the Agreement and
Declaration of Trust and By-Laws of the Trust, and that all other outstanding
shares of Adjustable Rate Fund were sold, issued and paid for in accordance
with the terms of Adjustable Rate Fund's prospectus in effect at the time of
such sales, each such outstanding share is fully paid, non-assessable, fully
transferable and has full voting rights;

(3) The Trust is an open-end, diversified investment company of
the management type registered as such under the 1940 Act;

(4) Except as disclosed in Adjustable Rate Fund's currently
effective prospectus, such counsel does not know of any material suit,
action, or legal or administrative proceeding pending or threatened against
Adjustable Rate Fund, the unfavorable outcome of which would materially and
adversely affect Adjustable Rate Fund;

(5) All corporate actions required to be taken by Trust and/or
Adjustable Rate Fund to authorize and effect this Plan contemplated hereby
have been duly authorized by all necessary corporate action on the part of
the Trust and Adjustable Rate Fund; and

(6) Neither the execution, delivery nor performance of this
Plan by the Trust and/or Adjustable Rate Fund violates any provision of the
Trust's Agreement and Declaration of Trust, its By-Laws, or the provisions of
any agreement or other instrument known to such counsel to which the Trust
and/or Adjustable Rate Fund is a party or by which Adjustable Rate Fund is
otherwise bound; this Plan is the legal, valid and binding obligation of the
Trust and Adjustable Rate Fund and is enforceable against the Trust and/or
Adjustable Rate Fund in accordance with its terms.

In giving the opinions set forth above, counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters
of fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust and Adjustable Rate
Fund.

(g) That Adjustable Rate Fund shall have received an opinion in form
and substance satisfactory to it from Messrs. Stradley, Ronon, Stevens &
Young, LLP, counsel to the Trust, to the effect that, subject in all respects
to the effects of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:

(1) Adjustable USG Fund is a series of the Trust, organized as
a business trust under the laws of the Commonwealth of Massachusetts on
December 22, 1986, and is validly existing and in good standing under the
laws of that state;

(2) Adjustable USG Fund is authorized to issue an unlimited
number of shares, par value $0.01 per share. Assuming that the initial
capital shares of Adjustable USG Fund were issued in accordance with the 1940
Act, and the Agreement and Declaration of Trust and By-Laws of the Trust, and
that all other outstanding shares of Adjustable USG Fund were sold, issued
and paid for in accordance with the terms of Adjustable USG Fund's prospectus
in effect at the time of such sales, each such outstanding share of
Adjustable USG Fund is fully paid, non-assessable, freely transferable and
has full voting rights;

(3) The Trust is an open-end, diversified investment company of
the management type registered as such under the 1940 Act;

(4) Except as disclosed in Adjustable USG Fund's currently
effective prospectus, such counsel does not know of any material suit,
action, or legal or administrative proceeding pending or threatened against
Adjustable USG Fund, the unfavorable outcome of which would materially and
adversely affect Adjustable USG Fund;

(5) Adjustable USG Fund Shares to be issued pursuant to the
terms of this Plan have been duly authorized and, when issued and delivered
as provided in this Plan, will have been validly issued and fully paid and
will be non-assessable by Adjustable USG Fund;

(6) All corporate actions required to be taken by the Trust
and/or Adjustable USG Fund to authorize this Plan contemplated hereby have
been duly authorized by all necessary corporate action on the part of
Adjustable USG Fund;

(7) Neither the execution, delivery nor performance of this
Plan by the Trust and/or Adjustable USG Fund violates any provision of the
Trust's Agreement and Declaration of Trust, its By-Laws, or the provisions of
any agreement or other instrument known to such counsel to which the Trust
and/or Adjustable USG Fund is a party or by which Adjustable USG Fund is
otherwise bound; this Plan is the legal, valid and binding obligation of the
Trust and Adjustable USG Fund and is enforceable against the Trust and/or
Adjustable USG Fund in accordance with its terms; and

(8) The Trust's registration statement of which the prospectus,
dated [March 1, 1998, as supplemented,] of Adjustable USG Fund and Adjustable
Rate Fund is a part (the "Prospectus") is, at the time of the signing of this
Plan, effective under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of such registration
statement has been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the U.S. Securities and
Exchange Commission under the 1933 Act, and nothing has come to counsel's
attention that causes it to believe that, at the time the Prospectus became
effective, or at the time of the signing of this Plan, or at the Closing,
such Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.

(h) That the Trust's Registration Statement with respect to the
Adjustable USG Fund Shares to be delivered to the Adjustable Rate Fund's
shareholders in accordance with this Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.

(i) That the Adjustable USG Fund Shares to be delivered hereunder
shall be eligible for sale by Adjustable USG Fund with each state commission
or agency with which such eligibility is required in order to permit the
Adjustable USG Fund Shares lawfully to be delivered to each Adjustable Rate
Fund shareholder.

(j) That, at the Closing, the Trust on behalf of Adjustable Rate Fund
transfers to Adjustable USG Fund aggregate Net Assets of Adjustable Rate Fund
comprising at least 90% in fair market value of the total net assets and 70%
of the fair market value of the total gross assets recorded on the books of
Adjustable Rate Fund on the Closing Date.

9. BROKERAGE FEES AND EXPENSES.

(a) Adjustable Rate Fund and Adjustable USG Fund each represents and
warrants to the other that there are no broker or finders fees payable by it
in connection with the transactions provided for herein.

(b) The expenses of entering into and carrying out the provisions of
this Plan shall be borne one quarter by Adjustable Rate Fund, one quarter by
Adjustable USG Fund, and one half by Franklin Advisers, Inc.

10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.

(a) Anything contained in this Plan to the contrary notwithstanding,
this Plan may be terminated and abandoned at any time (whether before or
after approval thereof by the shareholders of Adjustable Rate Fund) prior to
the Closing or the Closing may be postponed by the Trust on behalf of either
party by resolution of the Board of Trustees, if circumstances develop that,
in the opinion of the Board, make proceeding with the Plan inadmissible.

(b) If the transactions contemplated by this Plan have not been
consummated by July 31, 1999, the Plan shall automatically terminate on that
date, unless a later date is agreed to by the Trust on behalf of Adjustable
USG Fund and Adjustable Rate Fund.

(c) In the event of termination of this Plan pursuant to the
provisions hereof, the same shall become void and have no further effect, and
neither the Trust, Adjustable Rate Fund nor Adjustable USG Fund, nor their
trustees, officers, agents or shareholders shall have any liability in
respect of this Plan.

(d) At any time prior to the Closing, any of the terms or conditions
of this Plan may be waived by the party who is entitled to the benefit
thereof by action taken by the Trust's Board of Trustees if, in the judgment
of such Board of Trustees, such action or waiver will not have a material
adverse affect on the benefits intended under this Plan to its shareholders,
on behalf of whom such action is taken.

(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan, and
neither the Trust, Adjustable Rate Fund nor Adjustable USG Fund, nor any of
their officers, trustees, agents or shareholders shall have any liability
with respect to such representations or warranties after the Closing. This
provision shall not protect any officer, trustee, agent or shareholder of the
Trust, Adjustable Rate Fund or Adjustable USG Fund against any liability to
the entity for which that officer, trustee, agent or shareholder so acts or
to its shareholders to which that officer, trustee, agent or shareholder
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties in the conduct of such office.

(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Plan shall be issued prior to the Closing and
shall impose any terms or conditions that are determined by action of the
Board of Trustees of the Trust on behalf of the Adjustable Rate Fund or
Adjustable USG Fund to be acceptable, such terms and conditions shall be
binding as if a part of this Plan without further vote or approval of the
shareholders of Adjustable Rate Fund, unless such terms and conditions shall
result in a change in the method of computing the number of Adjustable USG
Fund Shares to be issued to Adjustable Rate Fund in which event, unless such
terms and conditions shall have been included in the proxy solicitation
material furnished to the shareholders of Adjustable Rate Fund prior to the
meeting at which the transactions contemplated by this Plan shall have been
approved, this Plan shall not be consummated and shall terminate unless the
Trust on behalf of Adjustable Rate Fund shall promptly call a special meeting
of shareholders at which such conditions so imposed shall be submitted for
approval.

11. ENTIRE PLAN AND AMENDMENTS.

This Plan embodies the entire plan of the Trust on behalf of the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Plan may be amended only by mutual consent of the parties
in writing. Neither this Plan nor any interest herein may be assigned
without the prior written consent of the other party.

12. COUNTERPARTS.

This Plan may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts together shall
constitute but one instrument.

13. NOTICES.

Any notice, report, or demand required or permitted by any provision of
this Plan shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to the Trust at
777 Mariners Island Boulevard, P. O. Box 7777, San Mateo, CA 94403-7777,
Attention: Secretary.

14. GOVERNING LAW.

This Plan shall be governed by and carried out in accordance with the
laws of the Commonwealth of Massachusetts.

IN WITNESS WHEREOF, Franklin Adjustable USG Fund and Franklin
Adjustable Rate Fund have each caused this Plan of Reorganization to be
executed on its behalf by its duly authorized officers, all as of the date
and year first-above written.

FRANKLIN ADJUSTABLE U.S.
GOVERNMENT SECURITIES FUND

Attest:

_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary

FRANKLIN ADJUSTABLE RATE SECURITIES FUND

Attest:

_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary

EXHIBIT B

PROSPECTUS DATED MARCH 1, 1998, AS SUPPLEMENTED JANUARY 1, 1999,
OF THE FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
AND FRANKLIN ADJUSTABLE RATE SECURITIES FUND

SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999

Class A - Formerly Considered Class I

SUPPLEMENT DATED JANUARY 1, 1999
TO THE PROSPECTUS OF
FRANKLIN INVESTORS SECURITIES TRUST
(FIST2 - FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND)
DATED MARCH 1, 1998

The prospectus is amended as follows:

I. As of January 1, 1999, the Fund's shares are considered Class A shares for
redemption, exchange and other purposes. Before January 1, 1999, the Fund's
shares were considered Class I shares.

All references in the prospectus to Class I shares are replaced with Class A,
and all references to Class II shares are replaced with Class C.

II. On December 15, 1998, the Board approved a proposal to merge the
Adjustable Rate Securities Fund into the Adjustable U.S. Government Fund,
subject to shareholder approval. The investment objective of both the
Adjustable Rate Securities Fund and the Adjustable U.S. Government Fund is to
seek a high level of current income, consistent with lower volatility of
principal. The Board believes this proposed merger will benefit shareholders.

It is anticipated that in early 1999 shareholders of the Adjustable Rate
Securities Fund will receive a proxy and proxy statement requesting their
votes on the proposed merger.

The Adjustable Rate Securities Fund was closed to new investors after the
close of business on December 15, 1998. If you were a shareholder of record
as of the close of business on December 15, 1998, you may continue to add to
your account, subject to your applicable minimum additional investment
amount, or buy additional shares through the reinvestment of dividend or
capital gain distributions.

Although you may redeem your shares, please keep in mind that if you sell all
the shares in your account, your account will be closed and you will not be
allowed to buy additional shares of the Adjustable Rate Securities Fund or to
reopen your account in that Fund.

III. The first two sentences in the section "How Does the Fund Invest Its
Assets? - The Advantages of Investing in the Fund" are revised as follows:

IV. The following paragraphs are added under "What Are the Risks of Investing
in the Fund?":

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

Advisers will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. Advisers, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.

If an issuer in which the Fund or the Portfolio is invested is adversely
affected by Year 2000 problems, it is likely that the price of its security
will also be adversely affected. A decrease in the value of one or more of
the Portfolio's or Fund's portfolio holdings will have a similar impact on
the price of the Fund's shares. Please see "Year 2000 Problem" under "Who
Administers the Fund?" for more information.

V. The following is added after the "Portfolio Transactions" section under
"Who Administers the Fund?":

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

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

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

VI. The second step in the section "How Do I Buy Shares? - Opening Your
Account" is replaced with the following:

2. Determine how much you would like to invest. The Adjustable U.S.
Government Fund's minimum investments are:

o To open a regular, non-retirement account ........................ $1,000
o To open an IRA, IRA Rollover, Roth IRA, or Education IRA ......... $ 250*
o To open a custodial account for a minor (an UGMA/UTMA account) ... $ 100
o To open an account with an automatic investment plan ............. $ 50**
o To add to an account ............................................. $ 50***

*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs or
Education IRAs, there is no minimum to add to an account.

For purchases by broker-dealers, registered investment advisors or
certified financial planners who have entered into an agreement with
Distributors for clients participating in comprehensive fee programs, the
minimum initial investment is $250. The minimum initial investment is $100
for officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies.

We reserve the right to change the amount of these minimums from time to
time or to waive or lower these minimums for certain purchases. We also
reserve the right to refuse any order to buy shares.

The Adjustable Rate Securities Fund is closed to new investors. If you were a
shareholder of record as of the close of business on December 15, 1998, you
may continue to add to your account with as little as $50 or buy additional
shares through the reinvestment of dividend or capital gain distributions. We
may waive the investment minimum for retirement plans.

VII. In the section "Sales Charge Waivers," found under "How Do I Buy Shares?
- - Sales Charge Reductions and Waivers,"

(a) the second waiver category is replaced with the following:

2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares,
except proceeds from the sale of Class B shares will be reinvested in
Class A shares.

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

Proceeds immediately placed in a Franklin Bank CD also may be
reinvested without a front-end sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.

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

(b) the following new category 7 is added to the end of the first list of
sales charge waiver categories:

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

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

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

VIII. The section "How Do I Buy Shares in Connection with Retirement Plans?",
found under "How Do I Buy Shares?", is replaced with the following:

HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?

Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.

Trust Company can provide you with brochures containing important information
about its plans. These plans require separate applications and their policies
and procedures may be different than those described in this prospectus. For
more information, including a free retirement plan brochure or application,
please call Retirement Plan Services.

Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.

IX. The first paragraph under "May I Exchange Shares for Shares of Another
Fund? - Will Sales Charges Apply to My Exchange?" is replaced with the
following:

You generally will not pay a front-end sales charge on exchanges. If you
have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund, if the difference is more than
0.25%. If you have never paid a sales charge on your shares because, for
example, they have always been held in a money fund, you will pay the Fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.

X. In the section "Exchange Restrictions," found under "May I Exchange Shares
for Shares of Another Fund?",

(a) the second item is replaced with the following:

o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
You may, however, exchange shares from a Fund account requiring two or
more signatures into an identically registered money fund account
requiring only one signature for all transactions. PLEASE NOTIFY US IN
WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT.
Additional procedures may apply. Please see "Transaction Procedures and
Special Requirements."

(b) and the following new item is added:

o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your Fund shares.

XI. In the "By Phone" section of the chart under "How Do I Sell Shares?",

(a) the first bulleted item is replaced with the following:

o If the request is $100,000 or less. Institutional accounts may exceed
$100,000 by completing a separate agreement. Call Institutional Services
to receive a copy.

(b) and the third bulleted item is deleted.

XII. Distribution option 3 in the section "What Distributions Might I Receive
From the Fund? - Distribution Options" is replaced with the following:

3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking or savings account, you may need a
signature guarantee. If you send the money to a checking or savings
account, please see "Electronic Fund Transfers" under "Services to Help You
Manage Your Account."

XIII. Under "Transaction Procedures and Special Requirements,"

(a) the section "Joint Accounts" is replaced with the following:

JOINT ACCOUNTS. For accounts with more than one registered owner, the Fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.

Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.

(b) the reference to $50,000 in the section "Signature Guarantees" is
replaced with $100,000.

(d) and the section "Keeping Your Account Open" is replaced with the
following:

KEEPING YOUR ACCOUNT OPEN

Due to the relatively high cost of maintaining a small account, we may
close your account if the value of your shares is less than $250, or less
than $50 for employee accounts and custodial accounts for minors. We will
only do this if the value of your account fell below this amount because
you voluntarily sold your shares and your account has been inactive (except
for the reinvestment of distributions) for at least six months. Before we
close your account, we will notify you and give you 30 days to increase the
value of your account to $1,000, or $100 for employee accounts and
custodial accounts for minors. These minimums do not apply to IRAs and
other retirement plan accounts or to accounts managed by the Franklin
Templeton Group.

XIV. Under "Services to Help You Manage Your Account,"

(a) the second sentence in the section "Automatic Investment Plan" is
replaced with the following:

Under the plan, you can have money transferred automatically from your
checking or savings account to the Fund each month to buy additional shares.

(b) the second paragraph under "Systematic Withdrawal Plan" is replaced with
the following:

If you would like to establish a systematic withdrawal plan, please
complete the systematic withdrawal plan section of the account application
included with this prospectus and indicate how you would like to receive
your payments. You may choose to direct your payments to buy the same class
of shares of another Franklin Templeton Fund or have the money sent
directly to you, to another person, or to a checking or savings account. If
you choose to have the money sent to a checking or savings account, please
see "Electronic Fund Transfers" below. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your
account.

ELECTRONIC FUND TRANSFERS

You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with 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. We will send any payments made during that time to the
address of record on your account.

(d) and the third bulleted item in the section "TeleFACTS(R)" is replaced with
the following:

o exchange shares (within the same class) between identically
registered Franklin Templeton Class A, B or C accounts; and

XV. In the "Useful Terms and Definitions" section,

(a) the definition of "Class I and Class II" is replaced with the following:

CLASS A, CLASS B AND CLASS C - Certain funds in the Franklin Templeton Funds
offer multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Because the fund's sales charge structure and Rule 12b-1 plan are similar to
those of Class A shares, shares of the fund are considered Class A shares for
redemption, exchange and other purposes.

(b) and the following definition is revised:

CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. The holding period begins on the day you buy your
shares. For example, if you buy shares on the 18th of the month, they will
age one month on the 18th day of the next month and each following month.

Please keep this supplement for future reference.

PROSPECTUS & APPLICATION

FRANKLIN INVESTORS

SECURITIES TRUST

MARCH 1, 1998

INVESTMENT STRATEGY
INCOME

FRANKLIN ADJUSTABLE U.S.GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND

This prospectus describes the Franklin Adjustable U.S. Government Securities
Fund (the "Adjustable U.S. Government Fund") and the Franklin Adjustable
Rate Securities Fund (the "Adjustable Rate Securities Fund"), each of which
may individually or together be referred to as the "Fund(s)." The Prospectus
contains information you should know before investing in the Fund. Please
keep it for future reference.

The Fund has a Statement of Additional Information ("SAI"), dated March 1,
1998, which may be amended from time to time. It includes more information
about the Fund's procedures and policies. It has been filed with the SEC and
is incorporated by reference into this prospectus. For a free copy or a
larger print version of this prospectus, call 1-800/DIAL BEN.

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

LIKE ALL MUTUAL FUNDS, 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.

FRANKLIN INVESTORS SECURITIES TRUST

Unlike most funds that invest directly in securities, the Adjustable U.S.
Government Fund seeks to achieve its investment objective by investing all of
its assets in shares of the U.S. Government Adjustable Rate Mortgage
Portfolio (the "Mortgage Portfolio"), and the Adjustable Rate Securities Fund
seeks to achieve its investment objective by investing all of its assets in
shares of the Adjustable Rate Securities Portfolio (the "Securities
Portfolio"). References to "the Portfolio" refer to each Portfolio
individually, unless the context indicates otherwise. The Portfolio is a
series of the Adjustable Rate Securities Portfolios. Its investment objective
is the same as the Fund's.

THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.

FRANKLIN INVESTORS SECURITIES TRUST

TABLE OF CONTENTS

ABOUT THE FUND

Expense Summary .................................................. 2
Financial Highlights ............................................. 3
How Does the Fund Invest Its Assets? ............................. 6
What Are the Risks of Investing in the Fund? ..................... 19
Who Administers the Fund? ........................................ 22
How Does the Fund Measure Performance? ........................... 24
How Taxation Affects the Fund and Its Shareholders ............... 24
How Is the Trust Organized? ...................................... 27

ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 28
May I Exchange Shares for Shares of Another Fund? ................ 35
How Do I Sell Shares? ............................................ 38
What Distributions Might I Receive From the Fund? ................ 41
Transaction Procedures and Special Requirements .................. 42
Services to Help You Manage Your Account ......................... 46
What If I Have Questions About My Account? ....................... 48

GLOSSARY
Useful Terms and Definitions ..................................... 49

Franklin Investors Securities Trust

March 1, 1998

When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.

777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777

1-800/DIAL BEN

Franklin Investors Securities Trust

ABOUT THE FUND

Expense Summary

This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses, including its
proportionate share of the Portfolio's expenses, for the fiscal year ended
October 31, 1997. The Fund's actual expenses may vary.

ADJUSTABLE ADJUSTABLE
U.S. GOVERNMENT RATE SECURITIES
FUND FUND
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 2.25%++ 2.25%++
Deferred Sales Charge None+++ None+++
Exchange Fee (per transaction) $5.00* $5.00*

B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management and Administration Fees 0.50%** 0.50%**
Rule 12b-1 Fees 0.25%*** 0.25%***
Other Expenses of the Fund and
the Portfolio 0.18% 0.25%
Total Fund Operating Expenses 0.93%** 1.00%**

C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
Adjustable U.S. Government Fund $32**** $51 $73 $134
Adjustable Rate Securities Fund $32**** $54 $77 $142

THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The Fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.

+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1
million or more if you sell the shares within one year. A Contingent Deferred
Sales Charge may also apply to purchases by certain retirement plans that
qualify to buy shares without a front-end sales charge. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
** For the period shown, Advisers had agreed in advance to limit its
management fees. With this reduction, management fees of the Mortgage
Portfolio and the Securities Portfolio were 0.22% and 0.21%, respectively,
and administration fees of the Fund were 0.10%. Total operating expenses of
the Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund
were 0.75% and 0.81%, respectively.
***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 charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.

The Board considered whether the total fees and expenses of the Fund and the
Portfolio would be more or less than if the Fund invested directly in the
types of securities held by the Portfolio. By investing all of its assets in
shares of the Portfolio, the Fund and other investment companies and
institutional investors are able to pool their assets. This may result in a
variety of operating economies. Accordingly, the Board concluded that the
total expenses of the Fund and the Portfolio were expected to be lower than
if the Fund invested directly in various types of securities. Of course,
there is no guarantee that asset growth and lower expenses will be achieved.
Advisers, however, has agreed in advance to limit expenses so that they will
not be higher than if the Fund invested directly in the types of securities
held by the Portfolio. Advisers may end this arrangement at any time upon
notice to the Board. For more information on the fees and expenses of the
Fund and the Portfolio, please see "Who Administers the Fund?"

FINANCIAL HIGHLIGHTS

This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the
fiscal year ended October 31, 1997. The Annual Report to Shareholders also
includes more information about the Fund's performance. For a free copy,
please call Fund Information.

ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993*** 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
Net Asset Value,
beginning of year $9.37 $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07 $10.17
Income from investment
operations:
Net investment income .55 .56 .54 .35 .28 .51 .74 .88 .94 .82
Net realized & unrealized gain (loss) .10 .03 .14 (.61) (.09) (.11) .03 .07 .03 (.23)
------------------------------------------------------------------------------------
Total from investment operations .65 .59 .68 (.26) .19 .41 .77 .95 .97 .59
------------------------------------------------------------------------------------
Less distributions from net
investment income (.54) (.56) (.54) (.31) (.28) (.52) (.78) (1.01) (.99) (.69)
Distributions from capital gains - - - - - (.003) - - - -
------------------------------------------------------------------------------------
Total distributions (.54) (.56) (.54) (.31) (.28) (.53) (.78) (1.01) (.99) (.69)
Net Asset Value, end of year $9.48 $9.37 $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07
------------------------------------------------------------------------------------
Total return* 7.18% 6.54% 7.57% (2.65)% 1.99% 4.16% 7.96% 9.91% 10.16% 5.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (in millions) $335 $397 $509 $701 $1,814 $2,971 $3,513 $1,173 $82 $45
Ratios to average net assets:
Expenses .75%+ .69%+ .61%+ .42%+ .65%**+ 66%+ 68%+ .30% .39% .44%
Expenses excluding waiver
and payments by affiliate .93%+ .86%+ .86%+ .82%+ .79%**+ .80%+ .89%+ .82% .87% .96%
Net investment income 5.81% 5.87% 5.76% 3.67% 3.92%** 5.10% 7.10% 8.23% 9.03% 7.92%

Portfolio turnover rate 43.68% 23.52% 17.81% 5.99% 6.97% 30.36% 30.89% 96.50% 76.32% 48.39%

ADJUSTABLE RATE SECURITIES FUND

YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993*** 19932 19921
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $9.87 $9.82 $9.70 $10.04 $10.03 $10.00 $10.00
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .45 .37 .60 -
Net realized & unrealized gain (loss) .09 .06 .12 (.34) .01 .03 -
-----------------------------------------------------------------------------
Total from investment operations .65 .60 .70 .11 .38 .63 -
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (.56) (.55) (.58) (.45) (.37) (.60) -
Total distributions (.56) (.55) (.58) (.45) (.37) (.60) -
-----------------------------------------------------------------------------
Net Asset Value, end of year $9.96 $9.87 $9.82 $9.70 $10.04 $10.03 $10.00
=============================================================================
Total return* 6.75% 6.23% 7.57% 1.11% 3.83% 6.48% -
Ratios/supplemental data
Net assets, end of year (in 000's) $21,137 $15,707 $17,014 $24,564 $37,809 $12,521 -
Ratios to average net assets:
Expenses+ .81% .90% .70% .45% .11%** - -
Expenses excluding waiver
and payments by affiliate+ 1.00% 1.12% .99% .85% 1.01%** 1.91% -
Net investment income 5.64% 5.54% 5.82% 4.45% 4.69%** 5.84% -
Portfolio turnover rate 86.71% 41.67% 53.30% 84.67% 49.11% 48.95% -

</TABLE>

1For the period December 26, 1991 (effective date of registration) to January
31, 1992.
2For the year ended January 31, 1993.
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized.
***For the nine months ended October 31, 1993.
+Includes the Fund's share of the Portfolio's allocated expenses.

HOW DOES THE FUND INVEST ITS ASSETS?

THE FUND'S INVESTMENT OBJECTIVE

The Fund's investment objective is to seek a high level of current income,
consistent with lower volatility of principal. The Adjustable U.S. Government
Fund seeks to achieve its objective by investing all of its assets in the
Mortgage Portfolio, and the Adjustable Rate Securities Fund seeks to achieve
its investment objective by investing all of its assets in the Securities
Portfolio. The investment objective of the Portfolio is the same as the
Fund's. The investment policies of the Fund are also substantially similar to
the corresponding Portfolio's except, in all cases, the Fund may pursue its
policies by investing in an open-end management investment company with the
same investment objective and substantially similar policies and restrictions
as the Fund. Any additional exceptions are noted below.

The Fund buys shares of the Portfolio at Net Asset Value. An investment in
the Fund is an indirect investment in the corresponding Portfolio. The
investment objective of both the Fund and the Portfolio is fundamental and
may not be changed without shareholder approval. Of course, there is no
assurance that the Fund will achieve its objective.

TYPES OF SECURITIES IN WHICH THE PORTFOLIO MAY INVEST

The Mortgage Portfolio seeks to achieve its investment objective by investing
at least 65% of its total assets in adjustable rate mortgage securities
("ARMS") or other securities collateralized by or representing an interest in
mortgages (collectively, "mortgage securities") and having interest rates
that reset at periodic intervals. The Mortgage Portfolio will only invest in
mortgage securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities.

The Securities Portfolio seeks to achieve its investment objective by
investing at least 65% of its total assets in adjustable-rate securities
collateralized by or representing an interest in mortgages (collectively,
"mortgage securities"), including ARMS, issued or guaranteed by private
institutions or by the U.S. government, its agencies or instrumentalities,
and other adjustable-rate asset-backed securities (collectively, "ARS"),
which have interest rates that reset at periodic intervals. The Securities
Portfolio may invest in ARMS issued by private institutions, such as
commercial banks, savings and loan institutions, insurance companies, private
mortgage insurance companies, mortgage bankers, mortgage conduits of
investment banks, finance companies, real estate companies, private
corporations, and others, as long as they are consistent with the Securities
Portfolio's investment objective. Privately issued mortgage securities are
generally structured with one or more types of credit enhancement. The
Securities Portfolio will only invest in securities rated at least AA by S&P
or Aa by Moody's, two nationally recognized statistical rating agencies. The
Securities Portfolio may also invest in unrated securities if Advisers
determines that they are of comparable quality to the ratings above.

The Portfolio may also invest up to 35% of its total assets in (a) notes,
bonds, and discount notes of the Federal Home Loan Banks, Federal National
Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Small
Business Administration; (b) obligations of or guaranteed by the full faith
and credit of the U.S. government and repurchase agreements collateralized by
such obligations; (c) time and savings deposits (including CDs) in commercial
or savings banks or in institutions whose accounts are insured by the Federal
Deposit Insurance Corporation; and (d) with respect to the Securities
Portfolio, asset-backed and mortgage-backed securities issued by private and
government entities. The Securities Portfolio may invest in fixed-rate or
adjustable-rate securities. The Portfolio's investments in time deposits will
not exceed 10% of its total assets.

For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. government securities, CDs of banks having total assets in
excess of $5 billion, and repurchase agreements.

MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. A mortgage security is an
interest in a pool of mortgage loans. The primary issuers or guarantors of
mortgage securities are GNMA, FNMA, and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage
bankers, commercial banks, and savings and loan associations. FNMA and FHLMC
issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks,
credit unions, and mortgage bankers. Many mortgage securities issued or
guaranteed by GNMA, FHLMC, or FNMA ("certificates") are called pass-through
certificates because a pro rata share of both regular interest and principal
payments (less GNMA's, FHLMC's, or FNMA's fees and any applicable loan
servicing fees), as well as unscheduled early prepayments on the underlying
mortgage pool, are passed through monthly to the holder of the certificate
(i.e., the Portfolio).

The principal and interest on GNMA securities are guaranteed by GNMA, and the
guarantee is backed by the full faith and credit of the U.S. government.
Mortgage securities of FNMA and FHLMC are not backed by the full faith and
credit of the U.S. government. FNMA guarantees full and timely payment of all
interest and principal, and FHLMC guarantees timely payment of interest and
the ultimate collection of principal. Securities issued by FNMA are supported
by the agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by FHLMC are supported only by the credit of
the agency. There is no guarantee that the government will support government
agency securities and, accordingly, they may involve a risk of non-payment of
principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, securities they issue are generally
considered to be high-quality investments having minimal credit risks. The
yields on these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities due
largely to their prepayment risk. (See "What Are the Risks of Investing in
the Fund?")

The Securities Portfolio may invest in private mortgage securities. Private
issuers of mortgage securities may be both the originators of the underlying
mortgage loans as well as the guarantors of the mortgage securities. Pools of
mortgage loans created by private issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government guarantees of payment. Timely payment of
interest and principal is, however, generally supported by various forms of
insurance or guarantees, including individual loan, title, pool, and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurance companies, or the mortgage poolers. The insurance and
guarantees and the creditworthiness of their issuers will be considered when
determining whether a mortgage security meets the Securities Portfolio's
quality standards. The Securities Portfolio may buy mortgage securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the poolers, Advisers determines that the
securities meet the Securities Portfolio's quality standards.

Most mortgage securities are pass-through securities. This means that they
provide investors with payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. Guarantees as to the timely
payment of principal and interest do not extend to the value or yield of
mortgage securities nor do they extend to the value of the Portfolio's or the
Fund's shares.

ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage
securities, are interests in pools of mortgage loans. The interest rates on
the mortgages underlying ARMS are reset periodically. The adjustable interest
rate feature of the mortgages underlying the mortgage securities in which the
Portfolio invests generally will act as a buffer to reduce sharp changes in
the Portfolio's Net Asset Value in response to normal interest rate
fluctuations. As the interest rates are reset, the yields of the securities
will gradually align themselves to reflect changes in market rates so that
their market value will remain relatively stable compared to fixed-rate
securities. As a result, the Portfolio's Net Asset Value should fluctuate
less significantly than if the Portfolio invested in more traditional
long-term, fixed-rate securities. During periods of extreme fluctuation in
interest rates, however, the Portfolio's and thus the Fund's Net Asset Value
will fluctuate.

Because the interest rates on the mortgages underlying ARMS are reset
periodically, the Portfolio may participate in increases in interest rates,
resulting in both higher current yields and lower price fluctuations. This
differs from fixed-rate mortgages, which generally decline in value during
periods of rising interest rates. The Portfolio, however, will not benefit
from increases in interest rates to the extent that interest rates exceed the
maximum allowable annual or lifetime reset limits (or "cap rates") for a
particular mortgage security. Since most mortgage securities held by the
Portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, short-term fluctuations in interest rates above these levels could
cause these mortgage securities to "cap out" and behave more like long-term,
fixed-rate debt securities. If prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, the Portfolio
generally will be able to reinvest these amounts in securities with a higher
current rate of return.

Please keep in mind that during periods of rising interest rates, changes in
the interest rates on mortgages underlying ARMS lag behind changes in the
market rate. This may result in a lower Net Asset Value until the interest
rate resets to market rates. Thus, you could suffer some principal loss if
you sell your shares of the Fund before the interest rates on the underlying
mortgages in the Portfolio reset to market rates. Also, the Portfolio's Net
Asset Value could vary to the extent that current yields on mortgage-backed
securities are different from market yields during interim periods between
coupon reset dates. A portion of the ARMS in which the Portfolio may invest
may not reset for up to five years.

During periods of declining interest rates, the interest rates may reset
downward, resulting in lower yields to the Portfolio. As a result, the value
of ARMS is unlikely to rise during periods of declining interest rates to the
same extent as the value of fixed-rate securities. As with other
mortgage-backed securities, declining interest rates may result in
accelerated prepayments of mortgages, and the Fund may have to reinvest the
proceeds from the prepayments at the lower prevailing interest rates.

For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change in accordance with movements in a pre-specified,
published interest rate index. The amount of interest due to an ARMS holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest
that is charged to the mortgagor during the life of the mortgage or to
maximum and minimum changes to that interest rate during a given period.

Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term, fixed-rate mortgages. As new
types of mortgage securities are developed and offered to investors, the
Securities Portfolio may invest in them if they are consistent with the
Securities Portfolio's objective, policies, and quality standards.

ADJUSTABLE RATE SECURITIES. The Securities Portfolio will invest primarily in
ARS. ARS are debt securities with interest rates that are adjusted
periodically pursuant to a pre-set formula and interval. Movements in the
relevant index, as well as the applicable spread relating to the ARS, will
affect the interest paid on ARS and, therefore, the current income earned by
the Securities Portfolio by investing in ARS. (See "Resets.")

The interest rates on ARS are generally readjusted periodically to an
increment over the chosen interest rate index. These readjustments occur at
intervals ranging from one to sixty months. The degree of volatility in the
market value of the securities held by the Securities Portfolio and of the
Net Asset Value of the Securities Portfolio's and thus the Adjustable Rate
Securities Fund's shares will be a function primarily of the length of the
adjustment period and the degree of volatility in the applicable indices. It
will also be a function of the maximum increase or decrease of the interest
rate adjustment on any one adjustment date, in any one year, and over the
life of the securities. These maximum increases and decreases are typically
referred to as "caps" and "floors," respectively. The Securities Portfolio
does not seek to maintain an overall average cap or floor, although Advisers
will consider caps or floors in selecting ARS for the Securities Portfolio.

While the Securities Portfolio does not attempt to maintain a stable Net
Asset Value per share, during periods when short-term interest rates move
within the caps and floors of the securities held by the Securities
Portfolio, the fluctuation in market value of the ARS held by the Securities
Portfolio is expected to be relatively limited, since the interest rates on
the ARS generally adjust to market rates within a short period of time. In
periods of substantial short-term volatility in interest rates, the value of
the Securities Portfolio's holdings may fluctuate more substantially because
the caps and floors of its ARS may not permit the interest rates to adjust to
the full extent of the movements in the market rates during any one
adjustment period. In the event of dramatic increases in interest rates, the
lifetime caps on the ARS may prevent the securities from adjusting to
prevailing rates over the term of the loan. In this case, the market value of
the ARS may be substantially reduced, with a corresponding decline in the
Securities Portfolio's and thus the Adjustable Rate Securities Fund's Net
Asset Value.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), Real Estate Mortgage Investment
Conduits ("REMICs"), and Multi-Class Pass-Throughs. The Portfolio may invest
in CMOs issued and guaranteed by U.S. government agencies or
instrumentalities. The Securities Portfolio may also invest in REMICs issued
and guaranteed by U.S. government agencies and instrumentalities, in CMOs and
REMICs issued by certain financial institutions and other mortgage lenders,
and in multi-class pass-through securities. The Mortgage Portfolio will not
invest in privately issued CMOs and REMICs except to the extent that it
invests in the securities of entities that are instrumentalities of the U.S.
government.

CMOs and REMICs are debt instruments issued by special purpose entities that
are secured by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are equity interests in a trust composed
of mortgage loans or other mortgage-backed securities. Payments of principal
and interest on the underlying collateral provides the funds to pay the debt
service on CMOs or REMICs or to make scheduled distributions on the
multi-class pass-through securities. Unless the context indicates otherwise,
the discussion of CMOs below may also apply to REMICs and multi-class
pass-through securities.

A CMO is a mortgage-backed security that separates mortgage pools into
short-, medium-, and long-term components. Each component pays a fixed rate
of interest at regular intervals. These components enable an investor, such
as the Portfolio, to predict more accurately the pace at which principal is
returned. The Mortgage Portfolio may buy CMOs that are:

(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;

(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized by
U.S. government securities; or

(3) securities in which the proceeds of the issuance are invested in mortgage
securities, and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.

CMOs are issued in multiple classes. Each class, often referred to as a
"tranche," is issued at a specified coupon rate or adjustable rate and has a
stated maturity or final distribution date. Principal prepayments on
collateral underlying CMOs may cause the CMOs to be retired substantially
earlier than their stated maturities or final distribution dates. Interest is
paid or accrues on all classes of a CMO on a monthly, quarterly, or
semiannual basis. The principal and interest on the mortgages underlying CMOs
may be allocated among the several classes in many ways. In a common
structure, payments of principal on the underlying mortgages, including any
principal prepayments, are applied to the classes of a series of a CMO in the
order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class until all other
classes having an earlier stated maturity or final distribution date have
been paid in full.

One or more tranches of a CMO may have coupon rates that reset periodically
at a specified increment over an index, such as the London Interbank Offered
Rate ("LIBOR"). These adjustable rate tranches, known as "floating-rate
CMOs," will be treated as ARMS by the Securities Portfolio. Floating-rate
CMOs may be backed by fixed- or adjustable rate mortgages. To date,
fixed-rate mortgages have been more commonly used for this purpose.
Floating-rate CMOs are typically issued with lifetime "caps" on the coupon
rate. These caps, similar to the caps on ARMS, represent a ceiling beyond
which the coupon rate may not be increased, regardless of increases in the
underlying interest rate index.

Yields on privately issued CMOs have been historically higher than the yields
on CMOs issued and guaranteed by U.S. government agencies or
instrumentalities. The risk of loss due to default on privately issued CMOs,
however, is higher since they are not guaranteed by the U.S. government. The
trustees of the Adjustable Rate Securities Portfolios believe that the risk
of loss to the Securities Portfolio relating to its investments in privately
issued CMOs is justified by the higher yield the Securities Portfolio will
earn in light of the historic loss experience on these instruments. The
Securities Portfolio will not invest in subordinated, privately issued CMOs.

REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the underlying mortgages
include those backed by GNMA certificates or other mortgage pass-throughs
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or issued by private entities and not guaranteed by any
government agency or instrumentality.

Advisers currently intends to limit the Securities Portfolio's investment in
fixed-rate CMOs and REMICs to planned amortization classes ("PACs") and
sequential pay classes. A PAC is retired according to a payment schedule in
order to have a stable average life and yield even if expected prepayment
rates change. Within a specified broad range of prepayment possibilities, the
retirement of all classes is adjusted so that the PAC bond amortization
schedule will be met. Thus, PAC bonds offer more predictable amortization
schedules at the expense of less predictable cash flows for the other bonds
in the structure. Within a given structure, the Securities Portfolio
currently intends to buy the PAC bond with the shortest remaining average
life. A sequential pay CMO is structured so that only one class of bonds will
receive principal until it is paid off completely. Then the next sequential
pay CMO class will begin receiving principal until it is paid off. The
Securities Portfolio currently intends to buy sequential pay CMO securities
in the class with the shortest remaining average life.

To the extent any privately issued CMOs and REMICs in which the Securities
Portfolio invests are considered by the SEC to be investment companies, the
Securities Portfolio will limit its investments in those securities in a
manner consistent with the 1940 Act.

RESETS. The interest rates paid on ARMS, ARS, and CMOs generally are
readjusted at intervals of one year or less to an increment over some
predetermined interest rate index, although some securities in which the
Portfolio may invest may have intervals as long as five years. There are
three main categories of indices: those based on LIBOR, those based on U.S.
Treasury securities, and those derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Commonly used
indices include the one-, three-, and five-year constant-maturity Treasury
rates; the three-month Treasury bill rate; the 180-day Treasury bill rate;
rates on longer-term Treasury securities; the 11th District Federal Home Loan
Bank Cost of Funds; the National Median Cost of Funds; the one-, three-,
six-month, or one-year LIBOR; the prime rate of a specific bank; or
commercial paper rates. Some indices, such as the one-year constant-maturity
Treasury rate, closely mirror changes in market interest rate levels. Others,
such as the 11th District Federal Home Loan Bank Cost of Funds, tend to lag
behind changes in market interest rate levels and tend to be somewhat less
volatile.

CAPS AND FLOORS. The underlying mortgages that collateralize ARMS and CMOs
will frequently have caps and floors that limit the maximum amount by which
the loan rate to the borrower may change up or down (a) per reset or
adjustment interval and (b) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.

STRIPPED MORTGAGE SECURITIES. The Securities Portfolio may invest in stripped
mortgage securities, which are derivative multi-class mortgage securities.
The stripped mortgage securities in which the Securities Portfolio may invest
will only be issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Securities
Portfolio invests.

Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security has
one class that receives some of the interest and most of the principal from
the mortgage assets, while the other class receives most of the interest and
the remainder of the principal. In the most extreme case, one class receives
all of the interest (the interest-only or "IO" class), while the other class
receives all of the principal (the principal-only or "PO" class). The yield
to maturity on an IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal payments
(including prepayments) on the underlying mortgage assets. A rapid rate of
principal payments may have a material adverse effect on the yield to
maturity of any IO class held by the Securities Portfolio. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Securities Portfolio may fail to recoup its initial investment fully,
even if the securities are rated in the highest rating categories, AAA or
Aaa, by S&P or Moody's, respectively.

Stripped mortgage securities are purchased and sold by institutional
investors, such as the Securities Portfolio, through several investment
banking firms acting as brokers or dealers. These securities were only
recently developed, and traditional trading markets have not yet been
established for all stripped mortgage securities. Accordingly, some of these
securities may be illiquid. The staff of the SEC has indicated that only
government-issued IO or PO securities that are backed by fixed-rate mortgages
may be deemed to be liquid, if procedures with respect to determining
liquidity are established by a fund's board. The Board of Trustees of the
Adjustable Rate Securities Portfolios may, in the future, adopt procedures
that would permit the Securities Portfolio to acquire, hold, and treat as
liquid government-issued IO and PO securities. At the present time, however,
all such securities will continue to be treated as illiquid and will,
together with any other illiquid investments, not exceed 10% of the
Securities Portfolio's net assets. This position may be changed in the
future, without notice to shareholders, in response to the SEC staff's
continued reassessment of this matter, as well as to changing market
conditions.

FLOATERS. Up to 5% of the Securities Portfolio's assets may be invested in
inverse floaters and super floaters. Please see the SAI for more information
about these investments.

ASSET-BACKED SECURITIES. The Securities Portfolio may invest in asset-backed
securities, including adjustable-rate asset-backed securities that have
interest rates that reset at periodic intervals. Asset-backed securities are
similar to mortgage-backed securities. The underlying assets, however, may
include receivables on home equity and credit card loans, and automobile,
mobile home, and recreational vehicle loans and leases. Asset-backed
securities are issued in either a pass-through structure (similar to a
mortgage pass-through structure) or a pay-through structure (similar to a CMO
structure). There may be other types of asset-backed securities that are
developed in the future in which the Securities Portfolio may invest. In
general, collateral supporting asset-backed securities has shorter maturities
than mortgage loans and historically has been less likely to experience
substantial prepayment.

DERIVATIVES. Some of the types of investments discussed in this prospectus
may be considered "derivatives." Derivatives are broadly defined as financial
instruments whose performance is derived, at least in part, from the
performance of an underlying asset. To the extent indicated, each Portfolio
may invest in CMOs and uncovered mortgage dollar rolls, and the Securities
Portfolio may also invest in REMICs, multi-class pass-throughs, stripped
mortgage securities, other asset-backed securities, and structured notes.
Some, all, or the component parts of these instruments may be considered
derivatives. The Portfolio may use these instruments to help manage risks
relating to interest rates and other market factors, to increase liquidity,
and/or to invest in a particular instrument in a more efficient or less
expensive way. The Portfolio will not necessarily use these instruments or
investment strategies to the full extent permitted unless Advisers believes
that doing so will help the Portfolio achieve its objective, and the
Portfolio will not use all instruments or strategies at all times.

OTHER INVESTMENT POLICIES OF THE PORTFOLIO

MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage "dollar rolls"
in which the Portfolio sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially
similar (name, type, coupon, and maturity) securities on a specified future
date. During the roll period, the Portfolio forgoes principal and interest
paid on the mortgage-backed securities. The Portfolio is compensated by the
difference between the current sale price and the lower forward price for the
future purchase (often referred to as the "drop"), as well as the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position
or a cash equivalent security position.

REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the Portfolio by
a custodian bank approved by the Board. The bank or broker-dealer must
transfer to the custodian securities with an initial market value of at least
102% of the repurchase price to help secure the obligation to repurchase the
securities at a later date. The securities are then marked-to-market daily to
maintain coverage of at least 100%. If the bank or broker-dealer does not
repurchase the securities as agreed, the Portfolio may experience a loss or
delay in the liquidation of the securities underlying the repurchase
agreement and may also incur liquidation costs. The Portfolio, however,
intends to enter into repurchase agreements only with banks or broker-dealers
that are considered creditworthy by Advisers.

WHEN-ISSUED AND DELAYED TRANSACTIONS. The Portfolio may buy U.S. government
obligations (or any securities in the case of the Securities Portfolio) on a
"when-issued" or "delayed-delivery" basis. These transactions are
arrangements under which the Portfolio buys securities with payment and
delivery scheduled for a future time, generally within 30 to 60 days.
Purchases of securities on a when-issued or delayed-delivery basis are
subject to market fluctuation and the risk that the value or yield at
delivery may be more or less than the purchase price or the yield available
when the transaction was entered into. Although the Portfolio will generally
buy securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if the
Portfolio deems it to be advisable. When the Portfolio is the buyer, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent the Portfolio
engages in when-issued and delayed-delivery transactions, it does so only for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage. In
when-issued and delayed-delivery transactions, the Portfolio relies on the
seller to complete the transaction. The seller's failure to do so may cause
the Portfolio to miss a price or yield considered advantageous. Securities
purchased on a when-issued or delayed-delivery basis generally do not earn
interest until their scheduled delivery date. The Portfolio is not subject to
any percentage limit on the amount of its assets that may be invested in
when-issued purchase obligations.

LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Adjustable Rate Securities Portfolios' Board of Trustees and subject to the
following conditions, the Portfolio may lend its portfolio securities to
qualified securities dealers or other institutional investors, if such loans
do not exceed 10% of the value of the Portfolio's total assets at the time of
the most recent loan. The borrower must deposit with the Portfolio's
custodian bank collateral with an initial market value of at least 102% of
the market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily
to maintain collateral coverage of at least 102%. This collateral shall
consist of cash. The lending of securities is a common practice in the
securities industry. The Portfolio may engage in security loan arrangements
with the primary objective of increasing the Portfolio's income either
through investing cash collateral in short-term interest-bearing obligations
or by receiving a loan premium from the borrower. Under the securities loan
agreement, the Portfolio continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.

BORROWING. The Securities Portfolio may borrow from banks from time to time
to increase its investments. Borrowings may be secured or unsecured and at
fixed or variable interest rates. The Securities Portfolio will borrow only
to the extent that the value of its assets, less its liabilities (excluding
borrowings), is equal to at least 300% of its borrowings. If the Securities
Portfolio does not meet the 300% test, it will be required to reduce its debt
within three business days to the extent necessary to meet the test. This may
require the Securities Portfolio to sell a portion of its investments at a
disadvantageous time.

Borrowing for investment purposes is a speculative investment technique known
as "leveraging." When the Securities Portfolio leverages its assets, the
Securities Portfolio's Net Asset Value may increase or decrease at a greater
rate than if the Securities Portfolio were not leveraged. The interest
payable on the amount borrowed increases the Securities Portfolio's expenses
(and thus reduces the income to the Adjustable Rate Securities Fund), and if
the appreciation and income produced by the investments purchased with the
borrowings do not exceed the cost of the borrowing, leveraging may reduce the
investment performance of the Securities Portfolio.

The Fund may not borrow money nor mortgage nor pledge any of its assets,
except that borrowings (and a pledge of assets therefor) for temporary or
emergency purposes may be made from banks in an amount up to 20% of the
Fund's total asset value.

Illiquid Investments. The Portfolio's policy is not to invest more than 10%
of its net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the Portfolio has valued them.

OTHER POLICIES AND RESTRICTIONS. The Fund and the Portfolio have a number of
additional investment restrictions that limit their activities to some
extent. Some of these restrictions may only be changed with shareholder
approval. For a list of these restrictions and more information about the
Fund's and the Portfolio's investment policies, please see "How Does the Fund
Invest Its Assets?" and "Investment Restrictions" in the SAI.

Each of the Fund's and the corresponding Portfolio's policies and
restrictions discussed in this prospectus and in the SAI is considered at the
time the Fund makes an investment. The Fund and the Portfolio are generally
not required to sell a security because of a change in circumstances.

THE FUND'S MASTER/FEEDER FUND STRUCTURE

The Fund's structure, whereby it invests all of its assets in the
corresponding Portfolio, is sometimes known as a "Master/Feeder Fund
Structure." This is a relatively new format that often results in certain
operational and other complexities. The Franklin organization was one of the
first mutual fund complexes in the country to implement this structure, and
the Board does not believe the additional complexities outweigh the potential
benefits to be gained by shareholders.

The Fund's investment of all of its assets in the corresponding Portfolio was
previously approved by shareholders of the Fund. Whenever the Fund, as an
investor in the corresponding Portfolio, is asked to vote on a matter
relating to the Portfolio, the Fund will hold a meeting of Fund shareholders
and will cast its votes in the same proportion as the Fund's shareholders
have voted.

The Franklin Templeton Funds have one other fund that invests in the Mortgage
Portfolio and one other that invests in the Securities Portfolio. They are
designed for institutional investors only. In the future, other funds may be
created that may likewise invest in the Portfolio, or existing funds may be
restructured so that they may invest in the Portfolio. If requested, we will
forward additional information to you about other funds through which you may
invest in the Portfolio. If you would like to receive this information,
please call Fund Information.

The Portfolio is a diversified series of the Adjustable Rate Securities
Portfolios, an open-end management investment company. The Adjustable Rate
Securities Portfolios was organized as a Delaware business trust on February
15, 1991, and is registered with the SEC. The Adjustable Rate Securities
Portfolios currently issues shares in two separate series. In the future,
additional series may be added by the Board of Trustees of the Adjustable
Rate Securities Portfolios.

For information on the Fund's administrator and its expenses, please see "Who
Administers the Fund?"

THE ADVANTAGES OF INVESTING IN THE FUND

The Adjustable U.S. Government Fund enables you to invest easily in mortgage
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities by allowing an initial investment of as low as $100.
Similarly, the Adjustable Rate Securities Fund enables you to invest easily
in adjustable rate securities rated in the top two rating categories by
nationally recognized statistical rating agencies or issued or guaranteed by
the U.S. government, its agencies or instrumentalities by allowing an initial
investment of as low as $100. Any guarantee will extend to the payment of
interest and principal due on the securities and will not provide any
protection from fluctuations in the market value of the securities. The Fund
believes that by investing in the corresponding Portfolio, which in turn
invests primarily in securities that provide for variable interest rates, it
will achieve a more consistent and less volatile Net Asset Value than is
characteristic of mutual funds that invest primarily in similar securities
paying a fixed interest rate. The dividends from the Adjustable U.S.
Government Fund's net investment income are declared and distributed monthly.
Some change in the Net Asset Value per share of the Adjustable U.S.
Government Fund during the month may be expected due to the accumulation of
undistributed income and the pay-out of such income once a month as a
dividend. Please see "How Are Fund Shares Valued?" in the SAI. Principal
payments received on the Portfolio's mortgage securities will be reinvested
by the Portfolio in other securities. These securities may have a higher or
lower yield than the mortgage securities already held by the Portfolio,
depending on market conditions.

An investment in the Fund also provides liquidity since you may redeem shares
of the Fund at any time at the current Net Asset Value. Please see "How Do I
Sell Shares?"

IF YOU ARE AN INVESTOR WHOSE INVESTMENT AUTHORITY IS RESTRICTED BY APPLICABLE
LAW OR REGULATION YOU SHOULD CONSULT YOUR LEGAL ADVISOR TO DETERMINE WHETHER
AND TO WHAT EXTENT SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR YOU.
If you are a municipal investor considering investment of proceeds of bond
offerings into the Fund, you should consult with expert counsel to determine
the effect, if any, of various payments made by the Fund, Advisers, or
Distributors on arbitrage rebate calculations.

WHAT ARE THE RISKS OF INVESTING IN THE FUND?

The value of your shares will increase as the value of the securities owned
by the Fund increases and will decrease as the value of the Fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the Fund. Since the Fund invests its assets in
shares of the corresponding Portfolio, as the value of the securities owned
by the Portfolio fluctuates, the Portfolio's Net Asset Value per share, and
thus the Fund's Net Asset Value per share, will also fluctuate. In addition
to the factors that affect the value of any particular security that the Fund
or the corresponding Portfolio owns, the value of Fund shares may also change
with movements in the bond market as a whole.

INTEREST RATE RISK. Changes in interest rates will affect the value of the
Portfolio's and thus the corresponding Fund's portfolio and their share
prices. Rising interest rates, which often occur during times of inflation or
a growing economy, are likely to have a negative effect on the value of the
Portfolio's and the corresponding Fund's shares. Interest rates have
increased and decreased in the past. These changes are unpredictable.

MASTER/FEEDER FUND STRUCTURE. An investment in the Fund may be subject to
certain risks due to the Fund's structure. These risks include the potential
that if other shareholders in the Portfolio sell their shares, the
corresponding Fund's expenses may increase or the economies of scale that
have been achieved as a result of the structure may diminish. Institutional
investors in the Portfolio that have a greater pro rata ownership interest in
the Portfolio than the corresponding Fund could also have effective voting
control over the operation of the Portfolio. Furthermore, if the Portfolio
changes its objective or any of its fundamental policies and shareholders of
the corresponding Fund do not approve the change for the Fund, the Fund may
be forced to withdraw its investment from the Portfolio and seek another
investment company with the same objective and policies.

If the Board considers it to be in the best interest of the Fund, the Fund
may withdraw its investment in the corresponding Portfolio at any time. In
that event, the Board would consider what action to take, including the
investment of all of the Fund's assets in another pooled investment entity
with the same investment objective and substantially similar policies as the
Fund or the hiring of an investment advisor to manage the Fund's investments.
Either circumstance may cause an increase in Fund expenses.

MORTGAGE SECURITIES. The mortgage securities in which the Portfolio invests
differ from conventional bonds in that principal is paid over the life of the
mortgage security rather than at maturity. As a result, the holder of the
mortgage securities (i.e., the Portfolio) receives monthly scheduled payments
of principal and interest and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When the holder
reinvests the payments and any unscheduled prepayments of principal it
receives, it may receive a rate of interest that is lower than the rate on
the existing mortgage securities. For this reason, mortgage securities may be
less effective than other types of U.S. government securities as a means of
"locking in" long-term interest rates. In general, fixed-rate mortgage
securities have greater exposure to this "prepayment risk" than ARMS.

The market value of mortgage securities, like other U.S. government
securities, will generally vary inversely with changes in market interest
rates, declining when interest rates rise and rising when interest rates
decline. An unexpected rise in interest rates could extend the life of a
mortgage security because of a lower than expected level of prepayments,
potentially reducing the security's value and increasing its volatility.
ARMS, however, have less risk of a decline in value during periods of rapidly
rising rates but, like other mortgage securities, may also have less
potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. To the extent market interest rates increase beyond
applicable caps or maximum rates on ARMS or beyond the coupon rates of
fixed-rate mortgage securities, the market value of the mortgage security
would likely decline to the same extent as a conventional fixed-rate security.

In addition, to the extent mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments may result in
some loss of the holder's principal investment to the extent of the premium
paid. On the other hand, if mortgage securities are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income that, when distributed to shareholders, will be taxable
as ordinary income.

Some of the CMOs in which the Portfolio may invest may have less liquidity
than other types of mortgage securities. As a result, it may be difficult or
impossible to sell the securities at an advantageous price or time under
certain circumstances.

With respect to pass-through mortgage pools issued by private issuers, there
is no assurance that private insurers of the securities will be able to meet
their obligations. Although the market for privately issued mortgage
securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. These securities are
subject to the Securities Portfolio's limit with respect to illiquid
investments.

ADJUSTABLE RATE SECURITIES. ARS have several characteristics that you should
consider before investing in the Adjustable Rate Securities Fund. As
indicated above, the interest rate reset features of ARS held by the
Securities Portfolio will reduce the effect on the Securities Portfolio's Net
Asset Value per share caused by changes in market interest rates. The market
value of ARS and, therefore, the Securities Portfolio's and the Adjustable
Rate Securities Fund's Net Asset Value may vary, however, to the extent that
the current interest rate on ARS differs from market interest rates during
periods between the interest rate reset dates. These variations in value
occur inversely to changes in the market interest rates. Thus, if market
interest rates rise above the current rates on the securities, the value of
the securities will decrease, and if market interest rates fall below the
current rate on the securities, the value of the securities will rise. The
longer the adjustment intervals on ARS held by the Securities Portfolio, the
greater the potential for fluctuations in the Securities Portfolio's and thus
the Adjustable Rate Securities Fund's Net Asset Value.

As an investor in the Adjustable Rate Securities Fund, you will receive
increased income as a result of upward adjustments of the interest rates on
ARS held by the Securities Portfolio in response to market interest rates.
The Adjustable Rate Securities Fund and its shareholders, however, will not
benefit from increases in market interest rates once the rates rise to the
point where they cause the rates on ARS to reach their maximum adjustment
rate annual or lifetime caps. In addition, because of their interest rate
adjustment feature, ARS are not an effective means of "locking-in" attractive
interest rates for periods in excess of the adjustment period.

In the case of privately issued ARMS where the underlying mortgage assets
carry no agency or instrumentality guarantee, the mortgagors on the loans
underlying ARMS are often qualified for the loans on the basis of the
original payment amounts. The mortgagor's income may not be sufficient to
enable the mortgagor to continue making loan payments as the payments
increase, resulting in a greater likelihood of default. Conversely, any
benefits to the Adjustable Rate Securities Fund and its shareholders from an
increase in the Securities Portfolio's Net Asset Value caused by falling
market interest rates is reduced by the potential for a decline in the
interest rates paid on ARS held by the Securities Portfolio. The Adjustable
Rate Securities Fund, therefore, is not designed for investors seeking
capital appreciation.

ASSET-BACKED SECURITIES. Asset-backed securities entail certain risks not
present with mortgage-backed securities, because they do not have the benefit
of the same type of security interests in the underlying collateral. Credit
card receivables are generally unsecured, and a number of state and federal
consumer credit laws give debtors the right to set off certain amounts owed
on credit cards, thereby reducing the outstanding balance. In the case of
automobile receivables, there is a risk that the holders may not have either
a proper or first security interest in all of the obligations backing the
receivables due to the large number of vehicles involved in a typical
issuance and the technical requirements imposed under state laws. Therefore,
recoveries on repossessed collateral may not always be available to support
payments on securities backed by these receivables. For more information
about the risks of investing in asset-backed securities, please see the SAI.

Investments in fixed-rate securities generally decline in value during
periods of rising interest rates and increase in value when interest rates
fall. To the extent the Securities Portfolio invests in fixed-rate
securities, the value of the Securities Portfolio's and thus the Adjustable
Rate Securities Fund's shares will be more sensitive to interest rate changes
than if the Securities Portfolio were fully invested in adjustable-rate
securities.

WHO ADMINISTERS THE FUND?

THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.

The Board, with approval of all disinterested and interested Board members,
has adopted written procedures designed to deal with potential conflicts of
interest that may arise from the Trust and the Adjustable Rate Securities
Portfolios having substantially the same boards. These procedures call for an
annual review of each Fund's relationship with the corresponding Portfolio.
If a conflict exists, the boards may take action, which may include the
establishment of a new board. The Board has determined that there are no
conflicts of interest at the present time. For more information, please see
"Summary of Procedures to Monitor Conflicts of Interest" and "Officers and
Trustees" in the SAI.

INVESTMENT MANAGER AND ADMINISTRATOR. Advisers manages the Portfolio's assets
and makes its investment decisions. Advisers also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisers and its affiliates manage over $221 billion in
assets. Advisers is also the administrator of the Fund. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the
Fund's Code of Ethics.

MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolios in which the Funds invest is: T. Anthony Coffey since 1991, Roger
Bayston since 1991 for the Securities Portfolio and since inception for the
Mortgage Portfolio, and Jack Lemein since inception.

T. 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 the Franklin Templeton Group
since 1989. He is a member of several securities industry-related
associations.

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 the Franklin Templeton Group since earning his MBA degree in 1991.

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 the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.

MANAGEMENT FEES. You will bear a portion of the Portfolio's operating
expenses, including its management fees, to the extent that the corresponding
Fund, as a shareholder of the Portfolio, bears these expenses. The portion of
the Portfolio's expenses borne by the corresponding Fund depends on the
Fund's proportionate share of the Portfolio's net assets.

During the fiscal year ended October 31, 1997, the Fund's proportionate share
of the corresponding Portfolio's management fees, before any advance waiver,
totaled 0.40% of the average daily net assets of the Fund. The Fund's
administration fees totaled 0.10%. Total operating expenses, including fees
paid to Advisers before any advance waiver, were 0.93% for the Adjustable
U.S. Government Fund and 1.00% for the Adjustable Rate Securities Fund. Under
an agreement by Advisers to limit its fees, the Adjustable U.S. Government
Fund and the Adjustable Rate Securities Fund each paid a proportionate share
of the corresponding Portfolio's management fees totaling 0.22% and 0.21%,
respectively. Total expenses of the Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund were 0.75% and 0.81%, respectively. Advisers
may end this arrangement at any time upon notice to the Board.

PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Portfolio Buy Securities for Its Portfolio?" in the SAI for more
information.

THE RULE 12B-1 PLAN

The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates; a prorated portion of Distributors' overhead expenses; and
the expenses of printing prospectuses and reports used for sales purposes,
and preparing and distributing sales literature and advertisements.

Payments by the Fund under the plan may not exceed 0.25% per year of the
Fund's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain purchases made without a sales charge, Securities Dealers may not be
eligible to receive the Rule 12b-1 fees associated with the purchase. For
more information, please see "The Fund's Underwriter" in the SAI.

HOW DOES THE FUND MEASURE PERFORMANCE?

From time to time, the Fund advertises its performance. Commonly used
measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.

Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows
the income per share earned by the Fund. The current distribution rate shows
the dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.

The Fund's investment results will vary. Performance figures are always based
on past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see
"How Does the Fund Measure Performance?" in the SAI.

HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS

ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.

TAXATION OF THE FUND'S INVESTMENTS

The Fund invests your money in the Portfolio which, in turn, invests in the
bonds and other securities that are described in the section "How Does the
Fund Invest Its Assets?" Special tax rules may apply in determining the
income and gains that the Portfolio earns on its investments. These rules
may, in turn, affect the amount of distributions that the Fund pays to you.
See the SAI for a discussion of these special tax rules.

TAXATION OF THE FUND. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.

TAXATION OF SHAREHOLDERS

DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. The Fund will
send you a statement in January of the current year that reflects the amount
of ordinary dividends, capital gain distributions, and non-taxable
distributions you received from the Fund in the prior year. This statement
will include distributions declared in December and paid to you in January of
the current year, but which are taxable as if paid on December 31 of the
prior year. The IRS requires you to report these amounts on your income tax
return for the prior year. The Fund's statement for the prior year will tell
you how much of your capital gain distribution represents 28% rate gain
property. The remainder of the capital gain distribution represents 20% rate
gain.

DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are
generally tax-deferred; this means that you are not required to report Fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and education IRAs.

DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.

REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your
income tax return. If you exchange Fund shares held for 90 days or less and
pay no sales charge, or a reduced sales charge, for the new shares, all or a
portion of the sales charge you paid on the purchase of the shares you
exchanged is not included in their cost for purposes of computing gain or
loss on the exchange. If you hold your shares for six months or less, any
loss you have will be treated as a long-term capital loss to the extent of
any capital gain distributions received by you from the Fund. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the Fund within 30 days
before or after your redemption or exchange.

NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions, and gains arising from redemptions or exchanges
of your Fund shares. Fund shares held by the estate of a non-U.S. investor
may be subject to U.S. estate tax. You may wish to contact your tax advisor
to determine the U.S. and non-U.S. tax consequences of your investment in the
Fund.

STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the Fund and gains arising from redemptions or exchanges of your
Fund shares will generally be subject to state and local income tax. It is
anticipated that no portion of the Fund's distributions will qualify for
exemption from state and local income tax as dividends paid from interest
earned on direct obligations of the U.S. government. The holding of Fund
shares may also be subject to state and local intangibles taxes. You may wish
to contact your tax advisor to determine the state and local tax consequences
of your investment in the Fund.

BACKUP WITHHOLDING. When you open an account, IRS regulations require that
you provide your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper tax certifications,
the Fund is required to withhold 31% of all the distributions (including
ordinary dividends and capital gain distributions), and redemption proceeds
paid to you. The Fund is also required to begin backup withholding on your
account if the IRS instructs the Fund to do so. The Fund reserves the right
not to open your account, or, alternatively, to redeem your shares at the
current net asset value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper tax certifications, or the IRS
instructs the Fund to begin backup withholding on your account.

THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. YOU SHOULD CONSULT YOUR
OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL, OR FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE FUND. PLEASE SEE "ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES" IN THE SAI FOR MORE COMPLETE DISCUSSION OF THESE
RULES AND RELATED MATTERS. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL
GAIN DISTRIBUTIONS, FOREIGN TAXES PAID, AND INCOME TAXES WITHHELD IS ALSO
DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK WHICH YOU MAY
OBTAIN BY CONTACTING FUND INFORMATION.

HOW IS THE TRUST ORGANIZED?

The Fund is a diversified series of Franklin Investors Securities Trust ("the
Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 22,
1986, and is registered with the SEC. Shares of each series of the Trust have
equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. Additional series and classes of shares may be
offered in the future.

The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.

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

ABOUT YOUR ACCOUNT

HOW DO I BUY SHARES?

OPENING YOUR ACCOUNT

To open your account, please follow the steps below. This will help avoid any
delays in processing your request.

1. Read this prospectus carefully.

2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $100*
o To add to your account: $ 25*

*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.

3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.

4. Make your investment using the table below.

Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your
check made payable to the Fund.

For additional investments:
Send a check made payable to the Fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will return
the money to the bank, and we will not credit
the purchase to your account.

2. For initial investments you must also return
your signed shareholder application to the Fund.

IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the
receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to
your account that day. If we receive your call
after 1:00 p.m. or the bank receives the wire
after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------

SALES CHARGE REDUCTIONS AND WAIVERS

- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.

QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.

TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------
Under $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.00% 0.85%
$1,000,000 or more* None None None

*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make
out of its own resources to Securities Dealers for certain purchases.

CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.

LETTER OF INTENT. You may buy shares at a reduced sales charge by completing
the Letter of Intent section of the shareholder application. A Letter of
Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay.

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

o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.

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

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

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

Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.

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

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

A qualified group is one that:

o Was formed at least six months ago,

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

o Has more than 10 members,

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

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

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

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

A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the Fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.

SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge.

Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:

1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class II shareholders of
another Franklin Templeton Fund who chose to reinvest their distributions in
the Fund before November 17, 1997, and to Advisor Class or Class Z
shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the Fund.

2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.

If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the Contingent Deferred Sales Charge you paid and the amount of
redemption proceeds that you reinvest.

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

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

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

5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds

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

If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent Deferred
Sales Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with additional
shares based on the contingent deferred sales charge you paid and the amount
of the redemption proceeds that you reinvest.

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

Various individuals and institutions also may buy shares of the Fund without
a front-end sales charge or Contingent Deferred Sales Charge, including:

1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.

2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is permissible
and suitable for you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations.

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

4. Registered Securities Dealers and their affiliates, for their
investment accounts only

5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer

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

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

8. Accounts managed by the Franklin Templeton Group

9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts

10. Group annuity separate accounts offered to retirement plans

11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below

RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases" above to be able to buy
shares without a front-end sales charge. We may enter into a special
arrangement with a Securities Dealer, based on criteria established by the
Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.

For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.

HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?

Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.

Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.

OTHER PAYMENTS TO SECURITIES DEALERS

The payments described below may be made to Securities Dealers who initiate
and are responsible for certain purchases made without a sales charge. The
payments are subject to the sole discretion of Distributors, and are paid by
Distributors or one of its affiliates and not by the Fund or its shareholders.

1. Purchases of $1 million or more - up to 0.75% of the amount invested.

2. Purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested.

3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.

4. Purchases by Chilean retirement plans - up to 1% of the amount invested.

A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 4 above or a payment of up to
1% for investments described in paragraph 2 will be eligible to receive the
Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.

FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.

FOR INVESTORS OUTSIDE THE U.S.

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

MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?

We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.

Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums.

Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative

Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.

WILL SALES CHARGES APPLY TO MY EXCHANGE?

You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund. If you have never paid a sales charge on your
shares because, for example, they have always been held in a money fund, you
will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without
a sales charge.

CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. For accounts with shares subject to a Contingent Deferred Sales
Charge, we will first exchange any shares in your account that are not
subject to the charge. If there are not enough of these to meet your exchange
request, we will exchange shares subject to the charge in the order they were
purchased. If you exchange shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. For more information about the Contingent Deferred Sales
Charge, please see that section under "How Do I Sell Shares?"

EXCHANGE RESTRICTIONS

Please be aware that the following restrictions apply to exchanges:

o You may only exchange shares within the SAME CLASS, except as noted below.

o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this option
to be available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."

o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.

o The fund you are exchanging into must be eligible for sale in your state.

o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.

o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.

Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.

LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES

Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Fund shares
for Advisor Class shares of that fund. Certain shareholders of Class Z shares
of Franklin Mutual Series Fund Inc. may also exchange their Class Z shares
for shares of the Fund at Net Asset Value.

How Do I Sell Shares?

You may sell (redeem) your shares at any time.

Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would like your
redemption proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name
of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee. To avoid any
delay in processing, the instructions should include the items
listed in "By Mail" above.

Telephone requests will be accepted:

o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.

o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund

o Unless you are selling shares in a Trust Company retirement
plan account

o Unless the address on your account was changed by phone within
the last 15 days

- If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH Call your investment representative
YOUR
DEALER
- ------------------------------------------------------------------------------

We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.

The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the Fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.

If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or
draft to clear. A certified or cashier's check may clear in less time.

Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.

Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.

TRUST COMPANY RETIREMENT PLAN ACCOUNTS

To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.

CONTINGENT DEFERRED SALES CHARGE

If you did not pay a front-end sales charge because you invested $1 million
or more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million
or more, any additional investments you make without a sales charge may also
be subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less.

Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to
a Contingent Deferred Sales Charge if the retirement plan is transferred out
of the Franklin Templeton Funds or terminated within 365 days of the
account's initial purchase in the Franklin Templeton Funds.

We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.

Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated number of shares, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.

WAIVERS. We waive the Contingent Deferred Sales Charge for:

o Account fees

o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the Securities Dealer of record has entered into a
supplemental agreement with Distributors

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

o Redemptions following the death of the shareholder or beneficial owner

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

o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million, you can
redeem up to $120,000 annually through a systematic withdrawal plan free of
charge.

o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy

o Tax-free returns of excess contributions from employee benefit plans

o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)

o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans

WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?

The Adjustable U.S. Government Fund declares dividends from its net
investment income monthly to shareholders of record on the first business day
before the 15th of the month and pays them on or about the last day of that
month.

The Adjustable Rate Securities Fund declares dividends from its net
investment income daily and pays them monthly on or about the last day of the
month. The daily allocation of net investment income begins on the day after
we receive your money or settlement of a wire order trade and continues to
accrue through the day we receive your request to sell your shares or the
settlement of a wire order trade.

Capital gains, if any, may be distributed annually, usually in December.

Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.

If you buy Adjustable U.S. Government Fund shares shortly before the record
date, please keep in mind that any distribution will lower the value of the
Fund's shares by the amount of the distribution and you will then receive a
portion of the price you paid back in the form of a taxable distribution.

If you buy Adjustable Rate Securities Fund shares shortly before the Fund
deducts a capital gain distribution from its Net Asset Value, please keep in
mind that you will receive a portion of the price you paid back in the form
of a taxable distribution.

DISTRIBUTION OPTIONS

You may receive your distributions from the Fund in any of these ways:

1. Buy additional shares of the Fund - You may buy additional shares of the
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.

2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy 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 distributions in cash - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your Account."

TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date (in
the case of the Adjustable U.S. Government Fund) and the reinvestment date
(in the case of the Adjustable Rate Securities Fund) for us to process the
new option. For Trust Company retirement plans, special forms are required to
receive distributions in cash.

TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS

SHARE PRICE

When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share, plus any applicable sales charges. When you sell shares, you
receive the Net Asset Value per share.

The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the Fund. Your redemption proceeds
from the Adjustable U.S. Government Fund will not earn interest between the
time we receive the order from your dealer and the time we receive any
required documents.

HOW AND WHEN SHARES ARE PRICED

The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value and Offering Price
of the Fund in many newspapers.

To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.

WRITTEN INSTRUCTIONS

Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:

o Your name,

o The Fund's name,

o A description of the request,

o For exchanges, the name of the fund you are exchanging into,

o Your account number,

o The dollar amount or number of shares, and

o A telephone number where we may reach you during the day, or in the evening
if preferred.

JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.

SIGNATURE GUARANTEES

For our mutual protection, we require a signature guarantee in the following
situations:

1) You wish to sell over $50,000 worth of shares,

2) You want the proceeds to be paid to someone other than the registered
owners,

3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,

4) We receive instructions from an agent, not the registered owners,

5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.

A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.

SHARE CERTIFICATES

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

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

TELEPHONE TRANSACTIONS

You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.

When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.

For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.

TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.

To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.

ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS

When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.

JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.

GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.

TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.

Required Documents. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.

Type of Account Documents Required
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------

PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or

2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or

2. A certification for trust

- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.

IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE

If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.

KEEPING YOUR ACCOUNT OPEN

Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100.

SERVICES TO HELP YOU MANAGE YOUR ACCOUNT

Automatic Investment Plan

Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. 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 discontinue the program at any time by notifying
Investor Services by mail or phone.

AUTOMATIC PAYROLL DEDUCTION

You may have money transferred from your paycheck to the Fund to buy
additional shares. Your investments will continue automatically until you
instruct the Fund and your employer to discontinue the plan. To process your
investment, we must receive both the check and payroll deduction information
in required form. Due to different procedures used by employers to handle
payroll deductions, there may be a delay between the time of the payroll
deduction and the time we receive the money.

SYSTEMATIC WITHDRAWAL PLAN

Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.

If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or 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. Once your plan is established, any distributions paid by the Fund will
be automatically reinvested in your account.

You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.

To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold 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 discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.

ELECTRONIC FUND TRANSFERS

You may choose to have dividend and capital gain distributions from the Fund
or payments under a systematic withdrawal plan sent directly to a checking
account. If the checking account is with 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. We will send any payments made during
that time to the address of record on your account.

TELEFACTS(R)

From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:

o obtain information about your account;

o obtain price and performance information about any Franklin Templeton
Fund;

o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and

o request duplicate statements and deposit slips for Franklin Templeton
accounts.

You will need the Fund's code number to use TeleFACTS(R). The Adjustable U.S.
Government Fund's code number is 138. The Adjustable Rate Securities Fund's
code number is 151.

STATEMENTS AND REPORTS TO SHAREHOLDERS

We will send you the following statements and reports on a regular basis:

o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.

o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.

INSTITUTIONAL ACCOUNTS

Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.

AVAILABILITY OF THESE SERVICES

The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.

WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?

If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.

HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.

GLOSSARY

USEFUL TERMS AND DEFINITIONS

ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and
the Fund's administrator

BOARD - The Board of Trustees of the Trust

CD - Certificate of deposit

CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Because the Fund's sales charge structure and Rule 12b-1 plan are similar to
those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.

CODE - Internal Revenue Code of 1986, as amended

CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each
following month.

CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.

DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."

ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the Fund is a legally permissible investment and that can only buy shares of
the Fund without paying sales charges.

FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund

FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries

FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds

INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent

IRA - Individual retirement account or annuity qualified under section 408 of
the Code

IRS - Internal Revenue Service

LETTER - Letter of Intent

MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.

MOODY'S - Moody's Investors Service, Inc.

NASD - National Association of Securities Dealers, Inc.

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.

NSCC - National Securities Clearing Corporation

NYSE - New York Stock Exchange

Offering Price - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 2.25%.

QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.

RESOURCES - Franklin Resources, Inc.

SAI - Statement of Additional Information

S&P - Standard & Poor's Corporation

SEC - U.S. Securities and Exchange Commission

SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.

SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code

SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code

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

TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.

U.S. - United States

WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.

EXHIBIT C

ANNUAL REPORT OF FRANKLIN INVESTORS SECURITIES TRUST
DATED OCTOBER 31, 1998

ANNUAL

REPORT

[Franklin Templeton Logo]

<PAGE>
[Celebrating over 50 Years Logo]

Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.

[Photo of Charles B. Johnson]
Charles B. Johnson
Chairman
Franklin Investors Securities Trust

<PAGE>
CONTENTS

Shareholder Letter ....................................................... 1

Fund Reports

Franklin Adjustable
Rate Securities Fund ..................................................... 5

Franklin Adjustable
U.S. Government
Securities Fund .......................................................... 14

Franklin Bond Fund ....................................................... 22

Franklin Convertible
Securities Fund .......................................................... 30

Franklin Equity
Income Fund .............................................................. 42

Franklin Global Government Income Fund ................................... 58

Franklin Short-Intermediate
U.S. Government
Securities Fund .......................................................... 76

Financial Highlights &
Statements of Investments ................................................ 86

Financial Statements ..................................................... 117

Notes to
Financial Statements ..................................................... 126

Independent
Auditors' Report ......................................................... 137

Tax Information .......................................................... 138

SHAREHOLDER LETTER

Dear Shareholder:

It's a pleasure to bring you Franklin Investors Securities Trust's annual report
for the period ended October 31, 1998.

FOREIGN STORMS BRING RAIN

Although El Nino's effects on domestic weather subsided in June, the U.S. stock
market faced its own version of adverse elements in August. On August 31, storm
clouds rained on American stock markets, washing away much of the first half of
1998's gains. On that day the Dow Jones(R) Industrial Average (DJIA) lost 512.61
points or 6.37% of its value.(1) Many analysts attributed this slide to concerns
about Russia's economic and political stability as well as evidence that the
Asian countries' economic problems are more deep-seated than originally
believed. At home, 1998 U.S. corporate profits, through the end of the reporting
period, fell dramatically from 1997 levels. Those companies with significant
Asian exports, competing with Asian products or those in commodity businesses
like paper, oil and steel were especially hard hit.

Responding to global financial problems, the Federal Reserve Board (the Fed)
gradually eased monetary policy in September and October. The Fed's monetary
policy panel, the Federal Open Market Committee, twice cut the federal funds
target rate by 0.25%, to 5.00%, hoping to stimulate growth. The Fed's move
attempted to prevent a recession by providing liquidity to the financial system
and making it easier for major corporations to obtain favorable lending from
banks. This interest-rate cut

(1) Source: Bloomberg.

<PAGE>
outshone lackluster earnings announcements and fueled October's stock market
rally, where the DJIA jumped 749.48 points, or 9.56% for the month. Of course,
this gain followed on the heels of August's 15.13% DJIA drop, which was the
biggest monthly percentage drop since October 1987.

At the same time, the very factors negatively impacting the U.S. stock market --
the slowing domestic economy and Russian and Asian economic turmoil -- provided
a boost to the U.S. bond market. Low inflation at home and foreign investors
flocking to U.S. bonds, especially U.S. Treasuries seen as a "safe haven" from
stock market volatility abroad, drove bond prices higher. Bond price and yield
move in an inverse relationship, so yields on long-term bonds fell to their
lowest levels in years. The benchmark 30-year U.S. Treasury bond, after falling
as low as 4.72%, ended the reporting period yielding 5.16%, compared with 6.15%
a year earlier.(1)

What is an investor to do faced with steeply fluctuating markets? While the
phrase "investment value may go down as well as up" abounds in financial
literature, the stock market's unusually high gains in the past few years may
have led many investors to believe otherwise. Putting the 1990s into historical
perspective, it is worth noting that the average yearly gain in the S&P 500(R),
which paints a broader picture of the U.S. market than the DJIA, has been
+10.51% since 1930; however, from January 1, 1990, through June 30, 1998, the
S&P 500 rose an average of +17.81% a year.(2) Also, there have been fewer market
corrections during

(2). Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates.

<PAGE>
the 1990s than previous decades, with a market correction being defined as a 10%
or greater decline over a period of days, weeks or months.

WEATHERPROOFING YOUR PORTFOLIO

In times like these, it's easy to understand why people can become emotional
about their investments. That's why we believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their goals
and why they made their investment choices in the first place. Two, discuss the
value of diversification, which can help reduce the risk that any one type of
security will have a negative impact on an overall portfolio, and check to
determine whether their investments are still properly diversified. As shown
during the reporting period, the bond and stock markets often behave
differently. In each of the five years since 1973 that stocks posted negative
annual returns, bonds posted positive returns.(3) Three, review their investment
timeframe to help put recent market declines into perspective and avoid turning
what could be only a temporary paper loss into a permanent one. Maintaining a
long-term outlook is one of the keys to weathering market volatility.

"While investment success is the
primary objective of investment
planning, one important
by-product of a good plan can
be peace of mind."

An important component of a long-term approach is setting up a regular
investment plan. Investing on a scheduled basis, regardless of market
directions, can help investors take advantage of market downturns when prices
are low, and benefit from any market rallies. We encourage you to contact your

(3). Source: For bond market statistics based on the Lehman Brothers Government/
Corporate Bond Index - Lehman Brothers; for stock measured by the S&P 500 Index
- -- Standard & Poor's(R).

<PAGE>
investment representative to discuss setting up a regular investment plan. While
investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind.

As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.

Sincerely,

/s/ C.B. Johnson
- ----------------
Charles B. Johnson
Chairman
Franklin Investors Securities Trust

<PAGE>
FRANKLIN ADJUSTABLE
RATE SECURITIES FUND

FUND CATEGORY
[Pyramid Graphic]

Your Fund's Goal: Franklin Adjustable Rate Securities Fund seeks to provide a
high level of current income consistent with lower volatility of principal than
a fund that invests in fixed-rate securities, by investing in a portfolio of
adjustable-rate securities.

ECONOMIC OVERVIEW

Volatility and uncertainty in global financial markets characterized the 12
months under review. The Asian economic crisis that unfolded in late 1997 spread
to Russia and other developing markets. At first, the U.S. economy felt minimal
impact, as the domestic economy enjoyed an unprecedented period of strong growth
coupled with low inflation. However, as 1998 progressed, signs of a slowdown
emerged. In particular, the manufacturing sector started to exhibit signs of
weakness. Bellwether manufacturing indicators, such as durable goods orders and
the National Association of Purchasing Managers' index, showed sharp downturns.
After six consecutive quarters of growth exceeding 3%, gross domestic product
gains finally dipped to an annualized 1.8% in the second quarter of 1998 and is
expected to remain weak through early 1999. The one remaining robust
manufacturing sub-sector is housing, driven by historically low mortgage rates.
Indeed, what strength the economy exhibited came primarily from the consumer
sector, which benefited from low unemployment and several years of

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 87 of
this report.

<PAGE>
stock market gains. The recent stock market sell-off put only a small dent in
the consumer's armor, so far.

TOP 5 ISSUERS
Franklin Adjustable Rate
Securities Fund
10/31/98

<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ----------------------------------------------
<S> <C>
FNMA 25.80%

GNMA 11.41%

U.S. Treasury 10.45%

Ryland 8.62%

Prudential Home 8.31%
</TABLE>

The weakening economic picture and absence of inflation led to an
unprecedented rally in U.S. Treasury securities. The 30-year Treasury bond yield
declined from 6.15% on October 31, 1997, to 5.15% on October 31, 1998, trading
as low as 4.72% at one point during the period. In September 1998, the Federal
Reserve Board (the Fed) lowered the federal funds target rate from 5.50% to
5.25%, its first such action since it raised rates in March 1997. Furthermore,
only 16 days later in a move that surprised many market experts, on October 15,
the Fed trimmed the federal funds rate and discount rate by another 0.25%.

In addition to low absolute interest rates, for much of the 12-month period the
fixed-income yield curve, the difference between short-term and long-term rates,
has been flat, with short-term rates close to long-term rates. Recently,
however, the curve has begun to steepen, as long-term rates have risen relative
to short-term rates. This yield-curve shape has important implications for
mortgage-backed securities, particularly adjustable-rate mortgages (ARMs).
Prepayments on ARMs are likely to decline as the yield curve steepens, because
homeowners have less incentive to refinance an ARM into a fixed-rate mortgage.
Thus, the high level of prepayments experienced by ARMs through most of the past
year should subside going forward.

PORTFOLIO NOTES

Franklin Adjustable Rate Securities Fund's underlying portfolio consists largely
of ARMs linked to or collateralized by mortgages issued or guaranteed by the
U.S. government, its agencies or instrumentalities. These include obligations of
the Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Home
Loan Mortgage Corporation (FHLMC or Freddie Mac) and the Government National
Mortgage Association

<PAGE>
FUND'S DISTRIBUTION RATE VS. TREASURY BILL ANNUALIZED YIELD
Franklin Adjustable Rate Securities Fund vs.
One-Year Constant Maturity T-Bill
(11/1/97 - 10/31/98)

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
RATE SECURITIES FUND ONE-YEAR CONSTANT MATURITY
DATE DISTRIBUTION RATE TREASURY BILL YIELD
- -----------------------------------------------------------------------------
<S> <C> <C>
11/1/97 6.14% 5.52%
12/31/97 5.68% 5.51%
1/31/98 5.08% 5.19%
2/28/98 5.76% 5.41%
3/31/98 5.36% 5.41%
4/30/98 5.51% 5.40%
5/31/98 5.20% 5.42%
6/30/98 4.87% 5.38%
7/31/98 5.24% 5.38%
8/31/98 4.95% 4.95%
9/30/98 5.26% 4.41%
10/31/98 4.80% 4.18%
</TABLE>

Source: Federal Reserve.

(GNMA or Ginnie Mae). The fund also invests in privately issued mortgage-backed
securities, rated AAA or AA by national credit rating agencies, such as S&P(R)
and Moody's.

The fund employs a fiscally responsible strategy of investing in seasoned ARM
securities, which tend to prepay at slower rates than newer-production ARMs,
which have not been through previous refinancing cycles. We choose securities
using a value-oriented approach, emphasizing bonds' fundamental value relative
to comparable securities as well as historical prepayment performance. During
the 12-month review period, the fund underperformed its benchmark, the Lehman
Brothers Short U.S. Government 1-2 Year Index, with a return of +5.47% vs.
+7.18%.(1) There were no major changes to the portfolio's overall mix during the
year. However, we did increase the fund's allocation in GNMA ARMs, from 4.42% to
11.41% of total net assets, which became significantly cheaper versus their
historical averages.

(1). Source: Lehman Brothers Global Family of Indices, October 31, 1998. Index
is unmanaged and includes reinvested dividends. One cannot invest directly in an
index.

<PAGE>
At the close of the period, your fund's distribution rate was 4.80%. As shown in
the graph on the previous page, this rate remained competitive, slightly
outperforming the yield of the one-year Treasury bill. Of course, the value and
interest rate of Treasuries, if held to maturity, are fixed, and principal is
guaranteed. In contrast, the investment return and share price of Franklin
Adjustable Rate Securities Fund will fluctuate with market conditions.

Going forward, the current high level of market uncertainty will likely continue
for the near term, as long as the global financial crisis persists. Interest
rates should remain volatile, and further Fed action is possible. We feel the
fund is well-positioned to weather additional financial storms that may appear
on the horizon, as we maintain our fiscally responsible strategy, in an effort
to produce consistent fund performance in all types of interest-rate
environments.

<PAGE>
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.

Sincerely,

/s/ T. Anthony Coffey
- ---------------------
T. Anthony Coffey

/s/ Jack Lemein
- ---------------
Jack Lemein

/s/ Roger A. Bayston
- --------------------
Roger A. Bayston

Portfolio Management Team
Franklin Adjustable Rate Securities Fund

<PAGE>
PERFORMANCE SUMMARY

Franklin Adjustable Rate Securities Fund's share price, as measured by net asset
value, decreased 1.0 cent, from $9.96 on October 31, 1997, to $9.95 on October
31, 1998.

During the reporting period, shareholders received per-share distributions
totaling 54.16 cents ($0.5416) in dividend income. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the maximum offering price of $10.18 on October 31, 1998, and an
annualization of the current monthly dividend of 4.0149 cents ($0.040149) per
share, your fund's distribution rate was 4.80%.

The fund reported a cumulative total return of +5.47% for the one-year period
ended October 31, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not include
the initial sales charge.

10 Past performance is not predictive of future results.

<PAGE>
The graph on page 12 compares the performance of the fund's shares with that of
the Lehman Brothers Short U.S. Government 1-2 Year Index and the Payden & Rygel
6-Month CD Index.* Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully invested because they need cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as Franklin Adjustable Rate Securities Fund's had been applied to
the indices, their performance would have been lower. Please remember that an
index is simply a measure of performance, and one cannot invest in it directly.

DIVIDEND DISTRIBUTIONS
Franklin Adjustable Rate
Securities Fund
11/1/97 - 10/31/98*

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ---------------------------------------
<S> <C>
November 4.7859 cents

December 5.1994 cents

January 4.2668 cents

February 4.6222 cents

March 4.8467 cents

April 4.6129 cents

May 4.2279 cents

June 4.3190 cents

July 4.5315 cents

August 4.3057 cents

September 4.4262 cents

October 4.0149 cents
- ---------------------------------------
TOTAL 54.1591 CENTS
</TABLE>

*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.

*Six-month certificates of deposit total returns are an average of the top rates
paid by major New York banks. CDs are insured by the FDIC up to $100,000 and
have principal and interest rate guarantees. The unmanaged Lehman Brothers Short
U.S. Government 1-2 Year Index invests in U.S. government securities with
maturities from one to two years.

Past performance is not predictive of future results. 11

<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Adjustable Rate Securities Fund
$10,000 Investment (12/26/91 - 10/31/98)

<TABLE>
<CAPTION>
ADJUSTABLE RATE
SECURITIES FUND LB 1-2 US GOVT P&R 6-MONTH CD
--------------- -----------------------------------------

<S> <C> <C> <C> <C> <C>
12/26/91 9,775 $10,000 $10,000

12/31/91 9,775 $10,021 0.21% $10,010 0.10%

1/31/92 9,775 $10,022 0.01% $10,051 0.41%

2/29/92 9,804 $10,051 0.29% $10,080 0.29%

3/31/92 9,847 $10,062 0.10% $10,109 0.29%

4/30/92 9,933 $10,148 0.86% $10,159 0.49%

5/31/92 9,981 $10,233 0.84% $10,196 0.37%

6/30/92 10,065 $10,321 0.86% $10,232 0.35%

7/31/92 10,097 $10,427 1.03% $10,288 0.55%

8/31/92 10,165 $10,501 0.71% $10,319 0.30%

9/30/92 10,232 $10,588 0.83% $10,362 0.41%

10/31/92 10,249 $10,540 -0.46% $10,379 0.17%

11/30/92 10,284 $10,529 -0.10% $10,390 0.10%

12/31/92 10,362 $10,620 0.86% $10,438 0.47%

1/31/93 10,409 $10,716 0.91% $10,478 0.38%

2/28/93 10,486 $10,792 0.70% $10,506 0.27%

3/31/93 10,547 $10,821 0.27% $10,535 0.27%

4/30/93 10,602 $10,880 0.55% $10,566 0.30%

5/31/93 10,622 $10,857 -0.22% $10,584 0.17%

6/30/93 10,661 $10,924 0.62% $10,613 0.27%

7/31/93 10,713 $10,951 0.24% $10,644 0.29%

8/31/93 10,754 $11,027 0.70% $10,678 0.32%

9/30/93 10,785 $11,061 0.31% $10,708 0.28%

10/31/93 10,807 $11,085 0.22% $10,734 0.25%

11/30/93 10,826 $11,095 0.09% $10,760 0.24%

12/31/93 10,868 $11,134 0.36% $10,792 0.30%

1/31/94 10,891 $11,197 0.56% $10,828 0.33%

2/28/94 10,865 $11,147 -0.44% $10,827 -0.01%

3/31/94 10,768 $11,119 -0.26% $10,852 0.23%

4/30/94 10,763 $11,089 -0.27% $10,868 0.15%

5/31/94 10,802 $11,107 0.17% $10,896 0.26%

6/30/94 10,821 $11,138 0.28% $10,930 0.31%

7/31/94 10,864 $11,227 0.80% $10,978 0.44%

8/31/94 10,926 $11,265 0.34% $11,021 0.39%

9/30/94 10,897 $11,256 -0.08% $11,049 0.25%

10/31/94 10,927 $11,288 0.28% $11,092 0.39%

11/30/94 10,934 $11,252 -0.32% $11,116 0.22%

12/31/94 10,981 $11,279 0.24% $11,159 0.39%

1/31/95 11,034 $11,416 1.22% $11,238 0.70%

2/28/95 11,131 $11,552 1.19% $11,306 0.61%

3/31/95 11,183 $11,618 0.57% $11,361 0.49%

4/30/95 11,272 $11,712 0.81% $11,427 0.58%

5/31/95 11,403 $11,875 1.39% $11,503 0.66%

6/30/95 11,477 $11,938 0.53% $11,560 0.50%

7/31/95 11,497 $11,994 0.47% $11,624 0.55%

8/31/95 11,602 $12,060 0.55% $11,680 0.48%

9/30/95 11,657 $12,114 0.45% $11,732 0.45%

10/31/95 11,740 $12,204 0.74% $11,794 0.53%

11/30/95 11,809 $12,294 0.74% $11,857 0.53%

12/31/95 11,910 $12,380 0.70% $11,923 0.56%

1/31/96 11,961 $12,478 0.79% $11,988 0.54%

2/29/96 11,958 $12,451 -0.22% $12,034 0.39%

3/31/96 12,001 $12,458 0.06% $12,077 0.35%

4/30/96 12,046 $12,482 0.19% $12,129 0.43%

5/31/96 12,061 $12,519 0.30% $12,179 0.42%

6/30/96 12,148 $12,603 0.67% $12,227 0.39%

7/31/96 12,195 $12,654 0.40% $12,280 0.43%

8/31/96 12,238 $12,705 0.41% $12,345 0.53%

9/30/96 12,324 $12,807 0.80% $12,405 0.49%

10/31/96 12,472 $12,935 1.00% $12,470 0.52%

11/30/96 12,543 $13,018 0.64% $12,529 0.48%

12/31/96 12,568 $13,039 0.16% $12,586 0.45%

1/31/97 12,626 $13,100 0.47% $12,641 0.44%

2/28/97 12,671 $13,138 0.29% $12,692 0.40%

3/31/97 12,769 $13,143 0.04% $12,735 0.34%

4/30/97 12,853 $13,242 0.75% $12,795 0.47%

5/31/97 12,931 $13,331 0.67% $12,861 0.52%

6/30/97 13,031 $13,415 0.63% $12,926 0.50%

7/31/97 13,160 $13,537 0.91% $12,995 0.54%

8/31/97 13,180 $13,564 0.20% $13,054 0.45%

9/30/97 13,274 $13,656 0.68% $13,114 0.46%

10/31/97 13,313 $13,746 0.66% $13,178 0.49%

11/30/97 13,351 $13,783 0.27% $13,234 0.42%

12/31/97 13,434 $13,870 0.63% $13,302 0.52%

1/31/98 13,532 $13,988 0.85% $13,378 0.57%

2/28/98 13,567 $14,010 0.16% $13,430 0.39%

3/31/98 13,620 $14,068 0.41% $13,491 0.45%

4/30/98 13,683 $14,134 0.47% $13,550 0.44%

5/31/98 13,741 $14,206 0.51% $13,617 0.49%

6/30/98 13,815 $14,277 0.50% $13,678 0.45%

7/31/98 13,877 $14,344 0.47% $13,745 0.49%

8/31/98 13,965 $14,492 1.03% $13,818 0.53%

9/30/98 14,069 $14,657 1.14% $13,902 0.61%

10/31/98 14,041-0.20% $14,733 0.52% $13,973 0.51%

Total Return 40.41% 47.33% 39.73%
</TABLE>

* Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends and
capital gains at net asset value.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

12 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
Franklin Adjustable Rate Securities Fund
Periods ended 10/31/98

<TABLE>
<CAPTION>
SINCE INCEPTION
1-YEAR 5-YEAR (12/26/91)
- -------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.47% +29.93% +43.64%

Average Annual Total Return(2) +3.09% +4.90% +5.08%

Distribution Rate(3) 4.80%

30-Day Standardized Yield(4) 4.65%
</TABLE>

(1) Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 2.25% initial
sales charge.

(3) Distribution rate is based on an annualization of the current 4.0149 cent
per share monthly dividend and the maximum offering price of $10.18 on October
31, 1998.

(4) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

Past expense reductions by the fund's manager increased the fund's total
returns. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.

Past performance is not predictive of future results. 13

<PAGE>
FUND CATEGORY

[Pyramid Graphic]

FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND

Your Fund's Goal: Franklin Adjustable U.S. Government Securities Fund seeks to
provide a high level of current income consistent with lower volatility of
principal by investing in a portfolio consisting primarily of adjustable-rate,
U.S. Government agency-guaranteed, mortgage-backed securities.(1)

ECONOMIC OVERVIEW

(1) Individual securities in the underlying portfolio, but not shares of the
fund, are guaranteed by the U.S. government, its agencies or instrumentalities,
as to the timely payment of principal and interest. Yield and share price are
not guaranteed and will fluctuate with market conditions.

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 89 of
this report.

<PAGE>
by historically low mortgage rates. Indeed, what strength the economy exhibited
came primarily from the consumer sector, which benefited from low unemployment
and several years of stock market gains. The recent stock market sell-off put
only a small dent in the consumer's armor, so far.

The weakening economic picture and absence of inflation led to an
unprecedented rally in U.S. Treasury securities. The 30-year Treasury bond
declined in yield from 6.15% on October 31, 1997, to 5.15% on October 31, 1998,
trading as low as 4.70% at one point during the period. In September 1998, the
Federal Reserve Board (the Fed) lowered the federal funds target rate from 5.50%
to 5.25%, its first such action since it raised rates in March 1997.
Furthermore, only 16 days later in a move that surprised many market experts, on
October 15, the Fed trimmed the federal funds rate and discount rate by another
0.25%.

PORTFOLIO BREAKDOWN
Franklin Adjustable U.S.
Government Securities Fund
Based on Total Net Assets
10/31/98

[Pie Chart]

FNMA 64.2%
FHLMC 19.1%
GNMA 11.6%
Other 5.1%

<PAGE>
PORTFOLIO NOTES

Franklin Adjustable U.S. Government Securities Fund's underlying portfolio
consists primarily of ARMs linked to or collateralized by mortgages issued or
guaranteed by the U.S. government, its agencies or instrumentalities. These
include obligations of the Federal National Mortgage Association (FNMA or Fannie
Mae), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and the
Government National Mortgage Association (GNMA or Ginnie Mae).

The fund employs a fiscally responsible strategy of investing in seasoned ARM
securities, which tend to prepay at slower rates than newer-production ARMs,
which have not been through previous refinancing cycles. We choose securities
using a value-oriented approach, emphasizing bonds' fundamental value relative
to comparable securities as well as historical prepayment performance. During
the 12-month review period, the fund underperformed its benchmark, the Lehman
Brothers Short U.S. Government 1-2 Year Index, with a return of +4.26% vs.
+7.18%.(2) There were no major changes to the portfolio's overall mix during the
year. However, we did increase the fund's allocation in GNMA ARMs, from 9.4% to
11.6% of total net assets, which became significantly cheaper versus their
historical averages.

(2). Source: Lehman Brothers Global Family of Indices, October 31, 1998. Index
is unmanaged and includes reinvested dividends. One cannot invest directly in an
index.

<PAGE>
FUND'S DISTRIBUTION RATE VS. TREASURY BILL ANNUALIZED YIELD
Franklin Adjustable U.S. Government Securities Fund vs.
One-Year Constant Maturity T-Bill
(11/1/97 - 10/31/98)

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT ONE-YEAR
SECURITIES FUND CONSTANT MATURITY
DATE DISTRIBUTION RATE TREASURY BILL YIELD

<S> <C> <C>
11/1/97 5.59% 5.52%

12/31/97 5.58% 5.51%

1/31/98 5.56% 5.19%

2/28/98 5.58% 5.41%

3/31/98 5.60% 5.41%

4/30/98 5.60% 5.40%

5/31/98 5.61% 5.42%

6/30/98 5.61% 5.38%

7/31/98 5.49% 5.38%

8/31/98 4.74% 4.95%

10/31/98 4.48% 4.41%

10/31/98 4.51% 4.18%
</TABLE>

Source: Federal Reserve.

At the close of the period, your fund's distribution rate was 4.51%. As shown in
the graph above, this rate remained competitive, slightly outperforming the
yield of the one-year Treasury bill. Of course, the value and interest rate of
Treasuries, if held to maturity, are fixed, and principal is guaranteed. In
contrast, the investment return and share price of Franklin Adjustable U.S.
Government Securities Fund will fluctuate with market conditions. In addition,
monthly payments of agency mortgage securities include principal and interest,
while semiannual payments of U.S. Treasury securities represent interest only.

<PAGE>
Going forward, the current high level of market uncertainty will likely continue
for the near term, as long as the global financial crisis persists. Interest
rates should remain volatile, and further Fed action is possible. We feel the
fund is well-positioned to weather additional financial storms that may appear
on the horizon, as we maintain our fiscally responsible strategy, in an effort
to produce consistent fund performance in all types of interest-rate
environments.

Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.

Sincerely,

/s/ T. Anthony Coffey
- ---------------------
T. Anthony Coffey

/s/ Jack Lemein
- ---------------
Jack Lemein

/s/ Roger A. Bayston
- --------------------
Roger A. Bayston

Portfolio Management Team
Franklin Adjustable U.S. Government Securities Fund

<PAGE>
PERFORMANCE SUMMARY

Franklin Adjustable U.S. Government Securities Fund's share price, as measured
by net asset value, decreased 12.0 cents, from $9.48 on October 31, 1997, to
$9.36 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
totaling 51.4 cents ($0.514) in dividend income. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the maximum offering price of $9.58 on October 31, 1998, and an
annualization of October's dividend of 3.6 cents ($0.036) per share, your fund's
distribution rate was 4.51%.

The fund reported a cumulative total return of +4.26% for the one-year period
ended October 31, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not include
the initial sales charge.

The graph on page 21 compares the performance of the fund's shares, for the past
10 years, with that of the Lehman Brothers Short U.S. Government 1-2 Year Index
and the Payden & Rygel

Past performance is not predictive of future results. 19

<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Adjustable U.S. Government
Securities Fund
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.5 cents
December 4.5 cents
January 4.5 cents
February 4.5 cents
March 4.5 cents
April 4.5 cents
May 4.5 cents
June 4.5 cents
July 4.4 cents
August 3.8 cents
September 3.6 cents
October 3.6 cents
TOTAL 51.4 CENTS
</TABLE>

6-Month CD Index.* Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully invested because they need cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as Franklin Adjustable U.S. Government Securities Fund's had been
applied to the indices, their performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

20 Past performance is not predictive of future results.

<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Adjustable U.S. Government Securities Fund
$10,000 Investment (11/1/88 - 10/31/98)

<TABLE>
<CAPTION>
ADJUSTABLE RATE U.S. LEHMAN BROTHERS SHORT 1-2 P&R 6 MO. CD
GOVERNMENT FUND US GOVT
--------------- -------
<S> <C> <C> <C>
11/1/88 $9,778 $10,000 $10,000
Nov-88 $9,816 $9,986 -0.14% $10,038 0.38%
Dec-88 $9,854 $10,014 0.28% $10,112 0.74%
Jan-89 $9,922 $10,091 0.76% $10,187 0.74%
Feb-89 $9,942 $10,096 0.06% $10,218 0.30%
Mar-89 $9,986 $10,143 0.46% $10,297 0.78%
Apr-89 $10,100 $10,265 1.21% $10,412 1.11%
May-89 $10,185 $10,402 1.33% $10,514 0.98%
Jun-89 $10,288 $10,574 1.65% $10,614 0.95%
Jul-89 $10,363 $10,718 1.36% $10,720 1.00%
Aug-89 $10,438 $10,673 -0.42% $10,771 0.48%
Sep-89 $10,535 $10,738 0.61% $10,840 0.64%
Oct-89 $10,664 $10,880 1.32% $10,946 0.98%
Nov-89 $10,763 $10,976 0.88% $11,026 0.73%
Dec-89 $10,873 $11,018 0.38% $11,100 0.67%
Jan-90 $10,930 $11,044 0.24% $11,169 0.62%
Feb-90 $11,010 $11,104 0.54% $11,238 0.62%
Mar-90 $11,098 $11,144 0.36% $11,305 0.59%
Apr-90 $11,174 $11,180 0.33% $11,371 0.59%
May-90 $11,273 $11,339 1.42% $11,472 0.89%
Jun-90 $11,359 $11,450 0.97% $11,553 0.70%
Jul-90 $11,465 $11,575 1.10% $11,651 0.85%
Aug-90 $11,546 $11,624 0.43% $11,721 0.60%
Sep-90 $11,638 $11,711 0.74% $11,789 0.58%
Oct-90 $11,720 $11,834 1.05% $11,881 0.78%
Nov-90 $11,803 $11,940 0.90% $11,947 0.56%
Dec-90 $11,909 $12,072 1.11% $12,063 0.97%
Jan-91 $12,014 $12,183 0.92% $12,164 0.84%
Feb-91 $12,116 $12,264 0.66% $12,237 0.60%
Mar-91 $12,217 $12,348 0.69% $12,323 0.70%
Apr-91 $12,294 $12,454 0.86% $12,404 0.66%
May-91 $12,368 $12,525 0.56% $12,464 0.48%
Jun-91 $12,415 $12,581 0.45% $12,509 0.36%
Jul-91 $12,546 $12,678 0.78% $12,585 0.61%
Aug-91 $12,639 $12,836 1.25% $12,676 0.72%
Sep-91 $12,754 $12,952 0.90% $12,744 0.54%
Oct-91 $12,831 $13,079 0.98% $12,821 0.60%
Nov-91 $12,868 $13,209 1.00% $12,895 0.58%
Dec-91 $12,941 $13,382 1.30% $12,974 0.61%
Jan-92 $12,970 $13,383 0.01% $13,027 0.41%
Feb-92 $13,037 $13,422 0.29% $13,065 0.29%
Mar-92 $13,089 $13,436 0.10% $13,103 0.29%
Apr-92 $13,126 $13,551 0.86% $13,167 0.49%
May-92 $13,212 $13,664 0.84% $13,216 0.37%
Jun-92 $13,298 $13,782 0.86% $13,262 0.35%
Jul-92 $13,309 $13,924 1.03% $13,335 0.55%
Aug-92 $13,365 $14,023 0.71% $13,375 0.30%
Sep-92 $13,420 $14,139 0.83% $13,430 0.41%
Oct-92 $13,381 $14,074 -0.46% $13,452 0.17%
Nov-92 $13,408 $14,061 -0.10% $13,466 0.10%
Dec-92 $13,460 $14,181 0.86% $13,529 0.47%
Jan-93 $13,509 $14,310 0.91% $13,581 0.38%
Feb-93 $13,571 $14,411 0.70% $13,617 0.27%
Mar-93 $13,589 $14,450 0.27% $13,654 0.27%
Apr-93 $13,659 $14,529 0.55% $13,695 0.30%
May-93 $13,661 $14,498 -0.22% $13,718 0.17%
Jun-93 $13,734 $14,588 0.62% $13,755 0.27%
Jul-93 $13,780 $14,623 0.24% $13,795 0.29%
Aug-93 $13,825 $14,725 0.70% $13,839 0.32%
Sep-93 $13,808 $14,770 0.31% $13,878 0.28%
Oct-93 $13,777 $14,802 0.22% $13,913 0.25%
Nov-93 $13,676 $14,815 0.09% $13,946 0.24%
Dec-93 $13,642 $14,868 0.36% $13,988 0.30%
Jan-94 $13,690 $14,952 0.56% $14,034 0.33%
Feb-94 $13,609 $14,886 -0.44% $14,033 -0.01%
Mar-94 $13,511 $14,847 -0.26% $14,065 0.23%
Apr-94 $13,424 $14,808 -0.27% $14,086 0.15%
May-94 $13,485 $14,832 0.17% $14,123 0.26%
Jun-94 $13,523 $14,873 0.28% $14,167 0.31%
Jul-94 $13,579 $14,992 0.80% $14,229 0.44%
Aug-94 $13,579 $15,043 0.34% $14,284 0.39%
Sep-94 $13,564 $15,031 -0.08% $14,320 0.25%
Oct-94 $13,409 $15,074 0.28% $14,376 0.39%
Nov-94 $13,403 $15,025 -0.32% $14,408 0.22%
Dec-94 $13,374 $15,061 0.24% $14,464 0.39%
Jan-95 $13,481 $15,245 1.22% $14,565 0.70%
Feb-95 $13,635 $15,426 1.19% $14,654 0.61%
Mar-95 $13,715 $15,514 0.57% $14,726 0.49%
Apr-95 $13,842 $15,640 0.81% $14,811 0.58%
May-95 $14,135 $15,857 1.39% $14,909 0.66%
Jun-95 $14,085 $15,942 0.53% $14,983 0.50%
Jul-95 $14,173 $16,016 0.47% $15,066 0.55%
Aug-95 $14,292 $16,105 0.55% $15,138 0.48%
Sep-95 $14,365 $16,177 0.45% $15,206 0.45%
Oct-95 $14,424 $16,297 0.74% $15,287 0.53%
Nov-95 $14,560 $16,417 0.74% $15,368 0.53%
Dec-95 $14,601 $16,532 0.70% $15,454 0.56%
Jan-96 $14,704 $16,663 0.79% $15,537 0.54%
Feb-96 $14,713 $16,626 -0.22% $15,598 0.39%
Mar-96 $14,802 $16,636 0.06% $15,652 0.35%
Apr-96 $14,814 $16,668 0.19% $15,720 0.43%
May-96 $14,875 $16,718 0.30% $15,786 0.42%
Jun-96 $15,016 $16,830 0.67% $15,847 0.39%
Jul-96 $15,061 $16,897 0.40% $15,915 0.43%
Aug-96 $15,106 $16,966 0.41% $16,000 0.53%
Sep-96 $15,214 $17,102 0.80% $16,078 0.49%
Oct-96 $15,368 $17,273 1.00% $16,162 0.52%
Nov-96 $15,440 $17,384 0.64% $16,239 0.48%
Dec-96 $15,513 $17,412 0.16% $16,313 0.45%
Jan-97 $15,619 $17,493 0.47% $16,384 0.44%
Feb-97 $15,709 $17,544 0.29% $16,450 0.40%
Mar-97 $15,751 $17,551 0.04% $16,506 0.34%
Apr-97 $15,879 $17,683 0.75% $16,583 0.47%
May-97 $15,974 $17,801 0.67% $16,670 0.52%
Jun-97 $16,086 $17,913 0.63% $16,753 0.50%
Jul-97 $16,250 $18,076 0.91% $16,843 0.54%
Aug-97 $16,260 $18,113 0.20% $16,919 0.45%
Sep-97 $16,374 $18,236 0.68% $16,997 0.46%
Oct-97 $16,471 $18,356 0.66% $17,080 0.49%
Nov-97 $16,480 $18,406 0.27% $17,152 0.42%
Dec-97 $16,594 $18,522 0.63% $17,241 0.52%
Jan-98 $16,725 $18,679 0.85% $17,339 0.57%
Feb-98 $16,734 $18,709 0.16% $17,407 0.39%
Mar-98 $16,778 $18,786 0.41% $17,485 0.45%
Apr-98 $16,859 $18,874 0.47% $17,562 0.44%
May-98 $16,904 $18,970 0.51% $17,648 0.49%
Jun-98 $16,985 $19,065 0.50% $17,728 0.45%
Jul-98 $17,028 $19,155 0.47% $17,815 0.49%
Aug-98 $17,133 $19,352 1.03% $17,909 0.53%
Sep-98 $17,235 $19,572 1.14% $18,018 0.61%
Oct-98 $17,174 -0.36% $19,674 0.52% $18,110 0.51%

Total Return 71.74% 96.74% 81.10%
</TABLE>

*Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends and
capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

PERFORMANCE
Franklin Adjustable U.S. Government Securities Fund
Periods ended 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/20/87)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +4.26% +24.65% +75.63% +86.57%

Average Annual Total Return(2) +1.90% +4.04% +5.56% +5.60%

Distribution Rate(3) 4.51%

30-Day Standardized Yield(4) 4.81%
</TABLE>

(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 2.25%
initial sales charge.

(3). Distribution rate is based on an annualization of October's 3.6 cent per
share monthly dividend and the maximum offering price of $9.58 on October 31,
1998.

(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

Past performance is not predictive of future results. 21

<PAGE>
FUND CATEGORY
[Pyramid Graphic]

FRANKLIN BOND FUND

Your Fund's Goal: Franklin Bond Fund seeks to provide investors with a high
level of income consistent with preservation of capital. Capital appreciation
over the long term is a secondary goal.

It's a pleasure to bring you Franklin Bond Fund's inaugural annual report,
covering the period since the fund's inception on August 3, 1998, through the
fund's fiscal year-end on October 31, 1998. Investor uncertainty and anxiety
strongly influenced financial markets around the world during the three months
under review, causing investors to generally avoid all classes of securities
except for the most widely traded U.S. Treasury issues. Global and domestic
market volatility was an outgrowth of the Asian financial crisis that developed
during the summer of 1997. The U.S. was somewhat insulated from the "Asian flu"
until recently, with tremendous consumer demand that offset weakening export and
manufacturing activity. However, as global demand diminished, the economy fought
stronger headwinds. The erosion so evident in the manufacturing sector began to
trickle into the service sector, notably impacting financial firms. In spite of
this, the labor market has not yet displayed significant weakness, and consumer
confidence remains near historically high levels. It is likely, however, that
continued slowing of the economy, and further equity market declines, will
translate into reduced employment and falling consumer confidence. The Federal
Reserve Board (the Fed), focused on

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 92 of
this report.

<PAGE>
this very possibility, cut the federal funds target rate to 5.25% on September
29, and then again to 5.00% on October 15, in an effort to sustain economic
growth going forward.

As of October 31, 1998, Franklin Bond Fund held 18.46% of total net
assets in U.S. Treasury securities. Low inflation coupled with a federal budget
surplus provided a favorable backdrop for U.S. Treasury securities during the
reporting period. Furthermore, as financial markets worldwide suffered from a
lack of confidence, investors ignored most other financial instruments and fled
to the relative safety of U.S. Treasuries. This sent Treasury yields plummeting
and prices jumping, in an already favorable environment. The 30-year Treasury
bond yield declined 52 basis points, from 5.67% on August 3, the fund's
inception date, to 5.15% on October 31. The 10-year Treasury note yield fell
from 5.46% to 4.64%, while the 5-year Treasury note yield dropped from 5.46% to
4.24%, during the three-month period.

Non-callable agency bonds comprised 13.34% of the fund's total net assets on
October 31, 1998. Non-callable U.S. government agency bonds, bonds that cannot
be redeemed until maturity, generally appreciated in price during the reporting
period. However, although agency bond prices tend to move in the same direction
as U.S. Treasuries, they were unable to keep pace with the enormous Treasury
market rally. Therefore, agency bond yield spreads, the difference between the
higher agency bond yields and Treasury yields, widened, enabling us to purchase
the bonds at a historically high-yield advantage relative to Treasuries.
Although yield spreads also widened on corporate bonds and mortgage pass-through
securities, agency bonds, as a sector, generally have lower cash-flow risk.

<PAGE>
PORTFOLIO BREAKDOWN
Franklin Bond Fund
10/31/98

<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ------------------------------------------------------------
<S> <C>
Mortgage-backed Securities 34.51%
Corporate Bonds 27.48%
U.S. Treasury Securities 18.46%
U.S. Agency Bonds 13.34%
Cash, assets and liabilities 6.21%
</TABLE>

Mortgage-backed securities accounted for 34.51% of the fund's total net assets
on October 31, 1998. Mortgage pass-through securities, bonds backed by
mortgages, underperformed comparable U.S. Treasury securities during the
reporting period, owing to the overwhelming flight-to-quality mentality. Even
so, lower-coupon mortgage bonds, which account for the majority of Franklin Bond
Fund's holdings in this sector, benefited from price appreciation during the
reporting period. The fund maintained little exposure to higher-coupon
mortgages, which have greater prepayment risk than lower-coupons. As the prices
of higher-coupon pass-through securities increasingly reflect the prepayment
risk associated with declining interest rates, we may increase our allocation to
these securities. If, in our view, higher-coupon pass-through securities' prices
begin decreasing due to an excessive amount of prepayments, then we may
overweight this sector.

As of October 31, 1998, corporate bonds comprised 27.48% of the fund's total net
assets. Corporate bonds came under pressure fundamentally and technically during
the reporting period. The lack of global demand for goods and services fueled
concern over earnings growth for the corporate sector. Turbulence in the
Russian, Asian, Latin American and domestic equity markets combined with fears
of weaker profitability and record issuance levels to push corporate bond prices
lower. Due to the concurrent Treasury market rally, yield spreads on
investment-grade corporate bonds approached levels not seen since the 1990-1991
recession. High-yield corporate bonds witnessed spreads, the difference between
corporate bond yields and U.S. Treasuries' yields, reaching wider levels than
their averages over the last 10 years. In this environment, we increased our
holdings throughout the period as opportunities to add value arose.

<PAGE>
The corporate bonds purchased for the fund emphasize short- to-intermediate-term
maturities from well-managed, profitable companies that are defensive in nature,
as we seek to position the fund to weather additional financial storms on the
horizon. We will continue to scan the corporate bond market for individual
securities that suffered declines we feel were unjustifiable in the sector
sell-off.

Going forward, we expect the Fed to lower short-term interest rates further in
the months ahead. In this declining interest-rate environment, Franklin Bond
Fund is well-positioned to benefit through our diversification in different
sectors, as well as our commitment to maintaining a value-oriented investment
approach.

Sincerely,

/s/ Roger A. Bayston
- --------------------
Roger A. Bayston
Portfolio Manager
Franklin Bond Fund

<PAGE>
PERFORMANCE SUMMARY

DIVIDEND DISTRIBUTIONS
Franklin Bond Fund - Class I
8/3/98 - 10/31/98*

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
August 0.0 cents
September 0.0 cents
October 4.5 cents
- ------------------------------------------------------
TOTAL 4.5 CENTS
</TABLE>

* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.

CLASS I

Franklin Bond Fund - Class I share price, as measured by net asset value,
increased 36.0 cents, from $10.00 since inception on August 3, 1998, to $10.36
on October 31, 1998.

The fund began paying dividends in October, and shareholders received per-share
distributions of 4.5 cents ($0.045) in dividend income. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the maximum offering price of $10.82 on October 31, 1998, and an
annualization of the current monthly dividend of 4.5 cents ($0.045) per share,
your fund's distribution rate was 4.99%.

The fund reported a +4.05% cumulative total return for the period ended October
31, 1998. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions, and does not include the initial
sales charge.

26 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
Franklin Bond Fund - Class I
Period ended 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
(8/3/98)
- -------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.05%

Aggregate Total Return(2) -0.34%

Distribution Rate(3) 4.99%

30-Day Standardized Yield(4) 4.40%
</TABLE>

(1). Cumulative total return measures the change in value of an investment over
the period indicated and does not include the sales charge.

(2). Aggregate total return represents the average annual change in value of an
investment over the period indicated and includes the current, maximum 4.25%
initial sales charge. Since the fund has existed for less than one year, the
figures represent aggregate total return from inception; therefore, average
annual total returns are not provided.

(3). Distribution rate is based on an annualization of the current 4.5 cent per
share monthly dividend and the maximum offering price of $10.82 on October 31,
1998.

(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

The fund's manager has agreed in advance to waive a portion of its
management fees, which reduces expenses and increases distribution rate, yield
and total return to shareholders. If the manager had not taken this action, the
fund's distribution rate and total return would have been lower and yield for
the period would have been 4.12%. The fee waiver may be discontinued at any
time, upon notice to the funds Board of Directors. All total return calculations
assume reinvestment of dividends and capital gains at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.

Past performance is not predictive of future results. 27

<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Bond Fund - Advisor Class
8/3/98 - 10/31/98*

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------------------------------
<S> <C>
August 0.00 cents
September 0.00 cents
October 4.71 cents
- -----------------------------------------------------
Total 4.71 cents
</TABLE>

ADVISOR CLASS

Franklin Bond Fund - Advisor Class share price, as measured by net asset value,
increased 37.0 cents, from $10.00 on August 3, 1998, to $10.37 on October 31,
1998.

The fund began paying dividends in October, and shareholders received per-share
distributions of 4.71 cents ($0.0471) in dividend income. Distributions will
vary depending on the fund's income, and past distributions are not indicative
of future trends.

Based on the fund's net asset value price of $10.37 on October 31, 1998, and an
annualization of the current monthly dividend of 4.71 cents ($0.0471) per share,
the fund's distribution rate was 5.45%.

The fund reported a +4.17% cumulative total return for the period ended October
31, 1998. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions.

28 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
Franklin Bond Fund - Advisor Class
Period ended 10/31/98

<TABLE>
<CAPTION>
Since
Inception
(8/3/98)
- --------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.17%

Aggregate Total Return(1) +4.17%

Distribution Rate(2) 5.45%

30-Day Standardized Yield(3) 4.84%
</TABLE>

(1) Cumulative total return represents the change in value of an investment over
the periods indicated. Aggregate total return represents the average annual
change in value of an investment over the period indicated. Since the fund has
existed for less than one year, the figures represent aggregate total return
from inception; therefore, average annual total returns are not provided.

(2) Distribution rate is based on an annualization of the current 4.71 cent per
share monthly dividend and the net asset value price of $10.37 on October 31,
1998.

(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces expenses and increases distribution rate, yield and total
return to shareholders. If the manager had not taken this action, the fund's
distribution rate and total return would have been lower and yield for the
period would have been 4.55%. The fee waiver may be discontinued at any time,
upon notice to the funds Board of Directors. All total return calculations
assume reinvestment of dividends and capital gains at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares.

Past performance is not predictive of future results. 29

<PAGE>
FUND CATEGORY

[Pyramid Graphic]

FRANKLIN CONVERTIBLE
SECURITIES FUND

Your Fund's Goal: Franklin Convertible Securities Fund seeks to maximize total
return consistent with reasonable risk through a portfolio of convertible
securities.

During the reporting period, concerns about the timing and extent of the global
economic slowdown produced increased market volatility. In particular, the
economic and political turmoil in Asia, Latin America and Russia raised concerns
about the health of corporate profits and future growth opportunities for
companies at home and abroad. The resulting market volatility and uncertainty
regarding economic and market conditions over the near term was one of the
principal reasons for the fund's underperformance. For the year ended October
31, 1998, the fund's Class I shares produced a -9.93% cumulative total return.

The behavior of the fund's key asset classes also contributed to its lackluster
performance. The fund has historically had a disposition to small-cap growth
companies, which enabled it to produce a strong +20.3% average annual total
return for the three-year period ending October 31, 1997. However, for the
current one-year period ended October 31, 1998, the fund's small-cap disposition
was one of the primary reasons for the fund's underperformance. Due to the large
positions in small-cap stocks, the fund was underweight the larger-cap Consumer

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 98 of
this report.

<PAGE>
Cyclical Growth sector, the second-best performing sector in the Goldman Sachs
Convertible 100 Bond Index during the first six months of 1998. In addition, the
fund was hurt in August's correction, as small-cap stocks suffered greater
declines than larger-cap stocks.

Earlier in the fund's fiscal year, we believed oil and energy companies fit our
investment profile, as they were attractively priced relative to their growth
prospects and risk profiles. Nonetheless, these positions negatively impacted
the fund, as oil prices continued to decline, falling to $11.61 a barrel on June
15, 1998, a 12-year low. The prolonged weakness in oil prices continued to
hamper the performance of several of the fund's investments, specifically those
in companies engaged in oil and gas exploration, and production and oilfield
services. However, recent evidence of OPEC production cutbacks and non-OPEC
production declines, associated with the lack of investment in high-cost
properties, adds to our confidence that oil and energy companies offer
significant value under current depressed industry conditions. At recent levels,
oil and energy companies look very attractive, given our expectation that supply
and demand will soon move back into equilibrium. The fund continues to have an
overweight position in these companies and should benefit as fundamental
conditions improve.

The fund had sizable investments in the real estate sector, as well. In the
third quarter of 1998, while the real estate industry continued to benefit from
strong operating fundamentals and low interest rates, the performance of certain
real estate securities, called real estate investment trusts (REITs), weakened,

PORTFOLIO BREAKDOWN
Franklin Convertible Securities Fund
10/31/98

<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
- ---------------------------------------------------
<S> <C>
Convertible Bonds 43.3%

Convertible Preferred Stocks 39.9%

Common Stocks 2.6%

Cash & Short-Term Equivalents 14.2%
</TABLE>

<PAGE>
TOP FIVE HOLDINGS
Franklin Convertible
Securities Fund
10/31/98

<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECURITY NET ASSETS
- ----------------------------------------------------
<S> <C>
Bell Atlantic Financial Services 3.4%
Convertible Bond

Xilinx,Inc. 3.0%
Convertible Bond

El Paso Energy Capital Trust I 2.9%
Convertible Preferred Stock

McKesson Financing Trust 2.5%
Convertible Preferred Stock

Diamond Offshore Drilling, Inc. 2.3%
Convertible Bond
</TABLE>

slightly underperforming the S&P 500. Investors reacted negatively to general
concerns about the U.S. economy and the slowdown in REIT acquisitions, stemming
from the inability to obtain financing, and pushed down REIT stock prices.
However, we believe that earnings visibility in 1999 could be excellent for the
real estate industry relative to the overall market, given strong sector
fundamentals and stable cash flows derived from real estate leases. As a result
of lower stock prices, REITs now trade at the most attractive valuations seen in
the last several years. We believe this growing sector should continue to
attract investors, as earnings consistency improves and REITs begin to benefit
from their diversified portfolios.

As a consequence of the past year's market volatility, we positioned the fund in
higher-quality, more widely traded securities in all sectors. While still
maintaining our strict investment criteria, we actively concentrated on names
with more defensive qualities, such as convertible securities in the utilities
sector, or in selective securities that offered attractive valuations and
allowed us to capitalize on favorable trends. Texas Utilities Co., for example,
was one of our favorite companies in the utilities sector. The Texas Utilities
convertible preferred stock was attractively priced and allowed us not only to
invest in a defensive industry, but earn a higher dividend than the common stock
as well.

The increased market volatility had an upside; it presented some attractive
investment opportunities. We recently purchased bonds issued by Omnicare, Inc.,
a leading provider of pharmaceuticals and other related services to the nursing
home

<PAGE>
sector. Although some uncertainty exists, we felt Omnicare has made more than
adequate allowances, and are further comforted by Omnicare's superior
technology, excellent management and extremely consistent operating performance.

McKesson Corp., the largest provider of drugs and medical supplies to hospitals,
nursing homes and physician clinics, was another attractive investment. The
company augments its core distribution with pharmacy management services,
automated drug-dispensing tools and a variety of information systems for
implementation in administrative and clinical environments. After announcing its
intent to acquire HBO & Co., a leading health care information systems company,
on October 18, 1998, investor skepticism drove McKesson's convertible preferred
stock down. However, given McKesson's superior management and market position,
we felt the merger's long-term results would be very favorable and were able to
purchase shares at attractive levels.

During the reporting period, we reduced our position in Union Pacific Corp., a
leading rail transportation and trucking company. Although we believe Union
Pacific will continue to make operational progress in absorbing Southern
Pacific, we determined that the company's bonds began to approach our target
price. Given Union Pacific's high relative position versus other securities, we
decided to decrease our exposure. However, we continue to feel the company
possesses one of the strongest positions in the railroad industry and will
monitor its convertible preferred stock for future investment opportunities.

<PAGE>
Going forward, our focus will remain value-driven, concentrating on high-quality
names that allow us to capture a significant portion of the underlying equity's
price appreciation, while attempting to limit our exposure to price declines. To
identify investments that meet our criteria, we analyze a large number of
convertible securities, narrowing our options to those companies we believe have
superior business prospects and attractive valuation levels. We will continue to
work closely with our team of equity analysts in identifying investment ideas
with the most favorable risk/reward characteristics.

Sincerely,

/s/ Edward B. Jamieson
- ----------------------
Edward B. Jamieson
Portfolio Manager
Franklin Convertible Securities Fund

<PAGE>
PERFORMANCE SUMMARY

CLASS I

Franklin Convertible Securities Fund - Class I reported a -9.93% cumulative
total return for the one-year period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 37, the fund delivered a +207.88% cumulative total return
since inception on April 15, 1987.

The fund's share price, as measured by net asset value, decreased $2.99, from
$14.74 on October 31, 1997, to $11.75 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 64.5 cents ($0.645) including a 4.5 cent
($0.045) special year-end distribution, 79.65 cents ($0.7965) in short-term
capital gains, and 24.55 cents ($0.2455) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio. Past distributions are
not indicative of future trends.

Past performance is not predictive of future results. 35

<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Convertible
Securities Fund - Class I
11/1/97 - 10/31/98

DIVIDEND
MONTH PER SHARE
- -----------------------------------------------------
<S> <C>
November 5.0 cents
December 9.5 cents*
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
TOTAL 64.5 CENTS
</TABLE>

*Includes a special 4.5 cent distribution.

TOTAL RETURN INDEX COMPARISON
Franklin Convertible Securities Fund - Class I
$10,000 Investment (11/1/88 - 10/31/98)

<TABLE>
<CAPTION>
DATE FRANKLIN CONVERTIBLE GOLDMAN SACHS CONVERTIBLE 100 GOLDMAN SACHS
SECURITIES FUND - CLASS I BOND INDEX CONV100 $T
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $9,422 $10,000
11/30/88 $9,339 $9,799 -2.01%
12/31/88 $9,316 $9,964 1.68%
1/31/89 $9,748 $10,454 4.92%
2/28/89 $9,775 $10,488 0.33%
3/31/89 $9,721 $10,560 0.68%
4/30/89 $10,068 $10,844 2.69%
5/31/89 $10,282 $10,976 1.22%
6/30/89 $10,247 $10,863 -1.03%
7/31/89 $10,474 $11,009 1.34%
8/31/89 $10,714 $11,245 2.15%
9/30/89 $10,626 $11,035 -1.87%
10/31/89 $10,239 $10,586 -4.07%
11/30/89 $10,354 $10,723 1.30%
12/31/89 $10,449 $10,705 -0.17%
1/31/90 $10,152 $10,153 -5.16%
2/28/90 $10,215 $10,226 0.72%
3/31/90 $10,453 $10,384 1.55%
4/30/90 $10,217 $10,020 -3.51%
5/31/90 $10,680 $10,645 6.24%
6/30/90 $10,845 $10,619 -0.25%
7/31/90 $10,694 $10,502 -1.10%
8/31/90 $10,024 $9,918 -5.56%
9/30/90 $9,483 $9,365 -5.57%
10/31/90 $9,009 $8,860 -5.40%
11/30/90 $9,422 $9,356 5.60%
12/31/90 $9,848 $9,605 2.66%
1/31/91 $10,228 $10,128 5.45%
2/28/91 $10,861 $10,737 6.01%
3/31/91 $11,269 $10,976 2.23%
4/30/91 $11,532 $11,083 0.97%
5/31/91 $11,970 $11,488 3.66%
6/30/91 $11,572 $11,130 -3.12%
7/31/91 $12,063 $11,433 2.72%
8/31/91 $12,496 $11,802 3.23%
9/30/91 $12,518 $11,770 -0.27%
10/31/91 $12,640 $12,003 1.98%
11/30/91 $12,485 $11,689 -2.62%
12/31/91 $13,159 $12,265 4.93%
1/31/92 $13,488 $12,857 4.83%
2/29/92 $13,703 $13,153 2.30%
3/31/92 $13,517 $13,000 -1.16%
4/30/92 $13,566 $13,010 0.07%
5/31/92 $13,824 $13,292 2.17%
6/30/92 $13,597 $13,158 -1.01%
7/31/92 $14,083 $13,618 3.50%
8/31/92 $13,906 $13,611 -0.05%
9/30/92 $14,115 $13,889 2.04%
10/31/92 $14,286 $13,915 0.19%
11/30/92 $14,891 $14,237 2.31%
12/31/92 $15,296 $14,430 1.36%
1/31/93 $15,703 $14,758 2.27%
2/28/93 $15,644 $14,929 1.16%
3/31/93 $16,261 $15,432 3.37%
4/30/93 $16,230 $15,405 -0.18%
5/31/93 $16,672 $15,790 2.50%
6/30/93 $16,850 $16,028 1.51%
7/31/93 $17,044 $15,988 -0.25%
8/31/93 $17,662 $16,432 2.78%
9/30/93 $17,943 $16,452 0.12%
10/31/93 $18,324 $16,704 1.53%
11/30/93 $17,984 $16,644 -0.36%
12/31/93 $18,438 $16,902 1.55%
1/31/94 $18,938 $17,318 2.46%
2/28/94 $18,870 $17,240 -0.45%
3/31/94 $18,180 $16,724 -2.99%
4/30/94 $17,904 $16,423 -1.80%
5/31/94 $17,973 $16,472 0.30%
6/30/94 $17,951 $16,311 -0.98%
7/31/94 $18,349 $16,650 2.08%
8/31/94 $18,794 $17,120 2.82%
9/30/94 $18,713 $16,868 -1.47%
10/31/94 $18,722 $16,789 -0.47%
11/30/94 $18,184 $16,199 -3.51%
12/31/94 $18,136 $16,081 -0.73%
1/31/95 $18,022 $16,400 1.98%
2/28/95 $18,398 $16,942 3.31%
3/31/95 $18,925 $17,442 2.95%
4/30/95 $19,436 $17,863 2.41%
5/31/95 $20,016 $18,375 2.87%
6/30/95 $20,597 $18,991 3.35%
7/31/95 $21,432 $19,574 3.07%
8/31/95 $21,634 $19,819 1.25%
9/30/95 $22,037 $20,050 1.17%
10/31/95 $21,563 $19,613 -2.18%
11/30/95 $22,123 $20,396 3.99%
12/31/95 $22,524 $20,508 0.55%
1/31/96 $22,940 $21,093 2.85%
2/29/96 $23,302 $21,453 1.71%
3/31/96 $23,539 $21,749 1.38%
4/30/96 $24,106 $21,952 0.93%
5/31/96 $24,600 $22,345 1.79%
6/30/96 $24,213 $22,190 -0.69%
7/31/96 $23,329 $21,451 -3.33%
8/31/96 $24,163 $22,136 3.19%
9/30/96 $25,112 $22,857 3.26%
10/31/96 $25,167 $22,732 -0.55%
11/30/96 $26,085 $23,498 3.37%
12/31/96 $26,202 $23,319 -0.76%
1/31/97 $27,374 $23,736 1.79%
2/28/97 $27,090 $23,817 0.34%
3/31/97 $26,498 $23,634 -0.77%
4/30/97 $26,560 $23,967 1.41%
5/31/97 $27,893 $25,089 4.68%
6/30/97 $28,799 $25,831 2.96%
7/31/97 $30,308 $27,366 5.94%
8/31/97 $30,537 $27,160 -0.75%
9/30/97 $31,827 $28,524 5.02%
10/31/97 $30,822 $27,839 -2.40%
11/30/97 $31,074 $27,745 -0.34%
12/31/97 $31,514 $27,867 0.44%
1/31/98 $31,061 $27,752 -0.41%
2/28/98 $31,815 $29,201 5.22%
3/31/98 $32,090 $30,226 3.51%
4/30/98 $32,481 $30,610 1.27%
5/31/98 $31,556 $29,784 -2.70%
6/30/98 $30,909 $29,959 0.59%
7/31/98 $30,139 $29,294 -2.22%
8/31/98 $26,840 $25,902 -11.58%
9/30/98 $27,379 $26,402 1.93%
10/31/98 $27,761 $27,313 3.45%
</TABLE>

The historical performance data shown pertains only to the fund's Class I
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

Based on the maximum offering price of $12.47 on October 31, 1998, and an
annualization of October's monthly dividend of 5.0 cents ($0.05) per share, the
fund's distribution rate was 4.81%.

The graph above compares the performance of the fund's Class I shares with that
of the Goldman Sachs Convertible 100 Bond Index. Keep in mind that an unmanaged
market index has inherent performance differentials in comparison with any fund.
An index doesn't pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike an index, mutual funds are never fully invested because they
need cash on hand to redeem shares. In addition, the performance shown for the
fund includes the maximum initial sales charge, all fund expenses and account
fees. If operating expenses such as Franklin Convertible Securities Fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.

36 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE

Franklin Convertible Securities Fund - Class I
Periods ended 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (4/15/87)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -9.93% +51.50% +194.65% +207.88%

Average Annual Total Return(2) -15.12% +7.38% +10.75% +9.67%

Value of $10,000 Investment(3) $8,488 $14,279 $27,761 $29,024

Distribution Rate(4) 4.81%

30-Day Standardized Yield(5) 5.67%
</TABLE>

10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.17% +15.18% +16.71% +22.47% -9.93%
</TABLE>

(1) Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.

(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and have been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.

(4) Distribution rate is based on an annualization of October's 5.0 cent per
share monthly dividend and the maximum offering price of $12.47 on October 31,
1998.

(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

(6) One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.

Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. Past expense reductions by the fund's manager increased the fund's
total returns. All calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.

Franklin Convertible Securities Fund - Class I paid distributions derived from
long-term capital gains of 24.55 cents per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).

Past performance is not predictive of future results. 37

<PAGE>
CLASS II

Franklin Convertible Securities Fund - Class II reported a -10.61% cumulative
total return for the one-year period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include sales charges. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 41, the fund delivered a +23.39% cumulative total return since inception on
October 2, 1995.

The fund's share price, as measured by net asset value, decreased $2.98, from
$14.68 on October 31, 1997, to $11.70 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 54.12 cents ($0.5412) including a 4.5
cent ($0.045) special year-end distribution, 79.65 cents ($0.7965) in short-term
capital gains, and 24.55 cents ($0.2455) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio. Past distributions are
not indicative of future trends.

38 Past performance is not predictive of future results.

<PAGE>
Based on the maximum offering price of $11.82 on October 31, 1998, and an
annualization of October's monthly dividend of 4.29 cents ($0.0429) per share,
the fund's distribution rate was 4.36%.

The graph on page 40 compares the performance of the fund's Class II shares,
since inception, with that of the Goldman Sachs Convertible 100 Bond Index. Keep
in mind that an unmanaged market index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never
fully invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes sales charges, all fund expenses and
account fees. If operating expenses such as Franklin Convertible Securities
Fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in it directly.

DIVIDEND DISTRIBUTIONS
Franklin Convertible
Securities Fund - Class II
11/1/97 - 10/31/98

DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.08 cents
December 8.58 cents*
January 4.07 cents
February 4.07 cents
March 4.07 cents
April 4.10 cents
May 4.10 cents
June 4.10 cents
July 4.22 cents
August 4.22 cents
September 4.22 cents
October 4.29 cents
- ------------------------------------------------------
TOTAL 54.12 CENTS
</TABLE>

*Includes a special 4.5 cent distribution.

Past performance is not predictive of future results. 39

<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Convertible Securities Fund - Class II
$10,000 Investment (10/2/95 - 10/31/98)

<TABLE>
<CAPTION>
DATE FRANKLIN CONVERTIBLE GOLDMAN SACHS CONVERTIBLE 100 GOLDMAN SACHS
SECURITIES FUND - CLASS II BOND INDEX CONV100 $T
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/2/95 $9,901 $10,000
10/31/95 $9,708 $9,782 -2.18%
11/30/95 $9,964 $10,172 3.99%
12/31/95 $10,125 $10,228 0.55%
1/31/96 $10,317 $10,520 2.85%
2/29/96 $10,468 $10,700 1.71%
3/31/96 $10,571 $10,847 1.38%
4/30/96 $10,822 $10,948 0.93%
5/31/96 $11,032 $11,144 1.79%
6/30/96 $10,854 $11,067 -0.69%
7/31/96 $10,451 $10,699 -3.33%
8/31/96 $10,812 $11,040 3.19%
9/30/96 $11,232 $11,400 3.26%
10/31/96 $11,245 $11,337 -0.55%
11/30/96 $11,659 $11,719 3.37%
12/31/96 $11,697 $11,630 -0.76%
1/31/97 $12,214 $11,838 1.79%
2/28/97 $12,079 $11,879 0.34%
3/31/97 $11,807 $11,787 -0.77%
4/30/97 $11,827 $11,953 1.41%
5/31/97 $12,416 $12,513 4.68%
6/30/97 $12,803 $12,883 2.96%
7/31/97 $13,469 $13,648 5.94%
8/31/97 $13,564 $13,546 -0.75%
9/30/97 $14,123 $14,226 5.02%
10/31/97 $13,667 $13,885 -2.40%
11/30/97 $13,780 $13,837 -0.34%
12/31/97 $13,957 $13,898 0.44%
1/31/98 $13,756 $13,841 -0.41%
2/28/98 $14,071 $14,564 5.22%
3/31/98 $14,184 $15,075 3.51%
4/30/98 $14,348 $15,267 1.27%
5/31/98 $13,939 $14,854 -2.70%
6/30/98 $13,643 $14,942 0.59%
7/31/98 $13,294 $14,610 -2.22%
8/31/98 $11,826 $12,918 -11.58%
9/30/98 $12,056 $13,168 1.93%
10/31/98 $12,217 $13,622 3.45%
</TABLE>

The historical performance data shown pertains only to the fund's Class II
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

40 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE

Franklin Convertible Securities Fund - Class II
Periods ended 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- -------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Cumulative Total Return(1) -10.61% +25.84% +23.39%

Average Annual Total Return(2) -12.30% +7.60% +6.72%

Value of $10,000 Investment(3) $8,770 $12,457 $12,217

Distribution Rate(4) 4.36%

30-Day Standardized Yield(5) 5.23%
</TABLE>

(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.

(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.

(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.

(4) Distribution rate is based on an annualization of October's 4.29 cent per
share monthly dividend and the maximum offering price of $11.82 on October 31,
1998.

(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.

Franklin Convertible Securities Fund - Class II paid distributions derived from
long-term capital gains of 24.55 cents per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).

Past performance is not predictive of future results. 41

<PAGE>
FRANKLIN EQUITY INCOME FUND

FUND CATEGORY [PYRAMID GRAPHIC]

- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Equity Income Fund seeks to maximize total return,
emphasizing high, current income and capital appreciation, consistent with
reasonable risk, through a portfolio of common stocks with above-average yields.
- --------------------------------------------------------------------------------

ECONOMIC OVERVIEW

The fiscal year ending October 31, 1998, witnessed increased volatility in the
world's stock markets. During the period, the Asian currency crisis, which
surfaced in late 1997, caused declines of 40% or more in many emerging markets.
However, the crisis paradoxically stimulated the U.S. economy and financial
markets in early 1998. Lower interest rates stemming from the "Asian flu"
boosted consumer spending in the U.S. while corporate profit growth remained
solid. Real gross domestic product grew by a surprisingly strong 5.5% annualized
rate, and the S&P 500 Index, driven by large-cap growth stocks, gained nearly
14% during the first quarter of 1998.

While the U.S. economy appeared to continue on a stable track of moderate
expansion with low inflation, the global economic environment deteriorated
during the summer months. The Asian crisis expanded to other regions, most
notably Russia and Latin America. Also, many economies of developed countries,
such as Canada and the U.K., reported slowing trends. This global weakness put
downward pricing pressure on many tradable

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 104 of
this report.

<PAGE>
goods, while at the same time reducing demand for these products. The result was
a slowing of corporate profit growth for many U.S.-based companies.

During the third quarter of 1998, these trends strongly influenced the U.S.
financial markets. The S&P 500 Index declined by more than 10%.
Smaller-capitalization stocks were especially hard hit, while traditional
large-capitalization value stocks, such as utilities, performed very well during
the market turmoil. The Federal Reserve Board reacted to these conditions by
lowering its federal funds target rate before quarter's end and again in
October, to 5.0%. Central banks outside the U.S. also announced similar
interest-rate cuts in an effort to stimulate economic growth.

TOP FIVE INVESTMENT SECTORS
FRANKLIN EQUITY INCOME FUND
10/31/98

<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ----------------------------------
<S> <C>
Utilities 15.8%
Financial Services 15.7%
Consumer Staples 13.7%
Energy 12.3%
Basic Materials 9.8%
</TABLE>

PORTFOLIO NOTES

The recent performance of Franklin Equity Income Fund, which invests in
large-capitalization value stocks, reflected these trends. The fund's investment
returns lagged the major market indices during early 1998 but registered
favorable relative results throughout the volatile later part of the year. For
the one-year period ended October 31, 1998, the fund's Class I shares generated
a cumulative +10.96% total return. This compares favorably with the +10.5%
return for the Lipper Analytical Equity Income Funds Index, although the fund
underperformed its benchmark, the S&P 500 Index.* The S&P 500 is a broad-based
index consisting entirely of common stocks of 500 widely held, domestic
companies, while the Lipper Analytical Equity Income Funds Index, which tracks
the performance of 30 equity income funds, resembles the fund more closely.

The fund maintains a value-oriented investment philosophy, utilizing a highly
disciplined approach to investing. We seek to invest in stocks that are selling
at attractive prices according

*Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index.

<PAGE>
to measurements such as relative dividend yield, book value, revenues and
normalized earnings. This generally entails investing in stocks at temporarily
depressed prices while collecting current, steady investment returns in the form
of dividends, which can provide a cushion against possible price declines.
Despite the financial market's recent volatility, we feel overall stock
valuations remain at the expensive end of their historical range. For example,
the average dividend yield for companies comprising the S&P 500 Stock Index was
a low 1.5% on October 31, 1998, compared with an average 3.6% over the past 35
years. The fund's asset allocation changed modestly during the year, reflecting
these valuation levels. Common stocks declined slightly from 89.5% to 86.2% of
total net assets, and more defensive, convertible preferred stocks increased
from 4.1% to 6.3%. Short-term investments also grew from 6.1% to 7.7%, as of
October 31, 1998. Stocks of internationally based companies fell from 15.9% to
9.7% of total net assets.

TOP TEN HOLDINGS
FRANKLIN EQUITY INCOME FUND
10/31/98

<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- ----------------------------------------------------
<S> <C>
Bell Atlantic Corp. 2.79%
Telecommunications

Atlantic Richfield Co. 2.56%
Oil

J.C. Penney Inc. 2.33%
Retail Trade

Pharmacia & Upjohn Inc. 2.20%
Health Technology

UST Inc. 1.88%
Consumer Non-Durables

Texaco Inc. 1.86%
Energy Minerals

Sempra Energy 1.83%
Electric Utilities

YPF SA, Sponsored
ADR (Argentina) 1.76%
Energy Minerals

US West, Inc. 1.76%
Telecommunications

Chevron Corp. 1.74%
Energy Minerals
</TABLE>

We often find compelling value in stocks of companies that appear to be
fundamentally strong but have experienced temporary disappointments, or in
companies whose industries have uncertain prospects for near-term earnings
growth. The fund's accumulation of a sizeable investment weighting of electric
utility stocks serves as a good example. The uncertainty that accompanied the
electric utility sector deregulation caused electric utility stocks to
underperform the broader market from late 1993 through 1997. Cumulative total
returns for the S&P 500 Index over this period were approximately triple that of
the Dow Jones Electric Utility Index, and relative valuations such as price
earnings ratios and yields reached their most attractive levels in years. Since
then, deregulation's effects have become more clearly defined, in turn making
utility companies' earnings growth prospects and balance sheets more easily
understood. One of the fund's investments, Iowa-based MidAmerican

<PAGE>
Energy Holdings, agreed to be acquired at an attractive premium to its market
price. We sold the position and initiated an investment in the 9.25% convertible
preferred stock of Texas Utilities Co. Electric utility stocks continue to
represent one of the fund's largest sectors, representing 12.3% of total net
assets as of fiscal year end.

Energy stocks remain an area of investment focus. Holdings were 12.3% of the
fund's total net assets on October 31, 1998. Early in 1998, mild weather in the
U.S. and lower than anticipated demand in Asia resulted in crude oil prices
temporarily dropping to their lowest levels in 12 years. Since then, OPEC
production has been curtailed, pushing prices up. We took advantage of the
short-term price weakness by adding to our existing positions. One of those
positions, Amoco Corp., subsequently announced an agreement to be acquired by
British Petroleum, Co. PLC at a significantly higher price.

Our investments in real estate investment trusts (REITs), comprising 7.1% of the
fund's total net assets on October 31, 1998, registered disappointing returns,
with most investments in the sector experiencing negative performance for the
12-month period. This was largely due to non-fundamental reasons in our opinion.
One bright spot was our investment in Equity Office Properties Trust, which we
purchased in July 1997. The stock reached our price target in late 1997 and was
sold at a total return in excess of +45%. In the near future, most industry
participants will likely face slower growth rates and any U.S. recession would
negatively affect them. However, we believe that the historical lows recently
reached in many REIT stocks' prices more than adequately reflect the prospects
for slower future growth rates and are now considered inexpensive. Several of
these stocks are selling at prices below their companies' net asset values and
at very attractive multiples to cash flow. Accordingly, we have added to our
existing holdings and started

<PAGE>
new positions in the 7.75% convertible preferred stock of Glenborough Realty
Trust, Inc. and in MeriStar Hospitality Corp, Inc., a hotel REIT that owns and
leases properties under such names as Hilton, Sheraton, Marriott and Westin.

Financial stocks experienced favorable returns early in the period but were
among the stock market's worst performers during the summer correction. Holdings
were 15.7% of the fund's total net assets as of October 31, 1998. The fund sold
its positions in Beneficial Finance, acquired in August 1997, and Swedish bank
Norbanken, which we began purchasing in October 1995, at returns in excess of
+90% and +150% respectively. Yet, we maintained a below-market investment
weighting in this area throughout the year. Our investments in insurance stocks,
however, increased from 5.1% to 8.0% over the 12-month reporting period. We
initiated positions in Safeco Corp. and St. Paul Corp. in recent months. Both
stocks offered attractive relative dividend yields and were selling near their
book values at time of purchase. Three of our investments, U.K.-based insurance
broker Willis Corroon Group PLC, as well as Bermuda-based reinsurance companies
Mid Ocean Ltd. and U.S.-based Life Re Corp. agreed to acquisitions during the
year under review.

Among our consumer stock investments, we continued to realize profits in the
pharmaceutical sector. We sold our remaining investment in Bristol-Myers Squibb
Co. at a total return of more than +200%. While the company's growth prospects
continued to look favorable, the stock had become expensive relative to its
growth rate, with valuations near 30 times earnings at time of sale, compared
with approximately 14 times earnings when much of the position was acquired in
1994. Within the food and beverage industries, we realized modest profits in
U.K.-based Cadbury Schweppes PLC and started an investment in Anheuser-Busch
Cos. Inc., based on stock price weakness. The stock has since performed well, as
beer prices have stayed

<PAGE>
approximately the same and the company successfully settled a strike with
employees. An adverse litigation environment and threat of future legislative
action caused tobacco stocks to suffer early in the year. We responded by taking
profits in British Imperial Tobacco, which was not affected, and reinvesting the
proceeds into Phillip Morris Cos. Inc. common stock. Phillip Morris' stock price
has since rebounded more than 40% and the company raised its dividend 10%.

In addition, we capitalized on investment opportunities in the stocks of
retailers during the summer market decline. We initiated an investment in the
convertible preferred of K Mart, Corp. at a near 8% dividend yield, and we added
to our investment in J.C. Penney Co. Inc., when the stock offered an approximate
5% dividend yield. Finally, we added to our investments in the auto sector with
the purchase of General Motors Corp. (GM). The world's largest auto company, GM
has dramatically lagged the investment performance of Ford Motor Co. and
Chrysler Corp. in recent years. The company recently announced a restructuring
that we believe will help investors better understand the value of its
attractive assets. On the other hand, we significantly reduced our investment in
Chrysler after its announced merger with Daimler Benz AG, which resulted in
sharp appreciation in its share price.

Our investments in economically sensitive basic material stocks, such as steel,
chemicals and forest products fared poorly during the year, largely due to weak
worldwide commodity prices. We reduced overall weightings from 11.2% to 9.8% of
total net assets, and we sold two positions, Arco Chemical Co. and Millenium
Chemicals, as they met price targets early in the year. We took losses when we
sold investments in Portugal-based, forest-product company Portucel SGPS,
diversified chemical company Chemed Corp., and Freeport McMoran Copper and Gold,
Inc. because of continued worsening fundamentals.

<PAGE>
"We remain committed to our disciplined value-oriented approach, which
historically produced consistent and favorable long-term results."

We also reduced the fund's overall investment holdings in telephone companies to
6.4% from 9.3% of the fund's total net assets, during the reporting period.
Overall, these stocks performed extremely well. We sold positions in AT&T Corp.,
France Telecom, and Argentina-based Nortel Inversora SA at attractive profits.
AT&T, for example, gained more than 65% during its approximate 18-month holding
period. Our investment in New Zealand Telecom, conversely, did not work out as
planned, because the stock suffered from the Asian crisis' effects. Two of the
fund's positions, GTE Corp. and Southern New England Telephone (SNG), were
subject to acquisition bids. We accordingly reduced our investment in SNG as it
reached our price target.

Finally, weakness in the technology sector during the period provided the fund
with some unique investment opportunities. Many of these stocks have been strong
performers over the years but did not previously meet our strict value
disciplines. Examples of new positions acquired on weakness with attractive
dividend yields include Eastman Kodak Co., filter company Pall, Corp. and
electronic connector company AMP, Inc. Pall should benefit as countries
increasingly mandate use of filtered blood for transfusions. AMP and Eastman
Kodak are undergoing major restructurings that we believe should lead to
resumption of above-average earnings growth.

Looking forward, we anticipate continued high levels of financial market
volatility. Corporate America will likely face earnings growth challenges
near-term, while overall valuations

<PAGE>
remain high. Importantly, volatility can offer opportunities to invest in
quality companies at bargain levels as widely fluctuating stock prices often
reflect emotional swings rather than long-term fundamentals. We remain committed
to our disciplined value-oriented approach, which historically produced
consistent and favorable long-term results. We thank you for your participation
in Franklin Equity Income Fund, and we look forward to serving you in the
future.

Sincerely,

/s/ Frank M. Felicelli

Frank M. Felicelli
Portfolio Manager
Franklin Equity Income Fund

<PAGE>
PERFORMANCE SUMMARY

CLASS I

Franklin Equity Income Fund - Class I reported +10.96% cumulative total return
for the one-year period ended October 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 53, the fund delivered a +290.34% cumulative total return
since inception on March 15, 1988.

The fund's share price, as measured by net asset value, increased 62 cents from
$19.31 on October 31, 1997, to $19.93 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 64.8 cents ($0.648) including a special
2.4 ($0.024) cent year-end distribution, 28.71 cents ($0.2871) in short-term
capital gains and 50.79 cents ($0.5079) in long-term capital gains.
Distributions

50 Past performance is not predictive of future results.

<PAGE>
will vary depending on income earned by the fund and any profits realized from
the sale of securities in the fund's portfolio. Past distributions are not
indicative of future trends.

Based on the maximum offering price of $21.15 on October 31, 1998, and an
annualization of October's monthly dividend of 5.2 cents ($0.052) per share, the
fund's distribution rate was 2.95%.

The graph on page 52 compares the performance of the fund's Class I shares with
that of the unmanaged Standard & Poor's 500 Stock Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as Franklin Equity Income Fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.

The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.

DIVIDEND DISTRIBUTIONS
FRANKLIN EQUITY INCOME FUND
CLASS I
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------
<S> <C>
November 5.2 cents
December 7.6 cents*
January 5.2 cents
February 5.2 cents
March 5.2 cents
April 5.2 cents
May 5.2 cents
June 5.2 cents
July 5.2 cents
August 5.2 cents
September 5.2 cents
October 5.2 cents
- ----------------------------
Total 64.8 cents
</TABLE>

*Includes a special 2.4 cent distribution.

Past performance is not predictive of future results. 51

<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN EQUITY INCOME FUND - CLASS I
$10,000 INVESTMENT (11/1/88-10/31/98)

<TABLE>
<CAPTION>
Date Franklin Equity S&P 500 CPI S&P 500 % CPI %
Income Fund -
Class I
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/1/88 $9,423 $10,000 $10,000
11/30/88 $9,303 $9,857 $10,008 -1.43% 0.08%
12/31/88 $9,367 $10,029 $10,025 1.75% 0.17%
1/31/89 $9,889 $10,764 $10,075 7.32% 0.50%
2/28/89 $9,764 $10,496 $10,116 -2.49% 0.41%
3/31/89 $9,974 $10,740 $10,175 2.33% 0.58%
4/30/89 $10,349 $11,298 $10,241 5.19% 0.65%
5/31/89 $10,660 $11,755 $10,300 4.05% 0.57%
6/30/89 $10,699 $11,688 $10,324 -0.57% 0.24%
7/31/89 $11,421 $12,744 $10,349 9.03% 0.24%
8/31/89 $11,565 $12,993 $10,366 1.96% 0.16%
9/30/89 $11,559 $12,940 $10,399 -0.41% 0.32%
10/31/89 $11,236 $12,640 $10,449 -2.32% 0.48%
11/30/89 $11,400 $12,898 $10,474 2.04% 0.24%
12/31/89 $11,612 $13,207 $10,491 2.40% 0.16%
1/31/90 $11,044 $12,321 $10,599 -6.71% 1.03%
2/28/90 $11,220 $12,480 $10,648 1.29% 0.47%
3/31/90 $11,291 $12,811 $10,707 2.65% 0.55%
4/30/90 $10,908 $12,492 $10,724 -2.49% 0.16%
5/31/90 $11,621 $13,710 $10,749 9.75% 0.23%
6/30/90 $11,499 $13,618 $10,807 -0.67% 0.54%
7/31/90 $11,258 $13,574 $10,848 -0.32% 0.38%
8/31/90 $10,400 $12,347 $10,948 -9.04% 0.92%
9/30/90 $9,925 $11,746 $11,040 -4.87% 0.84%
10/31/90 $9,839 $11,695 $11,106 -0.43% 0.60%
11/30/90 $10,469 $12,451 $11,130 6.46% 0.22%
12/31/90 $10,585 $12,798 $11,130 2.79% 0.00%
1/31/91 $10,972 $13,356 $11,197 4.36% 0.60%
2/28/91 $11,648 $14,311 $11,214 7.15% 0.15%
3/31/91 $11,799 $14,658 $11,231 2.42% 0.15%
4/30/91 $11,887 $14,693 $11,248 0.24% 0.15%
5/31/91 $12,375 $15,326 $11,281 4.31% 0.30%
6/30/91 $11,865 $14,624 $11,314 -4.58% 0.29%
7/31/91 $12,346 $15,306 $11,331 4.66% 0.15%
8/31/91 $12,713 $15,668 $11,364 2.37% 0.29%
9/30/91 $12,740 $15,407 $11,414 -1.67% 0.44%
10/31/91 $12,949 $15,613 $11,431 1.34% 0.15%
11/30/91 $12,675 $14,984 $11,464 -4.03% 0.29%
12/31/91 $13,571 $16,698 $11,472 11.44% 0.07%
1/31/92 $13,500 $16,387 $11,489 -1.86% 0.15%
2/29/92 $13,692 $16,599 $11,531 1.29% 0.36%
3/31/92 $13,521 $16,275 $11,590 -1.95% 0.51%
4/30/92 $14,169 $16,754 $11,606 2.94% 0.14%
5/31/92 $14,308 $16,836 $11,622 0.49% 0.14%
6/30/92 $14,415 $16,585 $11,664 -1.49% 0.36%
7/31/92 $15,095 $17,263 $11,688 4.09% 0.21%
8/31/92 $14,852 $16,909 $11,721 -2.05% 0.28%
9/30/92 $14,768 $17,107 $11,754 1.17% 0.28%
10/31/92 $14,626 $17,165 $11,795 0.34% 0.35%
11/30/92 $15,032 $17,749 $11,812 3.40% 0.14%
12/31/92 $15,369 $17,967 $11,803 1.23% -0.07%
1/31/93 $15,725 $18,118 $11,861 0.84% 0.49%
2/28/93 $16,187 $18,365 $11,903 1.36% 0.35%
3/31/93 $16,616 $18,752 $11,944 2.11% 0.35%
4/30/93 $16,586 $18,298 $11,978 -2.42% 0.28%
5/31/93 $16,829 $18,787 $11,995 2.67% 0.14%
6/30/93 $16,968 $18,841 $12,011 0.29% 0.14%
7/31/93 $17,142 $18,766 $12,011 -0.40% 0.00%
8/31/93 $17,763 $19,477 $12,045 3.79% 0.28%
9/30/93 $17,879 $19,327 $12,070 -0.77% 0.21%
10/31/93 $18,152 $19,727 $12,120 2.07% 0.41%
11/30/93 $17,963 $19,540 $12,128 -0.95% 0.07%
12/31/93 $18,109 $19,776 $12,128 1.21% 0.00%
1/31/94 $18,533 $20,449 $12,161 3.40% 0.27%
2/28/94 $18,020 $19,895 $12,202 -2.71% 0.34%
3/31/94 $17,261 $19,027 $12,244 -4.36% 0.34%
4/30/94 $17,395 $19,271 $12,261 1.28% 0.14%
5/31/94 $17,613 $19,587 $12,270 1.64% 0.07%
6/30/94 $17,574 $19,107 $12,311 -2.45% 0.34%
7/31/94 $18,039 $19,734 $12,345 3.28% 0.27%
8/31/94 $18,752 $20,543 $12,394 4.10% 0.40%
9/30/94 $18,388 $20,041 $12,427 -2.44% 0.27%
10/31/94 $18,506 $20,492 $12,436 2.25% 0.07%
11/30/94 $17,983 $19,746 $12,452 -3.64% 0.13%
12/31/94 $18,050 $20,039 $12,452 1.48% 0.00%
1/31/95 $18,562 $20,558 $12,502 2.59% 0.40%
2/28/95 $18,926 $21,359 $12,552 3.90% 0.40%
3/31/95 $19,198 $21,989 $12,593 2.95% 0.33%
4/30/95 $19,619 $22,636 $12,635 2.94% 0.33%
5/31/95 $20,028 $23,541 $12,660 4.00% 0.20%
6/30/95 $20,138 $24,088 $12,686 2.32% 0.20%
7/31/95 $20,398 $24,887 $12,686 3.32% 0.00%
8/31/95 $20,592 $24,949 $12,719 0.25% 0.26%
9/30/95 $21,310 $26,002 $12,744 4.22% 0.20%
10/31/95 $21,129 $25,909 $12,786 -0.36% 0.33%
11/30/95 $21,842 $27,046 $12,777 4.39% -0.07%
12/31/95 $22,695 $27,568 $12,768 1.93% -0.07%
1/31/96 $23,231 $28,505 $12,844 3.40% 0.59%
2/29/96 $23,017 $28,771 $12,885 0.93% 0.32%
3/31/96 $23,195 $29,047 $12,952 0.96% 0.52%
4/30/96 $23,256 $29,474 $13,002 1.47% 0.39%
5/31/96 $23,433 $30,234 $13,027 2.58% 0.19%
6/30/96 $23,803 $30,349 $13,035 0.38% 0.06%
7/31/96 $22,940 $29,008 $13,059 -4.42% 0.19%
8/31/96 $23,311 $29,620 $13,084 2.11% 0.19%
9/30/96 $23,874 $31,287 $13,126 5.63% 0.32%
10/31/96 $24,366 $32,151 $13,168 2.76% 0.32%
11/30/96 $25,483 $34,581 $13,193 7.56% 0.19%
12/31/96 $25,585 $33,897 $13,193 -1.98% 0.00%
1/31/97 $26,259 $36,015 $13,235 6.25% 0.32%
2/28/97 $26,782 $36,296 $13,276 0.78% 0.31%
3/31/97 $26,322 $34,804 $13,310 -4.11% 0.25%
4/30/97 $26,497 $36,882 $13,326 5.97% 0.12%
5/31/97 $27,891 $39,128 $13,318 6.09% -0.06%
6/30/97 $28,714 $40,881 $13,334 4.48% 0.12%
7/31/97 $30,085 $44,135 $13,350 7.96% 0.12%
8/31/97 $29,622 $41,664 $13,375 -5.60% 0.19%
9/30/97 $31,142 $43,947 $13,408 5.48% 0.25%
10/31/97 $30,312 $42,479 $13,442 -3.34% 0.25%
11/30/97 $31,652 $44,446 $13,434 4.63% -0.06%
12/31/97 $32,546 $45,210 $13,418 1.72% -0.12%
1/31/98 $32,320 $45,712 $13,443 1.11% 0.19%
2/28/98 $33,561 $49,008 $13,469 7.21% 0.19%
3/31/98 $35,335 $51,517 $13,494 5.12% 0.19%
4/30/98 $34,873 $52,038 $13,519 1.01% 0.18%
5/31/98 $34,344 $51,143 $13,543 -1.72% 0.18%
6/30/98 $34,282 $53,219 $13,559 4.06% 0.12%
7/31/98 $33,314 $52,650 $13,575 -1.07% 0.12%
8/31/98 $30,667 $45,036 $13,592 -14.46% 0.12%
9/30/98 $32,282 $47,923 $13,608 6.41% 0.12%
10/31/98 $33,633 $51,819 $13,641 8.13% 0.24%
</TABLE>

* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.

** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

52 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
FRANKLIN EQUITY INCOME FUND - CLASS I
PERIODS ENDED 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (3/15/88)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +10.96% +85.29% +256.92% +290.34%

Average Annual Total Return(2) +4.57% +11.80% +12.90% +13.04%

Value of $10,000 Investment(3) $10,457 $17,463 $33,633 $36,790

Distribution Rate(4) 2.95%

30-Day Standardized Yield(5) 3.11%
</TABLE>

<TABLE>
<CAPTION>
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +1.83% +14.10% +15.39% +24.40% +10.96%
</TABLE>

(1) Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(4) Distribution rate is based on an annualization of October's 5.2 cent per
share monthly dividend and the maximum offering price of $21.15 on October 31,
1998.

(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

(6) One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.

Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. Past expense waivers by the fund's manager increased the fund's
total returns. All total return calculations assume reinvestment of dividends
and capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.

Franklin Equity Income Fund - Class I paid distributions derived from long-term
capital gains of 50.79 cents per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).

Past performance is not predictive of future results. 53

<PAGE>
CLASS II

Franklin Equity Income Fund - Class II reported a +10.16% cumulative total
return for the one-year period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 57, the fund delivered a +54.65% cumulative total return since inception on
October 2, 1995.

The fund's share price, as measured by net asset value, increased 62 cents, from
$19.26 on October 31, 1997, to $19.88 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 49.89 cents ($0.4989) including a special
2.4 ($0.024) cent year-end distribution, 28.71 cents ($0.2871) in short-term
capital gains, and 50.79 cents ($0.5079) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the fund's portfolio. Past distributions
are not predictive of future trends.

DIVIDEND DISTRIBUTIONS
FRANKLIN EQUITY
INCOME FUND - CLASS II
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------
<S> <C>
November 4.01 cents
December 6.41 cents*
January 3.93 cents
February 3.93 cents
March 3.93 cents
April 3.91 cents
May 3.91 cents
June 3.91 cents
July 3.96 cents
August 3.96 cents
September 3.96 cents
October 4.07 cents
- ------------------------------
TOTAL 49.89 CENTS
</TABLE>

*Includes a special 2.4 cent distribution.

54 Past performance is not predictive of future results.

<PAGE>
Based on the maximum offering price of $20.08 on October 31, 1998, and an
annualization of October's monthly dividend of 4.07 cents ($0.0407) per share,
the fund's distribution rate was 2.43%.

The graph on page 56 compares the performance of the fund's Class II shares with
that of the unmanaged Standard & Poor's 500 Stock Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes sales charges, all fund expenses and account fees. If
operating expenses such as Franklin Equity Income Fund's had been applied to the
index, its performance would have been lower. Please remember that an index is
simply a measure of performance, and one cannot invest in it directly.

Past performance is not predictive of future results. 55

<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN EQUITY INCOME FUND - CLASS II
$10,000 INVESTMENT (10/2/95 - 10/31/98)

<TABLE>
<CAPTION>
DATE FRANKLIN EQUITY INCOME S&P 500 CPI S&P 500 %** CPI %**
FUND* - CLASS II
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/2/95 $9,903 $10,000 $10,000
10/31/95 $9,843 $9,964 $10,033 -0.36% 0.33%
11/30/95 $10,184 $10,401 $10,026 4.39% -0.07%
12/31/95 $10,548 $10,602 $10,019 1.93% -0.07%
1/31/96 $10,800 $10,963 $10,078 3.40% 0.59%
2/29/96 $10,697 $11,065 $10,110 0.93% 0.32%
3/31/96 $10,775 $11,171 $10,163 0.96% 0.52%
4/30/96 $10,800 $11,335 $10,203 1.47% 0.39%
5/31/96 $10,872 $11,627 $10,222 2.58% 0.19%
6/30/96 $11,040 $11,672 $10,228 0.38% 0.06%
7/31/96 $10,634 $11,156 $10,247 -4.42% 0.19%
8/31/96 $10,794 $11,391 $10,267 2.11% 0.19%
9/30/96 $11,049 $12,032 $10,300 5.63% 0.32%
10/31/96 $11,266 $12,365 $10,333 2.76% 0.32%
11/30/96 $11,771 $13,299 $10,352 7.56% 0.19%
12/31/96 $11,815 $13,036 $10,352 -1.98% 0.00%
1/31/97 $12,119 $13,851 $10,386 6.25% 0.32%
2/28/97 $12,352 $13,959 $10,418 0.78% 0.31%
3/31/97 $12,140 $13,385 $10,444 -4.11% 0.25%
4/30/97 $12,208 $14,184 $10,456 5.97% 0.12%
5/31/97 $12,839 $15,048 $10,450 6.09% -0.06%
6/30/97 $13,206 $15,722 $10,463 4.48% 0.12%
7/31/97 $13,830 $16,974 $10,475 7.96% 0.12%
8/31/97 $13,602 $16,023 $10,495 -5.60% 0.19%
9/30/97 $14,301 $16,901 $10,521 5.48% 0.25%
10/31/97 $13,903 $16,337 $10,548 -3.34% 0.25%
11/30/97 $14,510 $17,093 $10,541 4.63% -0.06%
12/31/97 $14,912 $17,387 $10,529 1.72% -0.12%
1/31/98 $14,799 $17,580 $10,549 1.11% 0.19%
2/28/98 $15,359 $18,848 $10,569 7.21% 0.19%
3/31/98 $16,163 $19,813 $10,589 5.12% 0.19%
4/30/98 $15,933 $20,013 $10,608 1.01% 0.18%
5/31/98 $15,681 $19,668 $10,627 -1.72% 0.18%
6/30/98 $15,650 $20,467 $10,640 4.06% 0.12%
7/31/98 $15,198 $20,248 $10,652 -1.07% 0.12%
8/31/98 $13,979 $17,320 $10,665 -14.46% 0.12%
9/30/98 $14,707 $18,430 $10,678 6.41% 0.12%
10/31/98 $15,316 $19,929 $10,704 8.13% 0.24%
</TABLE>

*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

56 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE

FRANKLIN EQUITY INCOME FUND - CLASS II
PERIODS ENDED 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +10.16% +55.60% +54.65%

Average Annual Total Return(2) +8.10% +15.50% +14.85%

Value of $10,000 Investment(3) $10,810 $15,408 $15,316

Distribution Rate(4) 2.43%

30-Day Standardized Yield(5) 2.54%
</TABLE>

(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.

(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.

(4) Distribution rate is based on an annualization of October's 4.07 cent per
share monthly dividend and the maximum offering price of $20.08 on October 31,
1998.

(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

Franklin Equity Income Fund - Class II paid distributions derived from long-term
capital gains of 50.79 cents per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).

Past performance is not predictive of future results. 57

<PAGE>
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND

FUND CATEGORY [PYRAMID GRAPHIC]

- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Global Government Income Fund seeks a high level of
current income consistent with preservation of capital, with capital
appreciation as a secondary consideration, through a portfolio of domestic and
foreign debt securities.
- --------------------------------------------------------------------------------

ECONOMIC OVERVIEW

For global bond investors, the year under review was marked by three dominant
trends. Most importantly, the persistent decline in raw materials' and
commodities' prices contributed to a very positive global inflation environment.
Partly as a result of this trend, the period saw intermittent yet continuing
crises develop in emerging market countries while at the same time, bond yields
in the world's major industrial markets fell just as persistently. These
divergent market trends meant that in this difficult period fund managers had to
be selective about their investment allocations.

Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth. In the U. S., the economic
expansion continued for the sixth consecutive year, while unemployment fell to
levels not seen since the early 1970s. European economies also emerged from a
sluggish growth environment to post impressive economic gains. In particular,
smaller European economies, such as Finland, Spain and the Netherlands, began to
expand quite

You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 111 of
this report.

<PAGE>
rapidly during the year, as the delayed impact of low, long-term interest rates
stimulated economic activity. By the end of the reporting period, accelerating
economic growth spread to the larger European economies of Germany, France and
Italy.

The official agreement to launch a common European currency, the euro, at the
beginning of 1999 had several favorable effects on the markets of participating
Continental European countries. The conversion of interest rates among European
countries, as the agreement required, enabled countries with higher rates, such
as Spain and Portugal, to enjoy the added economic boost of lowering their
rates. Currency risk among member countries also declined, as the euro will set
the exchange rate among individual currencies.

Consumer price inflation in the United States and Europe was rather tame during
the period, surprising many economists because economic growth at the recent
pace often generates at least modest price pressures. The relatively soft price
environment was much of the reason for global interest rate declines. For
example, ten-year government bond yields in the U.S. declined 1.20%, from 5.84%
to 4.64% during the reporting period, while similar bonds in Germany fell 1.44%,
from 5.58% to 4.14%.

Japan was an exception to this healthy global environment. Approximately nine
years after the Japanese stock market bubble burst, Japanese banks are still
hampered by an enormous load of bad debt. During the year under review,
government policy-makers were unable to craft a solution to Japan's banking and
economic woes. As of October 31, Japan remains in a recession with little
near-term prospects of emerging again into positive growth territory.

Japan's ongoing troubles contributed greatly to the emerging markets crisis that
arose during the 12-month reporting period.

<PAGE>
The yen's persistent weakness and country's poor domestic demand for exports
from other Asian markets put enormous pressure on developing Asian economies.
Furthermore, once the crisis engulfed Thailand, Malaysia, South Korea and
Indonesia, Japanese banks were so overloaded with bad debt that they could not
lend to those in need.

Toward the end of the 12-month period under review, the crisis spread out of
Asia and began to affect other emerging markets. In particular, Russia, with its
precarious debt-financing needs, came under tremendous pressure. Russia declared
a moratorium on debt service and ultimately devalued its currency, the ruble,
seeking some stability. Naturally, these conditions negatively influenced the
debt instruments of other developing markets, especially those in Latin and
Central America.

The crisis also affected such industrialized economies as Canada, Australia and
New Zealand, which are highly dependent on commodity exports, or those that
conduct a high-level of trade with the emerging economies in crisis. They
experienced moderate declines in their currencies compared to the U.S. dollar,
and interest rates in these countries rose relative to U.S. rates to protect the
value of their currencies.

In general, over the annual period, global bond investors reacted to these
conditions by progressively reducing their exposure to emerging markets debt
securities, preferring to increase their holdings of high-quality, industrial
market government bonds.

<PAGE>
PORTFOLIO NOTES

Franklin Global Government Income Fund attempted to maximize its return during
the reporting period by allocating approximately 70%-80% of its assets to
intermediate- and long-term bonds in the industrial markets and about 20%-30% of
its assets to the highest-quality and most-widely traded bonds in the emerging
markets. We believed this combination of bonds offered the greatest opportunity
for higher, long-term returns at the cost of only modestly higher, short-term
volatility.

In general, the fund's allocation to emerging markets exerted a drag on
performance. Emerging market bonds underperformed higher-quality,
industrial-market bonds during the period and this, in turn, caused the fund to
underperform its benchmark index, the J.P. Morgan Global Government Bond Index,
for the 12-month period. However, the portfolio management team believes that
the fund's emerging markets' positions should offer superior returns over the
next three to five years, but may be volatile in the meantime.

The fund's geographic allocation was relatively stable during the period. As the
chart to the right indicates, the percentage of holdings in the North American
and European regions remained approximately the same at about 27% and 38%,
respectively. The allocation within Europe, however, did change slightly as we
reduced our positions in Sweden by approximately 3% and increased our allocation
in the U.K. by approximately 2%.

COUNTRY DISTRIBUTION
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
BASED ON TOTAL NET ASSETS

<TABLE>
<CAPTION>
COUNTRY 10/31/97 10/31/98
- --------------------------------------------
<S> <C> <C>
United States 24.3% 26.4%
Germany 12.3% 11.1%
Italy 11.7% 9.6%
Canada 8.5% 7.8%
Spain 7.0% 6.6%
Argentina 6.0% 6.2%
Brazil 5.8% 5.1%
United Kingdom 3.3% 4.7%
Mexico 5.0% 4.4%
Australia 4.2% 4.2%
Sweden 5.7% 2.9%
Venezuela 2.2% 2.7%
Turkey 0.0% 2.5%
Denmark 1.8% 2.1%
New Zealand 2.0% 1.8%
Bulgaria 0.0% 0.9%
Panama 0.2% 0.5%
Peru 0.0% 0.5%
</TABLE>

<PAGE>
The largest change in the fund's composition involved the amount of foreign
exchange hedging we conducted for the fund's European holdings. We designed
currency-hedging activities seeking to minimize the loss of value arising from
the decline in the fund's European currency-denominated bond holdings. At the
end of the reporting period, the fund's net U.S. dollar exposure (combining the
holding of securities plus the effect of foreign currency hedging) stood at 49%
of total net assets, up from 44% at the end of the previous fiscal year. The net
exposure to European currencies stood at 41% versus 46% for the same period.
Increased foreign currency hedging primarily resulted from the U.S. dollar's
appreciation from last year, as well as the portfolio manager's belief that the
global crisis atmosphere increased the likelihood that certain European
currencies would lose value against the dollar.

Near the end of the period, the fund took advantage of steep price declines of
selected emerging markets bonds and purchased bonds issued by Turkey, Bulgaria
and Peru.

MARKET OUTLOOK

From our current vantage point, the crisis in the emerging markets does not
appear to be over. Ongoing market volatility in emerging and developed markets
is likely until the real economic impact of the emerging markets crisis is
better understood. We see this period of increased volatility in lower-rated
bond issues as an attractive investment opportunity for those investors with
medium-term investment horizons and the willingness to tolerate moderately
higher risk. With that in mind, it

<PAGE>
is likely that we will add lower-rated bonds to our holdings in periods of
excessive pessimism.

Outside of the emerging markets crisis, the critical issue for global interest
rates will continue to be concern over the balance between global growth and
inflation. We believe that global inflation probably will be mild in the period
ahead, while global economic growth is likely to decline modestly but not enough
to lead to a recession. We consider this an ideal environment for high-quality
bonds, the fund's primary investments, and thus, we are positive for the
intermediate-term outlook for the fund.

Sincerely,

/s/ Thomas J. Dickson

Thomas J. Dickson
Portfolio Manager
Franklin Global Government Income Fund

<PAGE>
PERFORMANCE SUMMARY

CLASS I

Franklin Global Government Income Fund - Class I share price, as measured by net
asset value, decreased 16.0 cents, from $8.41 on October 31, 1997, to $8.25 on
October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 61.0 cents ($0.61), including a special
1.0 cent ($0.01) year-end distribution. Distributions will vary depending on the
fund's income, and past distributions are not indicative of future trends.

Based on the maximum offering price of $8.62 on October 31, 1998, and an
annualization of October's monthly dividend of 5.0 cents ($0.05) per share, your
fund's distribution rate was 6.96%.

The fund reported a +5.57% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total

64 Past performance is not predictive of future results.

<PAGE>
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 67, the fund delivered a +114.47% cumulative total return
since inception on March 15, 1988.

The graph on page 66 compares the performance of the fund's Class I shares with
that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as Franklin Global Government Income
Fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in it directly.

DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME
FUND - CLASS I
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------
<S> <C>
November 5.0 cents
December 6.0 cents*
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
- ----------------------------
TOTAL 61.0 CENTS
</TABLE>

* Includes a special 1.0 cent distribution.

Past performance is not predictive of future results. 65

<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
$10,000 INVESTMENT (11/1/88 - 10/31/98)

<TABLE>
<CAPTION>
Franklin Global
Government JP Morgan Global
Income Fund* Government
Class I Bond Index**
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $9,577 $10,000 JPM Global Govt $
TR

11/30/88 $9,746 $10,087 0.87%
12/31/88 $9,676 $10,026 -0.60%
1/31/89 $9,828 $9,927 -0.99%
2/28/89 $9,688 $9,911 -0.16%
3/31/89 $9,691 $9,827 -0.85%
4/30/89 $9,742 $9,990 1.66%
5/31/89 $9,599 $9,881 -1.09%
6/30/89 $9,916 $10,107 2.28%
7/31/89 $10,118 $10,509 3.98%
8/31/89 $10,170 $10,199 -2.95%
9/30/89 $10,062 $10,359 1.57%
10/31/89 $9,963 $10,493 1.29%
11/30/89 $10,059 $10,586 0.89%
12/31/89 $10,219 $10,709 1.16%
1/31/90 $10,137 $10,549 -1.49%
2/28/90 $9,992 $10,435 -1.08%
3/31/90 $10,113 $10,372 -0.61%
4/30/90 $10,051 $10,331 -0.39%
5/31/90 $10,262 $10,662 3.20%
6/30/90 $10,574 $10,855 1.81%
7/31/90 $10,846 $11,174 2.94%
8/31/90 $10,702 $11,087 -0.78%
9/30/90 $10,671 $11,190 0.93%
10/31/90 $10,720 $11,632 3.95%
11/30/90 $10,909 $11,838 1.77%
12/31/90 $10,995 $11,969 1.11%
1/31/91 $11,129 $12,241 2.27%
2/28/91 $11,443 $12,252 0.09%
3/31/91 $11,230 $11,868 -3.13%
4/30/91 $11,404 $12,012 1.21%
5/31/91 $11,542 $12,023 0.09%
6/30/91 $11,447 $11,863 -1.33%
7/31/91 $11,677 $12,114 2.12%
8/31/91 $11,745 $12,365 2.07%
9/30/91 $12,057 $12,816 3.65%
10/31/91 $12,223 $12,942 0.98%
11/30/91 $12,206 $13,153 1.63%
12/31/91 $12,559 $13,817 5.05%
1/31/92 $12,529 $13,546 -1.96%
2/29/92 $12,540 $13,507 -0.29%
3/31/92 $12,525 $13,383 -0.92%
4/30/92 $12,645 $13,494 0.83%
5/31/92 $12,916 $13,877 2.84%
6/30/92 $12,900 $14,256 2.73%
7/31/92 $13,009 $14,570 2.20%
8/31/92 $12,918 $14,957 2.66%
9/30/92 $12,332 $14,942 -0.10%
10/31/92 $12,558 $14,569 -2.50%
11/30/92 $12,303 $14,311 -1.77%
12/31/92 $12,528 $14,447 0.95%
1/31/93 $12,710 $14,691 1.69%
2/28/93 $12,953 $14,927 1.61%
3/31/93 $13,421 $15,157 1.54%
4/30/93 $13,817 $15,433 1.82%
5/31/93 $14,034 $15,532 0.64%
6/30/93 $13,979 $15,544 0.08%
7/31/93 $13,938 $15,551 0.04%
8/31/93 $14,284 $16,011 2.96%
9/30/93 $14,260 $16,181 1.06%
10/31/93 $14,672 $16,173 -0.05%
11/30/93 $14,332 $16,054 -0.73%
12/31/93 $14,862 $16,218 1.02%
1/31/94 $15,156 $16,371 0.94%
2/28/94 $14,695 $16,191 -1.10%
3/31/94 $14,084 $16,116 -0.46%
4/30/94 $14,076 $16,103 -0.08%
5/31/94 $14,180 $15,971 -0.82%
6/30/94 $13,474 $16,160 1.18%
7/31/94 $13,665 $16,312 0.94%
8/31/94 $13,807 $16,269 -0.26%
9/30/94 $13,780 $16,350 0.50%
10/31/94 $13,848 $16,596 1.50%
11/30/94 $13,832 $16,387 -1.26%
12/31/94 $13,709 $16,424 0.23%
1/31/95 $13,623 $16,756 2.02%
2/28/95 $13,817 $17,188 2.58%
3/31/95 $14,102 $18,063 5.09%
4/30/95 $14,442 $18,352 1.60%
5/31/95 $14,821 $18,864 2.79%
6/30/95 $14,875 $18,981 0.62%
7/31/95 $15,003 $19,071 0.47%
8/31/95 $15,041 $18,540 -2.78%
9/30/95 $15,375 $18,959 2.26%
10/31/95 $15,600 $19,145 0.98%
11/30/95 $15,845 $19,358 1.11%
12/31/95 $16,187 $19,598 1.24%
1/31/96 $16,224 $19,398 -1.02%
2/29/96 $15,955 $19,283 -0.59%
3/31/96 $16,014 $19,254 -0.15%
4/30/96 $16,189 $19,183 -0.37%
5/31/96 $16,305 $19,202 0.10%
6/30/96 $16,542 $19,371 0.88%
7/31/96 $16,562 $19,728 1.84%
8/31/96 $16,819 $19,811 0.42%
9/30/96 $17,120 $19,920 0.55%
10/31/96 $17,441 $20,314 1.98%
11/30/96 $17,886 $20,605 1.43%
12/31/96 $17,928 $20,460 -0.70%
1/31/97 $17,702 $19,949 -2.50%
2/28/97 $17,619 $19,811 -0.69%
3/31/97 $17,536 $19,661 -0.76%
4/30/97 $17,578 $19,550 -0.56%
5/31/97 $17,724 $20,012 2.36%
6/30/97 $17,935 $20,240 1.14%
7/31/97 $18,020 $20,165 -0.37%
8/31/97 $17,978 $20,141 -0.12%
9/30/97 $18,343 $20,588 2.22%
10/31/97 $18,234 $21,025 2.12%
11/30/97 $18,300 $20,772 -1.20%
12/31/97 $18,431 $20,749 -0.11%
1/31/98 $18,608 $20,957 1.00%
2/28/98 $18,829 $21,112 0.74%
3/31/98 $18,917 $20,954 -0.75%
4/30/98 $18,940 $21,276 1.54%
5/31/98 $18,895 $21,368 0.43%
6/30/98 $18,850 $21,428 0.28%
7/31/98 $18,895 $21,485 0.27%
8/31/98 $17,837 $22,078 2.76%
9/30/98 $18,762 $23,231 5.22%
10/31/98 $19,250 $23,751 2.24%
</TABLE>

The historical performance data shown pertains only to the fund's Class I
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.

*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

66 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
PERIODS ENDED 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (3/15/88)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.57% +30.76% +109.44% +114.47%

Average Annual Total Return(2) +1.12% +4.59% +7.20% +7.03%

Distribution Rate(3) 6.96%

30-Day Standardized Yield(4) 5.31%
</TABLE>

(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current, maximum
4.25% initial sales charge. Prior to July 1, 1994, fund shares were offered at a
lower initial sales charge with dividends reinvested at the offering price; thus
actual total returns would differ.

(3). Distribution rate is based on an annualization of October's 5.0 cent per
share monthly dividend and the maximum offering price of $8.62 on October 31,
1998.

(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. Past expense reductions by the fund's manager increased the fund's
total returns. All total return calculations assume reinvestment of dividends
and capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.

Past performance is not predictive of future results. 67

<PAGE>
CLASS II

DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -------------------------------------------------------
<S> <C>
November 4.64 cents
December 5.64 cents*
January 4.60 cents
February 4.60 cents
March 4.60 cents
April 4.62 cents
May 4.62 cents
June 4.62 cents
July 4.63 cents
August 4.63 cents
September 4.63 cents
October 4.65 cents
- -------------------------------------------------------
TOTAL 56.48 CENTS
</TABLE>

* Includes a special 1.0 cent distribution.

Franklin Global Government Income Fund - Class II share price, as measured by
net asset value, decreased 15.0 cents, from $8.41 on October 31, 1997, to $8.26
on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 56.48 cents ($0.5648), including a
special 1.0 cent ($0.01) year-end distribution. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the maximum offering price of $8.34 on October 31, 1998, and an
annualization of October's monthly dividend of 4.65 cents ($0.0465) per share,
the fund's distribution rate was 6.69%.

The fund reported a +5.12% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include
sales charges. We have always maintained a long-term perspective when managing
the fund, and we encourage shareholders to

68 Past performance is not predictive of future results.

<PAGE>
view their investments in a similar manner. As you can see from the table on
page 71, the fund delivered a +29.74% cumulative total return since inception on
May 1, 1995.

The graph on page 70 compares the performance of the fund's Class II shares with
that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes sales charges, all fund expenses and account fees. If
operating expenses such as Franklin Global Government Income Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

Past performance is not predictive of future results. 69

<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
$10,000 INVESTMENT (5/1/95 - 10/31/98)

<TABLE>
<CAPTION>
FRANKLIN GLOBAL
GOVERNMENT JP MORGAN GLOBAL
INCOME FUND* GOVERNMENT
CLASS II BOND INDEX**
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/95 $9,901 $10,000 JPM Global Govt $
TR
5/31/95 $10,171 $10,279 2.79%
6/30/95 $10,204 $10,343 0.62%
7/31/95 $10,273 $10,391 0.47%
8/31/95 $10,294 $10,102 -2.78%
9/30/95 $10,518 $10,331 2.26%
10/31/95 $10,670 $10,432 0.98%
11/30/95 $10,834 $10,548 1.11%
12/31/95 $11,063 $10,679 1.24%
1/31/96 $11,084 $10,570 -1.02%
2/29/96 $10,894 $10,507 -0.59%
3/31/96 $10,929 $10,492 -0.15%
4/30/96 $11,029 $10,453 -0.37%
5/31/96 $11,117 $10,463 0.10%
6/30/96 $11,272 $10,555 0.88%
7/31/96 $11,280 $10,749 1.84%
8/31/96 $11,451 $10,795 0.42%
9/30/96 $11,650 $10,854 0.55%
10/31/96 $11,864 $11,069 1.98%
11/30/96 $12,163 $11,227 1.43%
12/31/96 $12,187 $11,149 -0.70%
1/31/97 $12,027 $10,870 -2.50%
2/28/97 $11,979 $10,795 -0.69%
3/31/97 $11,903 $10,713 -0.76%
4/30/97 $11,925 $10,653 -0.56%
5/31/97 $12,033 $10,904 2.36%
6/30/97 $12,170 $11,029 1.14%
7/31/97 $12,222 $10,988 -0.37%
8/31/97 $12,188 $10,975 -0.12%
9/30/97 $12,415 $11,218 2.22%
10/31/97 $12,336 $11,456 2.12%
11/30/97 $12,390 $11,319 -1.20%
12/31/97 $12,474 $11,306 -0.11%
1/31/98 $12,587 $11,419 1.00%
2/28/98 $12,716 $11,504 0.74%
3/31/98 $12,769 $11,417 -0.75%
4/30/98 $12,779 $11,593 1.54%
5/31/98 $12,743 $11,643 0.43%
6/30/98 $12,706 $11,676 0.28%
7/31/98 $12,731 $11,707 0.27%
8/31/98 $12,013 $12,030 2.76%
9/30/98 $12,630 $12,658 5.22%
10/31/98 $12,968 $12,942 2.24%
</TABLE>

The historical performance data shown pertains only to the fund's Class II
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.

*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

70 Past performance is not predictive of future results.

<PAGE>
PERFORMANCE
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
PERIODS ENDED 10/31/98

<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.12% +21.25% +29.74%

Average Annual Total Return(2) +3.14% +6.27% +7.40%

Distribution Rate(3) 6.69%

30-Day Standardized Yield(4) 4.96%
</TABLE>

(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.

(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.

(3). Distribution rate is based on an annualization of October's 4.65 cent per
share monthly dividend and the maximum offering price of $8.34 on October 31,
1998.

(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.

Past performance is not predictive of future results. 71

<PAGE>
ADVISOR CLASS

Franklin Global Government Income Fund - Advisor Class share price, as measured
by net asset value, decreased 15.0 cents, from $8.41 on October 31, 1997, to
$8.26 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 61.91 cents ($0.6191), including a
special 1.0 cent ($0.01) year-end distribution. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the net asset value price of $8.26 on October 31, 1998, and an
annualization of October's monthly dividend of 5.1 cents ($0.051) per share, the
fund's distribution rate was 7.41%.

The fund reported a +5.81% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.

DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME
FUND - ADVISOR CLASS
11/1/97 - 10/31/98

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------------------
<S> <C>
November 5.07 cents
December 6.08 cents*
January 5.07 cents
February 5.06 cents
March 5.07 cents
April 5.07 cents
May 5.07 cents
June 5.12 cents
July 5.07 cents
August 5.07 cents
September 5.06 cents
October 5.10 cents
- ----------------------------------------
TOTAL 61.91 CENTS
</TABLE>

* Includes a special 1.0 cent distribution.

72 Past performance is not predictive of future results.

<PAGE>
The graph on page 74 compares the performance of the fund's Advisor Class shares
with that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes all fund expenses and account fees. If operating expenses such
as Franklin Global Government Income Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.

Past performance is not predictive of future results. 73

<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Global
Government Income Fund -
Advisor Class
$10,000 Investment (11/1/88 - 10/31/98)

<TABLE>
<CAPTION>
Franklin Global JP Morgan Global
Government Income Fund Government
- Advisor Class Bond Index
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $10,000 $10,000 JPM Global Govt $
TR
11/30/88 $10,176 $10,087 0.87%
12/31/88 $10,104 $10,026 -0.60%
1/31/89 $10,262 $9,927 -0.99%
2/28/89 $10,116 $9,911 -0.16%
3/31/89 $10,119 $9,827 -0.85%
4/30/89 $10,172 $9,990 1.66%
5/31/89 $10,023 $9,881 -1.09%
6/30/89 $10,354 $10,107 2.28%
7/31/89 $10,565 $10,509 3.98%
8/31/89 $10,620 $10,199 -2.95%
9/30/89 $10,507 $10,359 1.57%
10/31/89 $10,404 $10,493 1.29%
11/30/89 $10,504 $10,586 0.89%
12/31/89 $10,670 $10,709 1.16%
1/31/90 $10,585 $10,549 -1.49%
2/28/90 $10,433 $10,435 -1.08%
3/31/90 $10,560 $10,372 -0.61%
4/30/90 $10,495 $10,331 -0.39%
5/31/90 $10,715 $10,662 3.20%
6/30/90 $11,042 $10,855 1.81%
7/31/90 $11,325 $11,174 2.94%
8/31/90 $11,175 $11,087 -0.78%
9/30/90 $11,142 $11,190 0.93%
10/31/90 $11,194 $11,632 3.95%
11/30/90 $11,391 $11,838 1.77%
12/31/90 $11,480 $11,969 1.11%
1/31/91 $11,621 $12,241 2.27%
2/28/91 $11,949 $12,252 0.09%
3/31/91 $11,726 $11,868 -3.13%
4/30/91 $11,908 $12,012 1.21%
5/31/91 $12,052 $12,023 0.09%
6/30/91 $11,953 $11,863 -1.33%
7/31/91 $12,193 $12,114 2.12%
8/31/91 $12,264 $12,365 2.07%
9/30/91 $12,590 $12,816 3.65%
10/31/91 $12,763 $12,942 0.98%
11/30/91 $12,746 $13,153 1.63%
12/31/91 $13,114 $13,817 5.05%
1/31/92 $13,083 $13,546 -1.96%
2/29/92 $13,095 $13,507 -0.29%
3/31/92 $13,078 $13,383 -0.92%
4/30/92 $13,204 $13,494 0.83%
5/31/92 $13,487 $13,877 2.84%
6/30/92 $13,470 $14,256 2.73%
7/31/92 $13,583 $14,570 2.20%
8/31/92 $13,489 $14,957 2.66%
9/30/92 $12,877 $14,942 -0.10%
10/31/92 $13,113 $14,569 -2.50%
11/30/92 $12,847 $14,311 -1.77%
12/31/92 $13,082 $14,447 0.95%
1/31/93 $13,272 $14,691 1.69%
2/28/93 $13,525 $14,927 1.61%
3/31/93 $14,014 $15,157 1.54%
4/30/93 $14,427 $15,433 1.82%
5/31/93 $14,654 $15,532 0.64%
6/30/93 $14,597 $15,544 0.08%
7/31/93 $14,554 $15,551 0.04%
8/31/93 $14,915 $16,011 2.96%
9/30/93 $14,890 $16,181 1.06%
10/31/93 $15,320 $16,173 -0.05%
11/30/93 $14,965 $16,054 -0.73%
12/31/93 $15,519 $16,218 1.02%
1/31/94 $15,826 $16,371 0.94%
2/28/94 $15,345 $16,191 -1.10%
3/31/94 $14,707 $16,116 -0.46%
4/30/94 $14,698 $16,103 -0.08%
5/31/94 $14,807 $15,971 -0.82%
6/30/94 $14,070 $16,160 1.18%
7/31/94 $14,268 $16,312 0.94%
8/31/94 $14,417 $16,269 -0.26%
9/30/94 $14,389 $16,350 0.50%
10/31/94 $14,460 $16,596 1.50%
11/30/94 $14,443 $16,387 -1.26%
12/31/94 $14,315 $16,424 0.23%
1/31/95 $14,225 $16,756 2.02%
2/28/95 $14,427 $17,188 2.58%
3/31/95 $14,725 $18,063 5.09%
4/30/95 $15,080 $18,352 1.60%
5/31/95 $15,476 $18,864 2.79%
6/30/95 $15,533 $18,981 0.62%
7/31/95 $15,665 $19,071 0.47%
8/31/95 $15,706 $18,540 -2.78%
9/30/95 $16,055 $18,959 2.26%
10/31/95 $16,289 $19,145 0.98%
11/30/95 $16,545 $19,358 1.11%
12/31/95 $16,902 $19,598 1.24%
1/31/96 $16,941 $19,398 -1.02%
2/29/96 $16,660 $19,283 -0.59%
3/31/96 $16,721 $19,254 -0.15%
4/30/96 $16,904 $19,183 -0.37%
5/31/96 $17,026 $19,202 0.10%
6/30/96 $17,273 $19,371 0.88%
7/31/96 $17,293 $19,728 1.84%
8/31/96 $17,563 $19,811 0.42%
9/30/96 $17,876 $19,920 0.55%
10/31/96 $18,212 $20,314 1.98%
11/30/96 $18,676 $20,605 1.43%
12/31/96 $18,720 $20,460 -0.70%
1/31/97 $18,486 $19,949 -2.50%
2/28/97 $18,422 $19,811 -0.69%
3/31/97 $18,315 $19,661 -0.76%
4/30/97 $18,382 $19,550 -0.56%
5/31/97 $18,537 $20,012 2.36%
6/30/97 $18,758 $20,240 1.14%
7/31/97 $18,849 $20,165 -0.37%
8/31/97 $18,806 $20,141 -0.12%
9/30/97 $19,167 $20,588 2.22%
10/31/97 $19,055 $21,025 2.12%
11/30/97 $19,148 $20,772 -1.20%
12/31/97 $19,288 $20,749 -0.11%
1/31/98 $19,474 $20,957 1.00%
2/28/98 $19,683 $21,112 0.74%
3/31/98 $19,801 $20,954 -0.75%
4/30/98 $19,826 $21,276 1.54%
5/31/98 $19,757 $21,368 0.43%
6/30/98 $19,737 $21,428 0.28%
7/31/98 $19,786 $21,485 0.27%
8/31/98 $18,681 $22,078 2.76%
9/30/98 $19,626 $23,231 5.22%
10/31/98 $20,162 $23,751 2.24%
</TABLE>

Franklin Global
Government Income Fund JP Morgan Global Government Bond Index

The historical performance data shown pertains only to the fund's Advisor Class
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.

*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including 12b-1 fees; and
(b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance including the deduction of all fees and expenses applicable only to
that class.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

74 Past performance is not predictive of future results.

<PAGE>

PERFORMANCE

Franklin Global Government Income Fund - Advisor Class
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION

1-YEAR 5-YEAR* 10-YEAR* (3/15/88)*
- ----------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.81% +31.45% +110.56% +115.65%

Average Annual Total Return(1) +5.81% +5.62% +7.73% +7.50%

Distribution Rate(2) 7.41%

30-Day Standardized Yield(3) 5.64%
</TABLE>

(1) Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.

(2) Distribution rate is based on an annualization of October's 5.1 cent per
share monthly dividend and the net asset value price of $8.26 on October 31,
1998.

(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions. You may have a gain
or loss when you sell your shares.

Past performance is not predictive of future results. 75

<PAGE>
[FUND CATEGORY PYRAMID GRAPHIC]

FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND

- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Short-Intermediate U.S. Government Securities Fund
seeks to provide investors with a high level of current income, while seeking to
preserve shareholders' capital, by investing primarily in U.S. government
securities with maturities between two and five years.
- --------------------------------------------------------------------------------

ECONOMIC OVERVIEW

The economic climate for bond investors was close to ideal for the 12 months
under review. Slower growth, lower inflation, evaporating federal budget
deficits and price stability relative to equity and overseas investments helped
U.S. Treasury note and bond prices. The economy, which grew at a better than 4%
rate during the third quarter of 1997, slowed to an annualized growth rate of
only 1.8% in the second quarter of 1998, easing some building pressures in the
labor market and allaying fears of higher inflation in the future. The economy
added an average of 199,000 jobs per month over the three months ending
September 1998, down substantially from the beginning of the year when jobs
increased by approximately 350,000 per month. Consequently, the unemployment
rate, which was as low as 4.3% in May 1998, rose to 4.6% at the end of the
reporting period. Meanwhile, inflation fell. Prices at the consumer level, as
measured by the Consumer Price Index on a

You will find a complete listing of the fund's portfolio holdings,
including dollar value and number of shares or principal amount,
76 beginning on page 116 of this report.

<PAGE>

year-over-year basis, rose only 1.5% as of September 30, 1998, down from an
already low 2.1% in October 1997.

Indeed, slower growth and declining inflation enabled the Federal Reserve Board
to lower the federal funds target rate twice by 0.25%, to 5.00%, since September
29, as the bigger risk to the economy was slower-than-desired growth, not
inflation. Short-to-intermediate market interest rates fell approximately 1.5%
or 150 basis points over the year ended October 31, 1998. As of October 31,
1998, the yields on the U.S. Treasury 2-year note and the U.S. Treasury 5-year
note were 4.12% and 4.24%, respectively. Although these nominal yields are not
as high as in recent years, the current, low-inflation environment, excellent
inflation outlook going forward and federal budget surplus, which should reduce
the government's borrowing needs, help to justify these market rates.

PORTFOLIO NOTES

We are pleased to report Franklin Short-Intermediate U.S. Government Securities
Fund's Class I shares had a cumulative total return of +7.38% for the 12-month
period ended October 31, 1998. Although this is slightly below the Lehman
Brothers Short U.S. Treasury 1-5 Year Index's return of +8.70%, it far exceeded
the rate of inflation. The fund underperformed relative to the Lehman index
mainly because at times throughout the year, the fund may have invested more
conservatively than the index, as preservation of capital is the fund's
secondary investment goal. Also, the index is unmanaged, has no expenses, and
one cannot invest in it directly.

"The economic climate for bond investors was close to ideal for the 12 months
under review."

<PAGE>

In an effort to maintain value during the past few turbulent months, the fund
invested entirely in U.S. Treasury securities, and on October 31, 1998, had an
average weighted maturity of a little more than two years. This average maturity
is slightly conservative given our prospectus mandate to stay between two and
five years. However, we feel the caution is necessary at this time due to the
recent high volatility in Treasury prices and yields. Going forward, we may
extend the maturity of the portfolio holdings once financial market conditions
settle, given the excellent economic environment for fixed-income investments.

Sincerely,

/s/ David Capurro
David Capurro
Portfolio Manager
Franklin Short-Intermediate
U.S. Government Securities Fund

<PAGE>

PERFORMANCE SUMMARY
CLASS I

Franklin Short-Intermediate U.S. Government Securities Fund - Class I share
price, as measured by net asset value, increased 17.0 cents, from $10.29 on
October 31, 1997, to $10.46 on October 31, 1998.

During the reporting period, shareholders received per-share distributions
totaling 56.7 cents ($0.567) in dividend income. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.

Based on the maximum offering price of $10.70 on October 31, 1998, and an
annualization of the current monthly dividend of 4.5 cents ($0.045) per share,
your fund's distribution rate was 5.05%.

The fund reported a +7.38% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include the
initial sales charge. We have always maintained a long-term perspective when
managing the fund, and we encourage shareholders to view their investments in a
similar manner. As you can see from the table on page 81, the fund delivered a
+118.84% cumulative total return since inception on April 15, 1987.

DIVIDEND DISTRIBUTIONS

Franklin Short-Intermediate
U.S. Government Securities Fund
Class I
11/1/97 to 10/31/98*

<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------

<S> <C>
November 4.8 cents
December 4.8 cents
January 4.8 cents
February 4.8 cents
March 4.8 cents
April 4.8 cents
May 4.8 cents
June 4.8 cents
July 4.8 cents
August 4.5 cents
September 4.5 cents
October 4.5 cents
- -----------------------------------------------------
TOTAL 56.7 CENTS
</TABLE>

* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.

Past performance is not predictive of future results. 79

<PAGE>

TOTAL RETURN INDEX COMPARISON

Franklin Short-Intermediate U.S. Government Securities Fund - Class I
$10,000 Investment (11/1/88-10/31/98)

<TABLE>
<CAPTION>
Short- Lehman Brothers
Intermediate Short 1-5
USG - Class I US Tsy CPI
------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
11/1/88 $ 9,771 $10,000 $ 10,000
Nov-88 $ 9,736 $ 9,948 -0.52% $10,008 0.08%
Dec-88 $ 9,758 $ 9,960 0.12% $10,025 0.17%
Jan-89 $ 9,829 $10,043 0.83% $10,075 0.50%
Feb-89 $ 9,832 $10,026 -0.17% $10,116 0.41%
Mar-89 $ 9,874 $10,069 0.43% $10,175 0.58%
Apr-89 $10,025 $10,255 1.85% $10,241 0.65%
May-89 $10,146 $10,415 1.56% $10,300 0.57%
Jun-89 $10,307 $10,642 2.18% $10,324 0.24%
Jul-89 $10,440 $10,829 1.76% $10,349 0.24%
Aug-89 $10,352 $10,723 -0.98% $10,366 0.16%
Sep-89 $10,404 $10,779 0.52% $10,399 0.32%
Oct-89 $10,581 $10,974 1.81% $10,449 0.48%
Nov-89 $10,666 $11,075 0.92% $10,474 0.24%
Dec-89 $10,699 $11,115 0.36% $10,491 0.16%
Jan-90 $10,712 $11,091 -0.21% $10,599 1.03%
Feb-90 $10,777 $11,141 0.45% $10,648 0.47%
Mar-90 $10,801 $11,164 0.20% $10,707 0.55%
Apr-90 $10,803 $11,165 0.01% $10,724 0.16%
May-90 $10,977 $11,365 1.79% $10,749 0.23%
Jun-90 $11,099 $11,498 1.17% $10,807 0.54%
Jul-90 $11,222 $11,652 1.34% $10,848 0.38%
Aug-90 $11,246 $11,664 0.11% $10,948 0.92%
Sep-90 $11,349 $11,764 0.85% $11,040 0.84%
Oct-90 $11,474 $11,911 1.25% $11,106 0.60%
Nov-90 $11,589 $12,048 1.15% $11,130 0.22%
Dec-90 $11,732 $12,203 1.29% $11,130 0.00%
Jan-91 $11,825 $12,323 0.98% $11,197 0.60%
Feb-91 $11,896 $12,397 0.60% $11,214 0.15%
Mar-91 $11,968 $12,473 0.62% $11,231 0.15%
Apr-91 $12,076 $12,601 1.02% $11,248 0.15%
May-91 $12,137 $12,675 0.59% $11,281 0.30%
Jun-91 $12,167 $12,705 0.24% $11,314 0.29%
Jul-91 $12,268 $12,832 1.00% $11,331 0.15%
Aug-91 $12,441 $13,044 1.65% $11,364 0.29%
Sep-91 $12,580 $13,222 1.36% $11,414 0.44%
Oct-91 $12,720 $13,376 1.17% $11,431 0.15%
Nov-91 $12,836 $13,527 1.13% $11,464 0.29%
Dec-91 $13,146 $13,789 1.93% $11,472 0.07%
Jan-92 $12,964 $13,718 -0.51% $11,489 0.15%
Feb-92 $12,994 $13,754 0.26% $11,531 0.36%
Mar-92 $12,932 $13,721 -0.24% $11,590 0.51%
Apr-92 $13,045 $13,854 0.97% $11,606 0.14%
May-92 $13,236 $14,023 1.22% $11,622 0.14%
Jun-92 $13,440 $14,205 1.30% $11,664 0.36%
Jul-92 $13,723 $14,427 1.56% $11,688 0.21%
Aug-92 $13,865 $14,573 1.01% $11,721 0.28%
Sep-92 $14,107 $14,749 1.21% $11,754 0.28%
Oct-92 $13,880 $14,601 -1.00% $11,795 0.35%
Nov-92 $13,796 $14,552 -0.34% $11,812 0.14%
Dec-92 $14,018 $14,715 1.12% $11,803 -0.07%
Jan-93 $14,279 $14,947 1.58% $11,861 0.49%
Feb-93 $14,528 $15,122 1.17% $11,903 0.35%
Mar-93 $14,588 $15,174 0.34% $11,944 0.35%
Apr-93 $14,675 $15,289 0.76% $11,978 0.28%
May-93 $14,626 $15,237 -0.34% $11,995 0.14%
Jun-93 $14,816 $15,401 1.08% $12,011 0.14%
Jul-93 $14,835 $15,429 0.18% $12,011 0.00%
Aug-93 $15,063 $15,614 1.20% $12,045 0.28%
Sep-93 $15,110 $15,666 0.33% $12,070 0.21%
Oct-93 $15,135 $15,703 0.24% $12,120 0.41%
Nov-93 $15,048 $15,669 -0.22% $12,128 0.07%
Dec-93 $15,105 $15,732 0.40% $12,128 0.00%
Jan-94 $15,259 $15,862 0.83% $12,161 0.27%
Feb-94 $15,027 $15,700 -1.02% $12,202 0.34%
Mar-94 $14,824 $15,546 -0.98% $12,244 0.34%
Apr-94 $14,706 $15,456 -0.58% $12,261 0.14%
May-94 $14,717 $15,473 0.11% $12,270 0.07%
Jun-94 $14,714 $15,497 0.15% $12,311 0.34%
Jul-94 $14,889 $15,665 1.09% $12,345 0.27%
Aug-94 $14,921 $15,714 0.31% $12,394 0.40%
Sep-94 $14,821 $15,629 -0.54% $12,427 0.27%
Oct-94 $14,842 $15,649 0.13% $12,436 0.07%
Nov-94 $14,759 $15,571 -0.50% $12,452 0.13%
Dec-94 $14,780 $15,607 0.23% $12,452 0.00%
Jan-95 $14,995 $15,844 1.52% $12,502 0.40%
Feb-95 $15,226 $16,112 1.69% $12,552 0.40%
Mar-95 $15,307 $16,202 0.56% $12,593 0.33%
Apr-95 $15,439 $16,369 1.03% $12,635 0.33%
May-95 $15,738 $16,746 2.30% $12,660 0.20%
Jun-95 $15,825 $16,846 0.60% $12,686 0.20%
Jul-95 $15,866 $16,883 0.22% $12,686 0.00%
Aug-95 $15,954 $16,998 0.68% $12,719 0.26%
Sep-95 $16,027 $17,093 0.56% $12,744 0.20%
Oct-95 $16,162 $17,259 0.97% $12,786 0.33%
Nov-95 $16,298 $17,438 1.04% $12,777 -0.07%
Dec-95 $16,419 $17,590 0.87% $12,768 -0.07%
Jan-96 $16,524 $17,750 0.91% $12,844 0.59%
Feb-96 $16,456 $17,628 -0.69% $12,885 0.32%
Mar-96 $16,420 $17,571 -0.32% $12,952 0.52%
Apr-96 $16,415 $17,556 -0.09% $13,002 0.39%
May-96 $16,428 $17,568 0.07% $13,027 0.19%
Jun-96 $16,554 $17,717 0.85% $13,035 0.06%
Jul-96 $16,599 $17,779 0.35% $13,059 0.19%
Aug-96 $16,644 $17,825 0.26% $13,084 0.19%
Sep-96 $16,788 $18,018 1.08% $13,126 0.32%
Oct-96 $16,966 $18,265 1.37% $13,168 0.32%
Nov-96 $17,111 $18,435 0.93% $13,193 0.19%
Dec-96 $17,075 $18,389 -0.25% $13,193 0.00%
Jan-97 $17,138 $18,469 0.44% $13,235 0.32%
Feb-97 $17,168 $18,503 0.18% $13,276 0.31%
Mar-97 $17,131 $18,445 -0.31% $13,310 0.25%
Apr-97 $17,263 $18,622 0.96% $13,326 0.12%
May-97 $17,378 $18,756 0.72% $13,318 -0.06%
Jun-97 $17,494 $18,901 0.77% $13,334 0.12%
Jul-97 $17,696 $19,179 1.47% $13,350 0.12%
Aug-97 $17,693 $19,154 -0.13% $13,375 0.19%
Sep-97 $17,828 $19,328 0.91% $13,408 0.25%
Oct-97 $17,963 $19,512 0.95% $13,442 0.25%
Nov-97 $17,977 $19,551 0.20% $13,434 -0.06%
Dec-97 $18,114 $19,697 0.75% $13,418 -0.12%
Jan-98 $18,304 $19,930 1.18% $13,443 0.19%
Feb-98 $18,301 $19,922 -0.04% $13,469 0.19%
Mar-98 $18,351 $19,988 0.33% $13,494 0.19%
Apr-98 $18,436 $20,084 0.48% $13,519 0.18%
May-98 $18,523 $20,204 0.60% $13,543 0.18%
Jun-98 $18,609 $20,319 0.57% $13,559 0.12%
Jul-98 $18,696 $20,407 0.43% $13,575 0.12%
Aug-98 $18,942 $20,731 1.59% $13,592 0.12%
Sep-98 $19,207 $21,123 1.89% $13,608 0.12%
Oct-98 $19,289 $21,209 0.41% $13,641 0.24%
Total Return 92.89% 112. 09% 36.41%
</TABLE>

*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

The graph above compares the performance of the fund's Class I shares with that
of the Lehman Brothers Short U.S. Treasury 1-5 Year Index.+ Keep in mind
that an unmanaged market index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never
fully invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes the initial maximum sales charge, all
fund expenses and account fees. If operating expenses such

+The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests
in U.S. government securities and Treasuries with maturities from one to five
years.

80 Past performance is not predictive of future results.

<PAGE>

Performance

Franklin Short-Intermediate U.S. Government Securities Fund - Class I
Periods ended 10/31/98
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
- ----------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +7.38% +27.45% +97.40% +118.84%

Average Annual Total Return(2) +4.94% +4.49% +6.79% +6.81%

Distribution Rate(3) 5.05%

30-Day Standardized Yield(4) 3.73%
</TABLE>

(1) Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.

(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 2.25% initial
sales charge.

(3) Distribution rate is based on an annualization of the current 4.5 cent per
share monthly dividend and the maximum offering price of $10.70 on October 31,
1998.

(4) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. Past expense reductions by the fund's manager increased the fund's
total returns. All total return calculations assume reinvestment of dividends
and capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.

as Franklin Short-Intermediate U.S. Government Securities Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

Past performance is not predictive of future results. 81

<PAGE>

DIVIDEND DISTRIBUTIONS

Franklin Short-Intermediate
U.S. Government Securities Fund
11/1/97 - 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.88 cents
December 4.87 cents
January 4.94 cents
February 4.88 cents
March 4.88 cents
April 4.85 cents
May 4.85 cents
June 4.86 cents
July 4.88 cents
August 4.59 cents
September 4.59 cents
October 4.58 cents
- ------------------------------------------------------
TOTAL 57.65 CENTS
</TABLE>

ADVISOR CLASS

Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
share price, as measured by net asset value, increased 15.0 cents, from $10.30
on October 31, 1997, to $10.45 on October 31, 1998.

During the reporting period, shareholders received per-share distributions of
57.65 cents ($0.5765) in dividend income. Distributions will vary depending on
the fund's income and past distributions are not indicative of future trends.

Based on the net asset value price of $10.45 on October 31, 1998, and an
annualization of the current monthly dividend of 4.58 cents ($0.0458) per share,
the fund's distribution rate was 5.27%.

The graph on page 84 compares the performance of the fund's Advisor Class shares
with that of the Lehman Brothers Short

82 Past performance is not predictive of future results.

<PAGE>

U.S. Treasury 1-5 Year Index.* Keep in mind that an unmanaged market index has
inherent performance differentials in comparison with any fund. An index doesn't
pay management fees to cover salaries of securities analysts or portfolio
managers, or pay commissions or market spreads to buy and sell securities.
Unlike an index, mutual funds are never fully invested because they need cash on
hand to redeem shares. In addition, the performance shown for the fund includes
all fund expenses and account fees. If operating expenses such as Franklin
Short-Intermediate U.S. Government Securities Fund's had been applied to the
index, its performance would have been lower. Please remember that an index is
simply a measure of performance, and one cannot invest in it directly.

*The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to five
years.

Past performance is not predictive of future results. 83

<PAGE>

TOTAL RETURN INDEX COMPARISON

Franklin Short-Intermediate U.S. Government
Securities Fund - Advisor Class
$10,000 Investment (11/1/88 - 10/31/98)

<TABLE>
<CAPTION>
Short- Lehman Brothers
Intermediate Short 1-5
USG - Adv. Class US Tsy CPI
---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
11/1/88 $10,000 $10,000 $10,000
Nov-88 $9,964 $9,948 -0.52% $10,008 0.08%
Dec-88 $9,987 $9,960 0.12% $10,025 0.17%
Jan-89 $10,059 $10,043 0.83% $10,075 0.50%
Feb-89 $10,062 $10,026 -0.17% $10,116 0.41%
Mar-89 $10,105 $10,069 0.43% $10,175 0.58%
Apr-89 $10,259 $10,255 1.85% $10,241 0.65%
May-89 $10,383 $10,415 1.56% $10,300 0.57%
Jun-89 $10,549 $10,642 2.18% $10,324 0.24%
Jul-89 $10,685 $10,829 1.76% $10,349 0.24%
Aug-89 $10,594 $10,723 -0.98% $10,366 0.16%
Sep-89 $10,648 $10,779 0.52% $10,399 0.32%
Oct-89 $10,829 $10,974 1.81% $10,449 0.48%
Nov-89 $10,915 $11,075 0.92% $10,474 0.24%
Dec-89 $10,949 $11,115 0.36% $10,491 0.16%
Jan-90 $10,962 $11,091 -0.21% $10,599 1.03%
Feb-90 $11,029 $11,141 0.45% $10,648 0.47%
Mar-90 $11,054 $11,164 0.20% $10,707 0.55%
Apr-90 $11,056 $11,165 0.01% $10,724 0.16%
May-90 $11,234 $11,365 1.79% $10,749 0.23%
Jun-90 $11,359 $11,498 1.17% $10,807 0.54%
Jul-90 $11,485 $11,652 1.34% $10,848 0.38%
Aug-90 $11,510 $11,664 0.11% $10,948 0.92%
Sep-90 $11,614 $11,764 0.85% $11,040 0.84%
Oct-90 $11,743 $11,911 1.25% $11,106 0.60%
Nov-90 $11,860 $12,048 1.15% $11,130 0.22%
Dec-90 $12,006 $12,203 1.29% $11,130 0.00%
Jan-91 $12,102 $12,323 0.98% $11,197 0.60%
Feb-91 $12,175 $12,397 0.60% $11,214 0.15%
Mar-91 $12,249 $12,473 0.62% $11,231 0.15%
Apr-91 $12,359 $12,601 1.02% $11,248 0.15%
May-91 $12,421 $12,675 0.59% $11,281 0.30%
Jun-91 $12,452 $12,705 0.24% $11,314 0.29%
Jul-91 $12,555 $12,832 1.00% $11,331 0.15%
Aug-91 $12,733 $13,044 1.65% $11,364 0.29%
Sep-91 $12,875 $13,222 1.36% $11,414 0.44%
Oct-91 $13,018 $13,376 1.17% $11,431 0.15%
Nov-91 $13,136 $13,527 1.13% $11,464 0.29%
Dec-91 $13,454 $13,789 1.93% $11,472 0.07%
Jan-92 $13,268 $13,718 -0.51% $11,489 0.15%
Feb-92 $13,299 $13,754 0.26% $11,531 0.36%
Mar-92 $13,235 $13,721 -0.24% $11,590 0.51%
Apr-92 $13,351 $13,854 0.97% $11,606 0.14%
May-92 $13,546 $14,023 1.22% $11,622 0.14%
Jun-92 $13,754 $14,205 1.30% $11,664 0.36%
Jul-92 $14,044 $14,427 1.56% $11,688 0.21%
Aug-92 $14,190 $14,573 1.01% $11,721 0.28%
Sep-92 $14,438 $14,749 1.21% $11,754 0.28%
Oct-92 $14,205 $14,601 -1.00% $11,795 0.35%
Nov-92 $14,119 $14,552 -0.34% $11,812 0.14%
Dec-92 $14,347 $14,715 1.12% $11,803 -0.07%
Jan-93 $14,614 $14,947 1.58% $11,861 0.49%
Feb-93 $14,868 $15,122 1.17% $11,903 0.35%
Mar-93 $14,929 $15,174 0.34% $11,944 0.35%
Apr-93 $15,018 $15,289 0.76% $11,978 0.28%
May-93 $14,968 $15,237 -0.34% $11,995 0.14%
Jun-93 $15,163 $15,401 1.08% $12,011 0.14%
Jul-93 $15,183 $15,429 0.18% $12,011 0.00%
Aug-93 $15,415 $15,614 1.20% $12,045 0.28%
Sep-93 $15,464 $15,666 0.33% $12,070 0.21%
Oct-93 $15,489 $15,703 0.24% $12,120 0.41%
Nov-93 $15,401 $15,669 -0.22% $12,128 0.07%
Dec-93 $15,459 $15,732 0.40% $12,128 0.00%
Jan-94 $15,616 $15,862 0.83% $12,161 0.27%
Feb-94 $15,379 $15,700 -1.02% $12,202 0.34%
Mar-94 $15,171 $15,546 -0.98% $12,244 0.34%
Apr-94 $15,050 $15,456 -0.58% $12,261 0.14%
May-94 $15,062 $15,473 0.11% $12,270 0.07%
Jun-94 $15,059 $15,497 0.15% $12,311 0.34%
Jul-94 $15,237 $15,665 1.09% $12,345 0.27%
Aug-94 $15,270 $15,714 0.31% $12,394 0.40%
Sep-94 $15,168 $15,629 -0.54% $12,427 0.27%
Oct-94 $15,189 $15,649 0.13% $12,436 0.07%
Nov-94 $15,105 $15,571 -0.50% $12,452 0.13%
Dec-94 $15,126 $15,607 0.23% $12,452 0.00%
Jan-95 $15,346 $15,844 1.52% $12,502 0.40%
Feb-95 $15,582 $16,112 1.69% $12,552 0.40%
Mar-95 $15,665 $16,202 0.56% $12,593 0.33%
Apr-95 $15,800 $16,369 1.03% $12,635 0.33%
May-95 $16,106 $16,746 2.30% $12,660 0.20%
Jun-95 $16,196 $16,846 0.60% $12,686 0.20%
Jul-95 $16,238 $16,883 0.22% $12,686 0.00%
Aug-95 $16,328 $16,998 0.68% $12,719 0.26%
Sep-95 $16,402 $17,093 0.56% $12,744 0.20%
Oct-95 $16,541 $17,259 0.97% $12,786 0.33%
Nov-95 $16,680 $17,438 1.04% $12,777 -0.07%
Dec-95 $16,803 $17,590 0.87% $12,768 -0.07%
Jan-96 $16,911 $17,750 0.91% $12,844 0.59%
Feb-96 $16,842 $17,628 -0.69% $12,885 0.32%
Mar-96 $16,804 $17,571 -0.32% $12,952 0.52%
Apr-96 $16,799 $17,556 -0.09% $13,002 0.39%
May-96 $16,812 $17,568 0.07% $13,027 0.19%
Jun-96 $16,941 $17,717 0.85% $13,035 0.06%
Jul-96 $16,988 $17,779 0.35% $13,059 0.19%
Aug-96 $17,034 $17,825 0.26% $13,084 0.19%
Sep-96 $17,181 $18,018 1.08% $13,126 0.32%
Oct-96 $17,363 $18,265 1.37% $13,168 0.32%
Nov-96 $17,512 $18,435 0.93% $13,193 0.19%
Dec-96 $17,474 $18,389 -0.25% $13,193 0.00%
Jan-97 $17,535 $18,469 0.44% $13,235 0.32%
Feb-97 $17,567 $18,503 0.18% $13,276 0.31%
Mar-97 $17,530 $18,445 -0.31% $13,310 0.25%
Apr-97 $17,666 $18,622 0.96% $13,326 0.12%
May-97 $17,785 $18,756 0.72% $13,318 -0.06%
Jun-97 $17,903 $18,901 0.77% $13,334 0.12%
Jul-97 $18,112 $19,179 1.47% $13,350 0.12%
Aug-97 $18,109 $19,154 -0.13% $13,375 0.19%
Sep-97 $18,249 $19,328 0.91% $13,408 0.25%
Oct-97 $18,389 $19,512 0.95% $13,442 0.25%
Nov-97 $18,423 $19,551 0.20% $13,434 -0.06%
Dec-97 $18,564 $19,697 0.75% $13,418 -0.12%
Jan-98 $18,762 $19,930 1.18% $13,443 0.19%
Feb-98 $18,759 $19,922 -0.04% $13,469 0.19%
Mar-98 $18,794 $19,988 0.33% $13,494 0.19%
Apr-98 $18,864 $20,084 0.48% $13,519 0.18%
May-98 $18,972 $20,204 0.60% $13,543 0.18%
Jun-98 $19,061 $20,319 0.57% $13,559 0.12%
Jul-98 $19,152 $20,407 0.43% $13,575 0.12%
Aug-98 $19,387 $20,731 1.59% $13,592 0.12%
Sep-98 $19,679 $21,123 1.89% $13,608 0.12%
Oct-98 $19,752 $21,209 0.41% $13,641 0.24%

Total Return 97.52% 112.09% 36.41%
</TABLE>

The historical performance data shown pertains only to the fund's Advisor Class
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.

*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class.

**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.

84 Past performance is not predictive of future results.

<PAGE>

PERFORMANCE

Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Periods ended 10/31/98
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year* 10-Year* (4/15/87)*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +7.38% +27.52% +97.52% +118.97%

Average Annual Total Return(1) +7.38% +4.98% +7.04% +7.02%

Distribution Rate(2) 5.27%

30-Day Standardized Yield(3) 3.91%
</TABLE>

*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was +13.12%.

(2) Distribution rate is based on an annualization of the current 4.58 cent per
share monthly dividend and the net asset value price of $10.45 on October 31,
1998.

(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.

All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions. You may have a gain
or loss when you sell your shares.

Past performance is not predictive of future results.

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

FRANKLIN ADJUSTABLE RATE SECURITIES FUND

<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 9.96 $ 9.87 $ 9.82 $ 9.70 $ 10.04
----------------------------------------------------------------

Income from investment operations:
Net investment income ............................... .54 .56 .54 .58 .45
Net realized and unrealized gains (losses) .......... (.01) .09 .06 .12 (.34)
----------------------------------------------------------------

Total from investment operations ..................... .53 .65 .60 .70 .11
----------------------------------------------------------------

Less distributions from net investment income ........ (.54) (.56) (.55) (.58) (.45)
----------------------------------------------------------------
Net asset value, end of year ......................... $ 9.95 $ 9.96 $ 9.87 $ 9.82 $ 9.70
================================================================

Total return* ........................................ 5.47% 6.75% 6.23% 7.57% 1.11%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 28,892 $ 21,137 $ 15,707 $17,014 $24,564
Ratios to average net assets:
Expenses** .......................................... .84% .81% .90% .70% .45%
Expenses excluding waiver and payments by affiliate** 1.03% 1.00% 1.12% .99% .85%
Net investment income ............................... 5.35% 5.64% 5.54% 5.82% 4.45%
================================================================
</TABLE>

**Includes the Fund's share of the Portfolio's allocated expenses.

See notes to financial statements.

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE RATE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.3%
Adjustable Rate Securities Portfolio (Note 1) 2,911,787 $28,943,162
-----------
TOTAL INVESTMENTS (COST $28,862,032) 100.2% 28,943,162
-----------
OTHER ASSETS, LESS LIABILITIES (.2)% (50,782)
-----------
NET ASSETS 100.0% $28,892,380
===========
</TABLE>

See notes to financial statements. 87

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>

YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 9.48 $ 9.37 $ 9.34 $ 9.20 $ 9.77
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .51 .55 .56 .54 .35
Net realized and unrealized gains (losses) . (.12) .10 .03 .14 (.61)
-------------------------------------------------------------------------------
Total from investment operations ............ .39 .65 .59 .68 (.26)
-------------------------------------------------------------------------------
Less distributions from net investment income (.51) (.54) (.56) (.54) (.31)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 9.36 $ 9.48 $ 9.37 $ 9.34 $ 9.20
===============================================================================

Total return* ............................... 4.26% 7.18% 6.54% 7.57% (2.65%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 298,298 $ 334,990 $ 397,078 $ 509,371 $ 700,617
Ratios to average net assets:
Expenses** ................................. .76% .75% .69% .61% .42%
Expenses excluding waiver and payments by
affiliate** ............................. .93% .93% .86% .86% .82%
Net investment income ...................... 5.38% 5.81% 5.87% 5.76% 3.67%
</TABLE>

**Includes the Fund's share of the Portfolio's allocated expenses.

88 See notes to financial statements.

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

MUTUAL FUNDS 100.4%

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------
MUTUAL FUNDS 100.4%
<S> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1) 31,958,938 $ 299,455,245
-------------
TOTAL INVESTMENTS (COST $321,282,773) 100.4% .............. 299,455,245
-------------
OTHER ASSETS, LESS LIABILITIES (.4)% ...................... (1,157,654)
------------
NET ASSETS 100.0% ......................................... $ 298,297,591
=============
</TABLE>

See notes to financial statements. 89

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS

FRANKLIN BOND FUND

<TABLE>
<CAPTION>
Class I
1998***
-------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................. $ 10.00
Income from investment operations:
Net investment income ............................................... .12
Net realized and unrealized gains ................................... .30
--------
Total from investment operations ..................................... .42
--------
Less distributions from net investment income ........................ (.05)
--------
Net asset value, end of period ....................................... $ 10.37
========
Total return* ........................................................ 4.05%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $4,232
Ratios to average net assets:
Expenses ............................................................ .50%**
Expenses excluding waiver and payments by affiliate ................. 1.29%**
Net investment income ............................................... 5.21%**
Portfolio turnover rate .............................................. 23.19%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.

**Annualized.

***For the period August 3, 1998 (effective date) to October 31, 1998. Based on
average weighted shares outstanding.

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)

FRANKLIN BOND FUND (CONT.)

<TABLE>
<CAPTION>
ADVISOR CLASS
1998***
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.00
--------
Income from investment operations:
Net investment income ........................ .12
Net realized and unrealized gains ............ .31
--------
Total from investment operations .............. .43
--------
Less distributions from net investment income . (.05)
--------
Net asset value, end of period ................ $ 10.38
========

Total return* ................................. 4.27%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 31,588
Ratios to average net assets:
Expenses .......................................... .25%**
Expenses excluding waiver and payments by affiliate 1.04%**
Net investment income ............................. 5.46%**
Portfolio turnover rate ............................ 23.19%
</TABLE>

*Total return is not annualized.

**Annualized.

***For the period August 3, 1998 (effective date) to October 31, 1998. Based on
average weighted shares outstanding.

See notes to financial statements. 91

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS 93.6%

BONDS 34.2%
ADJUSTABLE RATE MORTGAGES SECURITIES 4.8%
PHMS 1988-4 A, 7.915%, 7/25/18 $1,124,000 $1,131,026
RYMS 1991-B1 1, 7.184%, 3/25/20 406,679 406,044
RYMS 1992-3 A2, 7.296%, 6/25/20 196,384 196,752
----------
1,733,822
----------
COMMERCIAL MORTGAGE BACKED SECURITIES 3.6%
BSCMS 1998-C1 A1, 6.34%, 10/16/07 421,119 422,698
BSCMS 1998-C1 A2, 6.44%, 6/16/08 360,000 353,025
MLMI 1998-C2 A2, 6.39%, 2/15/30 500,000 508,403
----------
1,284,126
----------

COMMERCIAL SERVICES .3%
Outdoor Systems, Inc., 8.875%, 6/15/07 100,000 104,500
----------

CONSUMER DURABLES .3%
American Standard Cos, Inc., 7.375%, 2/01/08 100,000 98,750
----------

CONSUMER NON-DURABLES .5%
Grand Metropolitan Investments, 7.125%, 9/15/04 200,000 214,904
----------

CONSUMER SERVICES 2.6%
Chancellor Media Corp, 144A, 9.00%, 10/01/98 100,000 101,000
CSC Holdings, Inc., 7.25%, 7/15/08 100,000 98,015
Hollinger International Publishing, 9.25%, 2/01/06 100,000 104,750
Sun International Hotels, 9.00%, 3/15/07 100,000 104,000
TCI Communications, Inc., 6.875%, 2/15/06 500,000 534,017
----------
941,782
----------

ELECTRONIC TECHNOLOGY 1.8%
Lockheed Corp., 9.375%, 10/15/99 101,000 104,655
Raytheon Co., 6.50%, 7/15/05 500,000 524,386
----------
629,041
----------

ENERGY MINERALS .3%
P&L Coal Holdings Corp., 144A, 8.875%, 5/15/08 100,000 101,250
----------

FINANCE 8.2%
American General Corp., 7.75% 4/01/05 500,000 550,770
Chase Manhattan Corp., 7.875%, 8/01/04 400,000 402,914
Chase Manhattan Corp., 7.875%, 7/15/06 200,000 221,961
First Chicago NBD Corp., 7.625%, 1/15/03 291,000 314,614
HMH Properties, 7.875%, 8/01/08 100,000 96,500
Lincoln National Corp., 7.125%, 7/15/99 550,000 557,185
Paine Webber Group, Inc., 6.55%, 4/15/08 150,000 147,520
Salomon Inc., 7.00%, 5/15/99 300,000 302,731
Societe Generale-NY, 7.40%, 6/01/06 300,000 315,189
----------
2,909,384
----------
HEALTH SERVICES .3%
Tenet Healthcare, 144A, 7.625%, 6/01/08 100,000 98,667
----------

</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS (CONT.)
BONDS (CONT.)
HEALTH TECHNOLOGY 1.6%
American Home Products, 7.90%, 2/15/05 $ 500,000 $ 566,654
----------
PRODUCER MANUFACTURING .8%
Hayes Wheels Lemmerz International Inc., 9.125%, 7/15/07 100,000 101,000
Owens, 7.35%, 5/15/08 100,000 100,542
Westpoint Stevens, Inc., 7.875%, 06/15/05 100,000 101,750
----------
303,292
----------
RETAIL TRADE 1.8%
Dayton Hudson Corp., 7.25%, 9/01/04 500,000 541,950
Penney (J.C.) Co., Inc., 6.875%, 6/15/99 115,000 115,908
----------
657,858
----------
TRANSPORTATION 1.7%
Gearbulk Holding, LTD., senior notes, 11.25%, 12/01/04 100,000 104,000
Hertz Corp., 6.625%, 5/15/08 500,000 517,650
----------
621,650
----------
UTILITIES 5.6%
Calenergy Co., Inc., 7.52%, 9/15/08 100,000 102,265
Duquesne Light Co., 6.625%, 6/15/04 300,000 305,030
United Utilities, 6.45%, 4/01/08 500,000 511,354
US West Cap Funding, Inc., 6.375%, 7/15/08 500,000 528,422
Wisconsin Power & Light, 7.00%, 6/15/07 500,000 552,570
----------
1,999,641
----------
TOTAL BONDS (COST $12,157,787) 12,265,321
----------
FOREIGN GOVERNMENT SECURITIES AND AGENCIES 1.5%
Ontario Providence, 6.00%, 2/21/06 (Canada) (COST $514,165) 500,000 521,085
----------

OTHER GOVERNMENT & AGENCY SECURITIES 3.7%
Tennessee Valley Authority, 5.28%, 9/14/01 (COST $1,303,705) 1,300,000 1,318,938
----------
U.S. GOVERNMENT SECURITIES 54.0%
FHLMC, 7.50%, 4/01/28 504,999 516,736
FHLMC, 7.50%, 11/01/28 500,000 512,188
FNMA, 5.625%, 3/15/01 1,150,000 1,173,490
FNMA, 5.75%, 4/15/03 700,000 726,828
FNMA, 5.75%, 6/15/05 500,000 517,338
FNMA, 5.75%, 2/15/08 1,000,000 1,041,147
FNMA, 6.00%, 4/01/13 493,250 495,755
FNMA, 5.50%, 9/1/13 493,211 487,971
FNMA, 6.00%, 10/01/13 493,063 495,568
FNMA, 6.00%, 5/01/28 494,452 489,083
FNMA, 6.00%, 8/01/28 494,540 489,170
FNMA, 6.00%, 10/01/28 1,010,000 999,032
FNMA, 7.00%, 10/01/28 505,000 516,639
FNMA, 6.50%, 11/01/28 500,000 503,906
FNMA, 7.00%, 11/01/28 1,000,000 1,021,875
</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS (CONT.)
U.S. GOVERNMENT SECURITIES (CONT.)
FNMA, ARM, 7.41%, 5/01/20 $ 281,352 $ 289,114
GNMA I, 7.00%, 11/15/12 490,710 504,550
GNMA II, 6.00%, 3/20/28 498,119 490,648
GNMA I, 8.00%, 07/15/28 497,467 515,967
GNMA I, 7.50%, 8/15/28 500,000 515,782
GNMA I, 6.50%, 9/15/28 494,593 500,698
U.S. Treasury Notes, 5.375%, 7/31/00 1,000,000 1,017,501
U.S. Treasury Notes, 6.375%, 9/30/01 2,500,000 2,636,720
U.S. Treasury Notes, 5.75%, 11/30/02 1,500,000 1,575,002
U.S. Treasury Notes, 5.875%, 2/15/04 1,000,000 1,070,312
U.S. Treasury Notes, 6.125%, 11/15/27 200,000 225,000
----------
TOTAL US GOVERNMENT SECURITIES (COST $19,058,112) 19,328,020
----------
Zero Coupon Bonds .2%
Niagara Mohawk Power Corp., Series H, zero coupon to 7/01/03, 8.50%,
thereafter, 7/01/10 (COST $71,225) 100,000 73,750
----------

TOTAL LONG TERM INVESTMENTS (COST $33,208,994) 33,507,114
----------
SHORT TERM INVESTMENTS 2.4%
FINANCE 2.4%
American Express Credit Corp., 5/24/99 150,000 145,737
Deutsche Bank AG, 5.685%, 6/03/99 150,000 150,609
General Electric Capital Co., 2/24/99 200,000 196,772
General Electric Capital Co., 3/15/99 150,000 147,202
Morgan Stanley, 2/26/99 150,000 147,539
----------
787,859
----------
U.S. GOVERNMENT CASH EQUIVALENTS .2%
(c) U.S. Treasury Bills, 1/07/99 90,000 89,340
----------
TOTAL SHORT TERM INVESTMENTS (COST $875,831) 877,199
----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $34,084,825) 34,384,313
----------
</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------

(b) REPURCHASE AGREEMENT 8.7%

<S> <C> <C>
Joint Repurchase Agreement, 5.35%, 11/02/98, (Maturity Value $3,119,789) $ 3,118,399 $ 3,118,399
(Cost $3,118,399)
Barclays Capital Group, Inc. (Maturity Value $320,665)
Chase Securities, Inc. (Maturity Value $320,665)
CIBC Wood Gundy Securities Corp. (Maturity Value $320,665)
Deutsche Morgan Grenfell/C.J.Lawrence, Inc.(Maturity Value $320,665)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $320,665)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $233,807)
Greenwich Capital Markets, Inc. (Maturity Value $320,664)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $320,665)
Paribas Corp. (Maturity Value $320,664)
SBC Warburg Dillon Read, Inc. (Maturity Value $320,664)
Collateralized by U.S. Treasury Bills and Notes -----------
TOTAL INVESTMENTS (COST $37,203,224) 104.7% 37,502,712
-----------
OTHER ASSETS, LESS LIABILITIES (4.7%) (1,682,126)
-----------
NET ASSETS 100.0% $35,820,586
===========
</TABLE>

PORTFOLIO ABBREVIATIONS:
ARM - Adjustable Rate Mortgage
BSCMS - Bear Stearns Commercial Mortgage Securities
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
MLMI - Merrill Lynch Mortgage Investors, Inc.
PHMS - Prudential Home Mortgage Securities
RYMS - Ryland Mortgage Securities Corporation
*Securities traded in U.S. dollars unless otherwise indicated.

(b) See Note 1(c) regarding joint repurchase agreement.

See notes to financial statements. 95

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

FRANKLIN CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 14.74 $ 13.45 $ 12.73 $ 12.34 $ 12.79
-------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .62 .64 .61 .58 .59
Net realized and unrealized gains (losses) ........ (1.92) 2.15 1.39 1.10 (.33)
-------------------------------------------------------------------
Total from investment operations ................... (1.30) 2.79 2.00 1.68 .26
-------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.65) (.60) (.60) (.59) (.59)
Net realized gains ................................ (1.04) (.90) (.68) (.70) (.12)
-------------------------------------------------------------------
Total distributions ................................ (1.69) (1.50) (1.28) (1.29) (.71)
-------------------------------------------------------------------
Net asset value, end of year ....................... $ 11.75 $ 14.74 $ 13.45 $ 12.73 $ 12.34
===================================================================

Total return* ...................................... (9.93%) 22.47% 16.71% 15.18% 2.07%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 170,569 $ 212,631 $ 130,951 $ 83,523 $ 66,869
Ratios to average net assets:
Expenses .......................................... .98% 1.01% 1.02% 1.03% .84%
Expenses excluding waiver and payments by affiliate -- -- -- -- .92%
Net investment income ............................. 4.63% 4.81% 4.79% 4.82% 4.84%
Portfolio turnover rate ............................ 79.17% 141.49% 129.83% 108.64% 68.39%
</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST

FINANCIAL HIGHLIGHTS (CONTINUED)

FRANKLIN CONVERTIBLE SECURITIES FUND (CONT.)

<TABLE>
<CAPTION>
CLASS II
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1998 1997 1996 1995***
-------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 14.68 $ 13.41 $ 12.71 $ 13.06
-------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .51 .54 .51 .07
Net realized and unrealized gains (losses) . (1.91) 2.13 1.40 (.37)
-------------------------------------------------------------
Total from investment operations ............ (1.40) 2.67 1.91 (.30)
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.54) (.50) (.53) (.05)
Net realized gains ......................... (1.04) (.90) (.68) --
-------------------------------------------------------------
Total distributions ......................... (1.58) (1.40) (1.21) (.05)
-------------------------------------------------------------
Net asset value, end of year ................ $ 11.70 $ 14.68 $ 13.41 $ 12.71
=============================================================

Total return* ............................... (10.61%) 21.54% 15.92% (2.33%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 41,533 $ 35,282 $ 10,861 $ 209
Ratios to average net assets:
Expenses ................................... 1.73% 1.74% 1.79% 1.60%**
Net investment income ...................... 3.93% 4.04% 4.00% 3.64%**
Portfolio turnover rate ..................... 79.17% 141.49% 129.83% 108.64%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.

**Annualized.

***For the period October 1, 1995 (effective date) to October 31, 1995.

See notes to financial statements. 97

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCKS 2.6%

<S> <C> <C>
CONSUMER NON-DURABLES 1.5%
Philip Morris Cos., Inc. .................................. 60,000 $ 3,067,500
-----------
ELECTRONIC TECHNOLOGY .6%
(a)Xilinx, Inc. .............................................. 30,000 1,339,689
-----------
INDUSTRIAL SERVICES .5%
(a)Cogeneration Corp. of America ............................. 122,700 1,096,631
-----------
TOTAL COMMON STOCKS (COST $6,004,672) ..................... 5,503,820
-----------

CONVERTIBLE PREFERRED STOCKS 39.9%
CONSUMER DURABLES 1.2%
Newell Financial Trust I, 5.25% cvt. pfd., 144A ............ 44,100 2,447,550
-----------
CONSUMER NON-DURABLES 1.9%
Designer Holdings, Ltd., 5.00% cvt. pfd .................... 38,000 1,505,750
Ralston Purina/Interstate Bakeries Corp., 7.00% cvt. pfd .. 50,500 2,502,906
-----------
4,008,656
-----------
CONSUMER SERVICES 4.4%
Cendant Corp., 7.50% cvt. pfd .............................. 135,000 3,349,688
Host Marriott Financial Trust, 6.75% cvt. pfd., 144A ...... 40,000 1,615,000
(d)Triathlon Broadcasting, 9.00% cvt. pfd .................... 315,300 3,054,469
Wendys Financing I, 5.00% cvt. pfd., Series A ............. 25,000 1,225,000
-----------
9,244,157
-----------
ENERGY MINERALS .2%
Nuevo Financing I, 5.75% cvt. pfd., Series A .............. 13,100 481,425
-----------

FINANCE 10.9%
American Heritage Life Investment Corp., 8.50% cvt. pfd .... 28,300 1,683,850
FelCor Lodging Trust, Inc., $1.95 cvt. pfd., Series A ..... 60,000 1,188,750
Lincoln National Corp., 7.75% cvt. pfd .................... 186,600 4,618,350
National Australia Bank, 7.875% cvt. pfd. (Australia) ..... 42,900 1,134,169
Protective Life Capital Trust II, 6.50% cvt. pfd .......... 42,900 2,670,525
Reckson Associates Realty Corp., 7.625% cvt. pfd., Series A 170,000 3,591,250
SL Green Realty Corp., 8.00% cvt. pfd ..................... 80,000 1,782,504
United Rentals Trust I, 6.50% cvt. pfd., 144A ............. 70,000 2,769,375
WBK STRYPES Trust, 10.00% cvt. pfd ........................ 130,000 3,729,375
-----------
23,168,148
-----------
HEALTH SERVICES 2.9%
GS Financial Products/Oxford Health Plans, 7.00% cvt. pfd .. 60,000 975,000
McKesson Financing Trust, 5.00% cvt. pfd .................. 49,000 5,212,375
-----------
6,187,375
-----------
INDUSTRIAL SERVICES 2.4%
AES Trust II, 5.50% cvt. pfd., 144A ........................ 60,000 2,685,000
AES Trust II, 5.50% cvt. pfd, Series B .................... 8,400 375,900
EVI, Inc., 5.00% cvt. pfd., 144A .......................... 60,000 1,950,000
-----------
5,010,900
-----------
</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
NON-ENERGY MINERALS .5%
WHX Corp., 6.50% cvt. pfd., Series A .................................... 26,000 $ 1,111,500
-----------
PROCESS INDUSTRIES 1.8%
International Paper Co., 5.25% cvt. pfd ................................. 20,000 950,000
Owens-Illinois, Inc., 4.75% cvt. pfd ................................... 70,000 2,808,750
-----------
3,758,750
-----------
TRANSPORTATION 1.9%
Union Pacific Capital Trust, 6.25% cvt. pfd ............................. 86,700 4,031,550
-----------
UTILITIES 11.8%
(c)CMS Energy Trust I, 7.75% cvt. pfd ..................................... 73,000 3,946,563
El Paso Energy Capital Trust I, 4.75% cvt. pfd ......................... 128,000 6,208,000
Enron Corp., 6.25% cvt. pfd ............................................ 85,000 1,413,125
MediaOne Group, Inc., 6.25% cvt. pfd ................................... 81,100 4,369,263
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina) ............... 50,000 2,818,750
Salomon Smith Barney Holdings, Inc., 6.25% cvt. pfd .................... 30,000 1,481,250
Texas Utilities Co., 9.25% cvt. pfd .................................... 86,500 4,876,438
-----------
25,113,389
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $93,186,193) .................. 84,563,400
-----------
</TABLE>

<TABLE>
PRINCIPAL
AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS 43.3%
COMMERCIAL SERVICES .5%
Metamore Worldwide, Inc., cvt. sub. notes, 2.94%, 8/15/04 .................... $1,250,000 1,015,625
----------

CONSUMER DURABLES 1.6%
Activision, Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ...................... 4,000,000 3,500,000
----------
CONSUMER SERVICES 3.4%
AMF Bowling, Inc., cvt. sub. deb., 144A, 0.00%, 5/12/18 ...................... 4,000,000 355,000
ShoLodge, Inc., cvt. sub. deb., 7.50%, 5/01/04 .............................. 2,595,000 1,518,075
Tele-Communications International, Inc., cvt. sub. deb., 4.50%, 2/15/06 ..... 2,500,000 2,506,250
Veterinary Centers of America, Inc., cvt. sub. deb., 144A, 5.25%, 5/01/06 ... 3,500,000 2,765,000
----------
7,144,325
----------
ELECTRONIC TECHNOLOGY 8.6%
Comverse Technology, Inc., cvt. sub. notes, 144A, 4.50%, 7/01/05 ............. 2,500,000 2,325,000
Cymer, Inc., cvt. sub. deb., 144A, 3.50% coupon to 8/06/00, 7.25% thereafter;
8/06/04 ................................................................... 4,250,000 2,836,874
Dovatron International, Inc., cvt. sub. notes, 144A, 6.00%, 10/15/02 ........ 1,800,000 1,719,000
Itron, Inc., cvt. sub. notes, 6.75%, 3/31/04 ................................ 750,000 487,500
Level One Communications, Inc., cvt. sub. notes, 4.00%, 9/01/04 ............. 1,500,000 1,734,374
Motorola, Inc., cvt. sub. deb., 0.00%, 9/07/09 .............................. 2,000,000 1,910,000
Western Digital Corp., cvt. sub. deb., 144A, 0.00%, 2/18/18 ................. 4,000,000 860,000
Xilinx, Inc., cvt. sub. notes, 5.25%, 11/01/02 .............................. 6,300,000 6,457,500
----------
18,330,248
----------
</TABLE>

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
ENERGY MINERALS 1.0%
Swift Energy Co., cvt. sub. notes, 6.25%, 11/15/06 ................ $ 2,750,000 $ 2,196,563
-----------
FINANCE 3.7%
OMEGA Healthcare Investors, Inc., cvt. sub. deb., 8.50%,
2/01/01 ....................................................... 700,000 823,374
Rent-Way, Inc., cvt. sub. deb., 7.00%, 2/01/07 ..................... 1,425,000 2,686,125
The Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02............. 4,500,000 4,297,500
----------
7,806,999
----------
HEALTH SERVICES 2.0%
Omnicare, Inc., cvt. deb., 5.00%, 12/01/07 ......................... 4,000,000 4,300,000
----------
Health Technology 4.8%
Alza Corp., cvt. sub. notes, 0.00%, 7/14/14 ........................ 6,000,000 3,847,500
Athena Neurosciences, Inc., cvt. notes, 4.75%,
11/15/04 ........................................................ 2,000,000 2,430,000
Dura Pharmaceuticals, Inc., cvt. sub. notes, 3.50%,
7/15/02 ......................................................... 3,000,000 2,175,000
ESC Medical Systems, Ltd., cvt. sub. notes, 144A, 6.00%,
9/01/02 ......................................................... 2,500,000 1,775,000
----------
10,227,500
----------
INDUSTRIAL SERVICES 5.5%
Baker Hughes, Inc., cvt. notes, 0.00%, 5/05/08 ..................... 5,000,000 3,406,250
Diamond Offshore Drilling, Inc., cvt. sub. notes, 3.75%,
2/15/07 ......................................................... 4,800,000 4,818,000
Waste Management, Inc., cvt. sub. notes, 4.00%, 2/01/02 ........... 3,000,000 3,487,500
----------
11,711,750
----------
PROCESS INDUSTRIES .7%
APP Global Finance V, Ltd., 2.00%, 7/25/00 (United Kingdom) ........ 1,000,000 645,000
APP Global Finance V, Ltd., 144A, 2.00%, 7/25/00 (United
Kingdom) ........................................................ 1,200,000 774,000
----------
1,419,000
----------
PRODUCER MANUFACTURING 2.5%
Mark IV Industries, Inc., cvt. sub. notes, 144A, 4.75%,
11/01/04 ......................................................... 3,000,000 2,463,750
Tower Automotive, Inc., cvt. sub. notes, 144A, 5.00%,
8/01/04 ........................................................ 1,000,000 1,030,000
Tower Automotive, Inc., cvt. sub. notes, 5.00%,
8/01/04 ........................................................ 1,750,000 1,802,500
----------
5,296,250
----------
RETAIL TRADE 2.1%
Rite Aid Corp., cvt. sub. notes, 144A, 5.25%, 9/15/02 .............. 3,500,000 4,469,062
----------
TECHNOLOGY SERVICES 2.9%
Data Processing Resources Corp., cvt. sub
notes, 144A, 5.25%, 4/01/05 ...................................... 2,500,000 2,187,500
HNC Software, Inc., cvt. sub. notes, 4.75%, 3/01/03 ............... 1,500,000 1,481,250
Wind River Systems, Inc., cvt. sub. notes, 144A, 5.00%,
8/01/02 ......................................................... 300,000 322,500
Wind River Systems, Inc., cvt. sub. notes, 5.00%,
8/01/02 ......................................................... 2,000,000 2,150,000
----------
6,141,250
----------
</TABLE>

100

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)

<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------

CONVERTIBLE BONDS (CONT.)
UTILITIES 4.0%
<S> <C> <C>
Bell Atlantic Financial Service, cvt. bonds, 144A, 5.75%, 4/01/03 $7,000,000 $ 7,201,250
Natwest Enron, cvt. notes, 144A, 3.50%, 9/01/04 1,000,000 1,252,500
------------
8,453,750
------------
TOTAL CONVERTIBLE BONDS (COST $98,293,071) 92,012,322
------------
TOTAL LONG-TERM INVESTMENTS (COST $197,483,936) 182,079,542
------------

(b) REPURCHASE AGREEMENT 13.2%

Joint Repurchase Agreement, 5.35%, 11/02/98 (Maturity Value $27,995,841)
(COST $27,983,365) 27,983,365 27,983,365
Barclays Capital Group, Inc. (Maturity Value $2,877,526)
Chase Securities, Inc. (Maturity Value $2,877,526)
CIBC Wood Gundy Securities Corp. (Maturity Value $2,877,526)
Deutsche Morgan Grenfell/C. J. Lawrence, Inc. (Maturity Value $2,877,526)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,877,526)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $2,098,104)
Greenwich Capital Markets, Inc. (Maturity Value $2,877,527)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $2,877,526)
Paribas Corp. (Maturity Value $2,877,527)
SBC Warburg Dillon Read, Inc. (Maturity Value $2,877,527)
Collateralized by U.S. Treasury Bills and Notes

TOTAL INVESTMENTS (COST $225,467,301) 99.0% 210,062,907
------------
OTHER ASSETS, LESS LIABILITIES 1.0% 2,038,871
------------
NET ASSETS 100.0% $212,101,778
============

</TABLE>

PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security

(a) Non-income producing.

(b) See Note 1(c) regarding joint repurchase agreement.

(d) The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in non-controlled "affiliated
companies" at October 31, 1998 were $3,054,469.

See notes to financial statements. 101

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

FRANKLIN EQUITY INCOME FUND

<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 19.31 $ 16.41 $ 15.19 $ 14.14 $ 14.91
------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .64 .64 .64 .63 .62
Net realized and unrealized gains (losses) ........ 1.42 3.23 1.63 1.27 (.36)
------------------------------------------------------------------
Total from investment operations ................... 2.06 3.87 2.27 1.90 .26
------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.65) (.64) (.65) (.61) (.72)
Net realized gains ................................ (.79) (.33) (.40) (.24) (.31)
------------------------------------------------------------------
Total distributions ................................ (1.44) (.97) (1.05) (.85) (1.03)
------------------------------------------------------------------
Net asset value, end of year ....................... $ 19.93 $ 19.31 $ 16.41 $ 15.19 $ 14.14
==================================================================
Total return* ...................................... 10.96% 24.40% 15.39% 14.10% 1.83%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 428,228 $ 352,555 $246,952 $168,897 $ 92,763
Ratios to average net assets:
Expenses .......................................... .94% .97% .98% 1.00% .77%
Expenses excluding waiver and payments by affiliate -- -- -- 1.02% .95%
Net investment income ............................. 3.20% 3.62% 4.11% 4.44% 4.53%
Portfolio turnover rate ............................ 30.65% 29.04% 24.15% 27.86% 39.51%
</TABLE>

102

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)

<TABLE>
FRANKLIN EQUITY INCOME FUND (CONT.)
CLASS II
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1998 1997 1996 1995***
-------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.26 $ 16.38 $ 15.19 $ 15.38
-------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .50 .50 .52 .05
Net realized and unrealized gains (losses) . 1.41 3.22 1.63 (.19)
-------------------------------------------------------------
Total from investment operations ............ 1.91 3.72 2.15 (.14)
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.50) (.51) (.56) (.05)
Net realized gains ......................... (.79) (.33) (.40) --
-------------------------------------------------------------
Total distributions ......................... (1.29) (.84) (.96) (.05)
-------------------------------------------------------------
Net asset value, end of year ................ $ 19.88 $ 19.26 $ 16.38 $ 15.19
=============================================================

Total return* ............................... 10.16% 23.40% 14.53% (.93%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 81,078 $ 45,277 $ 18,227 $ 386
Ratios to average net assets:
Expenses ................................... 1.69% 1.72% 1.73% 1.99%**
Net investment income ...................... 2.45% 2.78% 3.33% 3.57%**
Portfolio turnover rate ..................... 30.65% 29.04% 24.15% 27.86%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.

**Annualized.

***For the period October 1, 1995 (effective date) to October 31, 1995.

See notes to financial statements. 103

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

FRANKLIN EQUITY INCOME FUND SHARES VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 86.2%
COMMERCIAL SERVICES .6%
Dun & Bradstreet Corp. ................ 104,200 $ 2,956,675
-----------
Consumer Durables 4.7%
Chrysler Corp. ........................ 55,000 2,646,875
Eastman Kodak Co. ..................... 86,000 6,665,000
Ford Motor Co. ........................ 120,500 6,537,125
General Motors Corp. .................. 125,000 7,882,813
-----------
23,731,813
-----------
CONSUMER NON-DURABLES 9.0%
Anheuser-Busch Cos., Inc. ............. 125,300 7,447,519
DIMON, Inc. ........................... 14,800 191,475
Fortune Brands, Inc. .................. 121,500 4,017,094
General Mills, Inc. ................... 107,500 7,901,250
Heinz (H.J.) Co. ...................... 97,000 5,638,125
Philip Morris Cos., Inc. .............. 166,200 8,496,975
RJR Nabisco Holdings Corp. ............ 93,500 2,670,594
UST, Inc. ............................. 282,000 9,588,000
----------
45,951,032
----------
ELECTRONIC TECHNOLOGY .5%
AMP, Inc. ............................. 60,000 2,463,750
----------
ENERGY MINERALS 12.3%
Amoco Corp. ........................... 90,400 5,073,700
Atlantic Richfield Co. ................ 189,400 13,044,925
Chevron Corp. ......................... 108,900 8,875,350
Exxon Corp. ........................... 79,400 5,657,250
Mobil Corp. ........................... 100,600 7,614,163
Texaco, Inc. .......................... 160,000 9,490,000
Ultramar Diamond Shamrock Corp. ....... 157,400 4,239,963
YPF, SA, Sponsored ADR (Argentina) .... 309,200 8,947,475
----------
62,942,826
----------
FINANCE 13.8%
Bank One Corp. ........................ 77,180 3,772,173
BankBoston Corp. ...................... 106,800 3,931,575
Exel Limited, Class A (Bermuda) ....... 89,176 6,816,391
Gallagher (Arthur J.) & Co. ........... 187,300 7,936,838
IPC Holdings, Ltd. (Bermuda) .......... 160,000 3,720,000
J.P. Morgan & Co., Inc. ............... 38,000 3,581,500
Lincoln National Corp. ................ 98,500 7,473,688
Mercantile Bancorporation, Inc. ....... 70,526 3,222,157
National City Corp. ................... 96,700 6,219,019
PNC Bank Corp. ........................ 87,300 4,365,000
Safeco Corp. .......................... 150,000 6,496,875
Scor, SA (France) ..................... 50,500 2,895,321
St. Paul Cos., Inc. ................... 190,700 6,316,938
Westpac Banking Corp., Ltd. (Australia) 611,015 3,699,388
----------
70,446,863
----------
</TABLE>

104

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY 3.4%
Glaxo Wellcome, Plc., Sponsored ADR (United Kingdom) 100,200 $ 6,237,450
Pharmacia & Upjohn, Inc. ........................... 212,000 11,222,750
-----------
17,460,200
-----------
INDUSTRIAL SERVICES .8%
Browning-Ferris Industries, Inc. ................... 111,100 3,937,106
-----------
NON-ENERGY MINERALS 3.9%
British Steel, PLC., Sponsored ADR (United Kingdom) 154,500 2,703,750
Carpenter Technology Corp. ......................... 131,000 4,593,188
De Beers Consolidated Mines, AG, Sponsored ADR
(South Africa) ................................... 292,000 4,197,500
Georgia-Pacific Corp. (Timber Group) ............... 133,100 2,953,156
Weyerhaeuser Co. ................................... 120,000 5,617,500
----------
20,065,094
----------
PROCESS INDUSTRIES 5.9%
Dow Chemical Co. ................................... 70,000 6,553,750
Imperial Chemical Industries, Plc., Sponsored ADR
(United Kingdom) ................................. 186,700 6,767,875
Pall Corp. ......................................... 319,000 8,054,750
Potlatch Corp. ..................................... 78,000 2,847,000
Union Camp Corp. ................................... 135,000 5,805,000
----------
30,028,375
----------
PRODUCER MANUFACTURING 1.9%
Cooper Industries, Inc. ............................ 86,700 3,825,638
Federal Signal Corp. ............................... 237,000 5,702,813
----------
9,528,451
----------
REAL ESTATE INVESTMENT TRUSTS 7.1%
Arden Realty, Inc. ................................. 305,000 6,595,625
Equity Residential Properties Trust ................ 161,300 6,774,600
FelCor Lodging Trust, Inc. ......................... 253,900 5,982,519
Highwoods Properties, Inc. ......................... 236,600 6,610,013
MeriStar Hospitality Corp. ......................... 150,000 2,775,000
Simon Property Group, Inc. ......................... 241,400 7,226,913
----------
35,964,670
----------
RETAIL TRADE 2.3%
Penney (J.C.) Co., Inc. ............................ 250,000 11,875,000
----------
TELECOMMUNICATIONS 6.4%
Bell Atlantic Corp. ................................ 267,120 14,190,750
GTE Corp. .......................................... 131,500 7,717,406
SBC Communications, Inc. ........................... 36,541 1,692,325
U S West, Inc. ..................................... 155,800 8,939,025
----------
32,539,506
----------
UTILITIES 13.6%
CINergy Corp. ...................................... 186,000 6,417,000
Consolidated Natural Gas Co. ....................... 95,300 5,033,030
</TABLE>

105

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.
UTILITIES (CONT.)
Dominion Resources, Inc. ............................ 187,700 $ 8,669,393
Entergy Corp. ....................................... 136,000 3,910,000
National Fuel Gas Co. ............................... 124,600 5,887,350
New Century Energies, Inc. .......................... 135,000 6,522,187
Northern States Power Co. ........................... 280,000 7,560,000
OGE Energy Corp. .................................... 190,000 5,046,875
Pacific Gas & Electric Co. .......................... 153,100 4,659,980
PacifiCorp .......................................... 320,000 6,100,000
Sempra Energy ....................................... 358,609 9,323,833
------------
69,129,648
------------
TOTAL COMMON STOCKS (COST $370,560,660) ............. 439,021,009
------------
PREFERRED STOCKS 6.3%
FINANCE 1.9%
Glenborough Realty Trust, 7.75% cvt. pfd., Series A . 324,200 6,220,587
National Australia Bank, 7.875% cvt. pfd. (Australia) 127,600 3,373,425
------------
9,594,012
------------
TRANSPORTATION 1.4%
Union Pacific Capital Trust, 6.25% cvt. pfd., 144A .. 158,300 7,360,950
------------
Retail Trade .8%
Kmart Financing, 7.75% cvt. pfd ..................... 75,000 4,157,812
------------
UTILITIES 2.2%
(c)CMS Energy Trust I, 7.75% cvt. pfd .................. 80,000 4,325,000
Texas Utilities Co., 9.25% cvt. pfd ................. 117,100 6,601,512
------------
10,926,512
------------
TOTAL PREFERRED STOCKS (COST $33,030,122) ........... 32,039,286
------------
TOTAL LONG TERM INVESTMENTS (COST $403,590,782) ..... 471,060,295
------------
</TABLE>

106

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------

(b)REPURCHASE AGREEMENT 7.7%

<S> <C> <C>
Joint Repurchase Agreement, 5.35%, 11/02/98 (Maturity Value $39,382,924) (COST $39,365,375) $39,365,375 $39,365,375
Barclays Capital Group, Inc. (Maturity Value $4,047,937)
Chase Securities, Inc. (Maturity Value $4,047,937)
CIBC Wood Gundy Securities Corp. (Maturity Value $4,047,937)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $4,047,937)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $4,047,937)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $2,951,491)
Greenwich Capital Markets, Inc. (Maturity Value $4,047,937)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $4,047,937)
Paribas Corp. (Maturity Value $4,047,937)
SBC Warburg Dillon Read, Inc. (Maturity Value $4,047,937)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $442,956,157) 100.2% 510,425,670
------------
OTHER ASSETS, LESS LIABILITIES (.2%) (1,119,545)
------------
NET ASSETS 100.0% $509,306,125
============
</TABLE>

(b)See Note 1(c) regarding joint repurchase agreement.

(c)See Note 8 regarding restricted securities.

See notes to financial statements. 107

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS

FRANKLIN GLOBAL GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.65 $ 8.31 $ 8.06 $ 9.33
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .62 .60 .61 .67 1.30
Net realized and unrealized gains (losses) . (.17) (.22) .33 .29 (1.81)
-------------------------------------------------------------------------------
Total from investment operations ............ .45 .38 .94 .96 (.51)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.57) (.61) (.60) (.64) (.08)
In excess of net investment income ......... (.04) (.01) -- -- --
Tax return of capital ...................... -- -- -- (.07) (.60)
Net realized gains ......................... -- -- -- -- (.08)
-------------------------------------------------------------------------------
Total distributions ......................... (.61) (.62) (.60) (.71) (.76)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 8.25 $ 8.41 $ 8.65 $ 8.31 $ 8.06
===============================================================================

Total return* ............................... 5.57% 4.31% 11.80% 12.65% (5.72%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 110,876 $ 118,348 $ 137,626 $ 164,970 $ 187,204
Ratios to average net assets:
Expenses ................................... .96% .90% .85% .96% .89%
Net investment income ...................... 7.49% 6.97% 7.68% 8.29% 8.54%
Portfolio turnover rate ..................... 49.93% 193.30% 139.71% 103.49% 80.69%
</TABLE>

108

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)

FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
CLASS II
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1998(1) 1997 1996 1995***
----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.65 $ 8.31 $ 8.03
----------------------------------------------------------
Income from investment operations:
Net investment income ...................... .58 .55 .56 .31
Net realized and unrealized gains (losses) . (.17) (.22) .33 .30
----------------------------------------------------------
Total from investment operations ............ .41 .33 .89 .61
----------------------------------------------------------
Less distributions from:
Net investment income ...................... (.52) (.56) (.55) (.30)
In excess of net investment income ......... (.04) (.01) -- --
Tax return of capital ...................... -- -- -- (.03)
----------------------------------------------------------
Total distributions ......................... (.56) (.57) (.55) (.33)
----------------------------------------------------------
Net asset value, end of year ................ $ 8.26 $ 8.41 $ 8.65 $ 8.31
==========================================================
Total return* ............................... 5.12% 3.74% 11.19% 7.09%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 5,710 $ 4,473 $ 3,700 $ 1,193
Ratios to average net assets:
Expenses ................................... 1.49% 1.46% 1.40% 1.54%**
Net investment income ...................... 6.96% 6.43% 7.17% 7.41%**
Portfolio turnover rate ..................... 49.93% 193.30% 139.71% 103.49%
</TABLE>

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.

**Annualized.

***For the period May 1, 1995 (effective date) to October 31, 1995.
(1)Based on average weighted shares outstanding.

109

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)

FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)

<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------
YEAR ENDED OCTOBER 31,
------------------------
1998(1) 1997***
------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.71
------------------------
Income from investment operations:
Net investment income ...................... .63 .49
Net realized and unrealized losses ......... (.16) (.28)
------------------------
Total from investment operations ............ .47 .21
------------------------
Less distributions from:
Net investment income ...................... (.58) (.49)
In excess of net investment income ......... (.04) (.02)
------------------------
Total distributions ......................... (.62) (.51)
------------------------
Net asset value, end of year ................ $ 8.26 $ 8.41
========================
Total return* ............................... 5.81% 2.49%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 829 $ 741
Ratios to average net assets:
Expenses ................................... .85% .82%**
Net investment income ...................... 7.62% 7.08%**
Portfolio turnover rate ..................... 49.93% 193.30%
</TABLE>

*Total return is not annualized.

**Annualized.

***For the period January 2, 1997 (effective date) to October 31, 1997.
(1)Based on average weighted shares outstanding.

110 See notes to financial statements.

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
Franklin Global Government Income Fund AMOUNT* VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
BONDS - CORPORATE (COST $1,250,000)

TURKEY .8%
Cellco Finance NV, 144A, 15.00%, 8/01/05 $ 1,250,000 $ 996,875
-----------
BONDS - GOVERNMENT & GOVERNMENT AGENCIES 91.6%
ARGENTINA 6.2%
Republic of Argentina
10.95%, 11/01/99 3,215,000 3,215,000
8.75%, 5/09/02 3,100,000 2,756,675
8.375%, 12/20/03 260,000 234,975
11.00%, 10/09/06 250,000 248,750
11.375%, 1/30/17 325,000 315,250
9.75%, 9/19/27 600,000 520,875
-----------
7,291,525
-----------
AUSTRALIA 4.2%
Government of Australia, 7.50%, 7/15/05 6,855,000 AUD 4,923,228
-----------
BRAZIL 5.1%
Brazil C-Bond, 8.00%, 4/15/14 3,144,243 1,968,238
Government of Brazil
FRN, 6.188%, 4/15/09 3,950,000 2,170,031
Series L, FRN, 6.188%, 4/15/12 1,250,000 663,288
10.125%, 5/15/27 1,700,000 1,178,100
-----------
5,979,657
-----------
BULGARIA .9%
Republic of Bulgaria
FRN, 6.688%, 7/28/11 1,460,000 980,025
REGD, 6.688%, 7/28/11 120,000 80,550
-----------
1,060,575
-----------
CANADA 7.8%
Government of Canada
10.50%, 7/01/00 4,675,000 CAD 3,298,353
10.50%, 3/01/01 5,000,000 CAD 3,635,262
10.00%, 5/01/02 3,005,00 CAD 2,260,743
-----------
9,194,358
-----------
DENMARK 2.1%
Kingdom of Denmark
9.00%, 11/15/00 3,385,000 DKK 588,280
8.00%, 5/15/03 10,065,000 DKK 1,841,437
-----------
2,429,717
-----------
GERMANY 11.1%
Federal Republic of Germany
7.75%, 2/21/00 6,000,000 DEM 3,820,553
6.00%, 1/05/06 5,700,000 DEM 3,847,724
6.00%, 1/04/07 7,980,000 DEM 5,408,495
-----------
13,076,772
-----------
</TABLE>

111

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
BONDS - GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
ITALY 9.6%
Buoni Poliennali Del Tesoro
12.00%, 1/17/99 1,925,000,000 ITL $ 1,186,781
10.50%, 7/15/00 4,000,000,000 ITL 2,709,721
10.50%, 4/01/05 5,350,000,000 ITL 4,397,891
10.50%, 4/28/14 1,200,000 GBP 2,927,338
-----------
11,221,731
-----------
MEXICO 4.4%
United Mexican States
9.75%, 2/06/01 1,950,000 2,013,375
9.875%, 1/15/07 1,375,000 1,306,250
11.375%, 9/15/16 1,115,000 1,110,819
Series A, with warrants, 6.25%, 12/31/19 1,000,000 754,375
-----------
5,184,819
-----------
NEW ZEALAND 1.8%
Government of New Zealand, 6.50%, 2/15/00 3,995,000 NZD 2,150,033
-----------
PANAMA .5%
Republic of Panama, 8.875%, 9/30/27 650,000 599,625
-----------
PERU .5%
Republic of Peru, FRN, 4.00%, 3/07/17 910,000 523,250
-----------
SPAIN 6.6%
Bonos Y Oblig Del Estado, 8.80%, 4/30/06 321,600,000 ESP 2,922,134
Government of Spain, 12.25%, 3/25/00 609,440,000 ESP 4,820,415
-----------
7,742,549
-----------
SWEDEN 2.9%
Kingdom of Sweden, 10.25%, 5/05/03 21,500,000 SEK 3,425,856
-----------
TURKEY 1.7%
Republic of Turkey
144A, 10.00%, 9/19/07 170,000 146,838
Reg S, 9.875%, 2/23/05 1,040,000 865,800
Reg S, 10.00%, 9/19/07 1,010,000 872,388
-----------
1,885,026
-----------
UNITED KINGDOM 4.7%
United Kingdom
8.00%, 12/07/00 1,950,000 GBP 3,435,049
cvt. stk., 9.50%, 4/18/05 1,000,000 GBP 2,069,197
-----------
5,504,246
-----------
UNITED STATES 18.8%
Fannie Mae, 6.00%, 5/15/08 3,390,000 3,594,346
U.S. Treasury Bond, 6.375%, 8/15/02 1,330,000 1,421,023
U.S. Treasury Notes:
6.625%, 4/30/02 4,335,000 4,645,226
7.25%, 8/15/04 5,214,000 5,940,706
</TABLE>

112

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE

BONDS - GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
UNITED STATES (CONT.)
U.S. Treasury Notes (cont.)
<S> <C> <C>
6.125%, 8/15/07 ............................................... $ 3,466,000 $ 3,823,435
6.125%, 11/15/27 .............................................. 2,386,000 2,684,252
-------------
22,108,988
-------------
VENEZUELA 2.7%
Republic of Venezuela
144A, 9.125%, 6/18/07 ......................................... 1,220,000 820,450
9.25%, 9/15/27 ................................................ 3,895,000 2,395,425
-------------
3,215,875
-------------
TOTAL BONDS - GOVERNMENT & GOVERNMENT AGENCIES (COST $112,595,936) 107,517,830
-------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $113,845,936) 108,514,705
-------------
(a)REPURCHASE AGREEMENTS 5.1%
Deutsche Bank AG, 5.40%,11/02/98 (Maturity Value $3,433,544)
Collateralized by U.S. Treasury Notes and Bonds .................. 3,432,000 3,432,000
Warburg Dillon Read, 5.37%,11/02/98 (Maturity Value $2,511,123)
Collateralized by U.S. Treasury Notes and Bonds ................. 2,510,000 2,510,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $5,942,000) ..................... 5,942,000
TOTAL INVESTMENTS (COST $119,787,936) 97.5% ....................... 114,456,705
-------------
NET EQUITY IN FORWARD CONTRACTS .................................. (5,747)
OTHER ASSETS, LESS LIABILITIES 2.5% .............................. 2,964,734
-------------
TOTAL NET ASSETS 100.0% .......................................... $ 117,415,692
=============
</TABLE>

CURRENCY ABBREVIATIONS:

AUD - Australian Dollar
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
ESP - Spanish Peseta
GBP - British Pound
ITL - Italian Lira
NZD - New Zealand Dollar
SEK - Swedish Krone

PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes

*Securities traded in U.S. dollars unless otherwise indicated.

(a)At October 31, 1998, all repurchase agreements held by the Fund had been
entered into on October 30, 1998.

See notes to financial statements. 113

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND

<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.29 $ 10.28 $ 10.35 $ 10.03 $ 10.80
------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .54 .57 .58 .56 .49
Net realized and unrealized gains (losses) ........ .19 .02 (.08) .31 (.70)
------------------------------------------------------------------------
Total from investment operations ................... .73 .59 .50 .87 (.21)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.56) (.58) (.57) (.55) (.47)
Net realized gains ................................ -- -- -- -- (.09)
------------------------------------------------------------------------
Total distributions ................................ (.56) (.58) (.57) (.55) (.56)
------------------------------------------------------------------------
Net asset value, end of year ....................... $ 10.46 $ 10.29 $ 10.28 $ 10.35 $ 10.03
========================================================================

Total return* ...................................... 7.38% 5.88% 4.97% 8.90% (1.99%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 224,132 $ 192,051 $ 196,042 $208,057 $ 225,352
Ratios to average net assets:
Expenses .......................................... .78% .78% .74% .73% .65%
Expenses excluding waiver and payments by affiliate -- -- -- -- .68%
Net investment income ............................. 5.24% 5.51% 5.64% 5.42% 4.75%
Portfolio turnover rate ............................ 37.70% 40.56% 72.62% 56.34% 99.09%
</TABLE>

114

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)

FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND (CONT.)

<TABLE>
<CAPTION>
ADVISOR CLASS
-------------------------
YEAR ENDED OCTOBER 31,
-------------------------
1998 1997***
-------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.30 $ 10.24
-------------------------
Income from investment operations:
Net investment income ...................... .57 .47
Net realized and unrealized gains .......... .16 .07
-------------------------
Total from investment operations ............ .73 .54
-------------------------
Less distributions from net investment income (.58) (.48)
-------------------------
Net asset value, end of year ................ $ 10.45 $ 10.30
=========================

Total return* ............................... 7.38% 5.45%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 3,644 $ 385
Ratios to average net assets:
Expenses ................................... .69% .70%**
Net investment income ...................... 5.28% 5.35%**
Portfolio turnover rate ..................... 37.70% 40.56%
</TABLE>

*Total return is not annualized.

**Annualized.

***For the period January 2, 1997 (effective date) to October 31, 1997.

See notes to financial statements. 115

<PAGE>

FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES 98.1%
U.S. Treasury Notes, 5.50%, 1/31/03 $23,000,000 $ 23,999,074
U.S. Treasury Notes, 5.875%, 9/30/02 34,000,000 35,806,284
U.S. Treasury Notes, 7.50%, 11/15/01 25,000,000 27,203,150
U.S. Treasury Notes, 5.625%, 2/28/01 25,000,000 25,718,775
U.S. Treasury Notes, 5.875%, 6/30/00 36,000,000 36,888,768
U.S. Treasury Notes, 5.75%, 9/30/99 20,000,000 20,237,520
U.S. Treasury Notes, 6.00%, 8/15/99 26,000,000 26,309,660
U.S. Treasury Notes, 6.375%, 5/15/99 20,000,000 20,200,020
U.S. Treasury Notes, 6.50%, 4/30/99 7,000,000 7,072,191
------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $217,518,738) 223,435,442
------------

REPURCHASE AGREEMENT 2.0%
(b)Joint Repurchase Agreement, 5.35%, 11/02/98
(Maturity Value $4,464,925) (COST $4,462,936) 4,462,936 4,462,936
Barclays Capital Group, Inc. (Maturity Value $458,923)
Chase Securities, Inc. (Maturity Value $458,923)
CIBC Wood Gundy Securities Corp. (Maturity Value
$458,923)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
(Maturity Value $458,923)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity
Value $458,923)
Dresdner Kleinwort Benson, North America, L.L.C.
(Maturity Value $334,617)
Greenwich Capital Markets, Inc. (Maturity Value
$458,923)
NationsBanc Montgomery Securities, L.L.C.
(Maturity Value $458,923)
Paribas Corp. (Maturity Value $458,923)
SBC Warburg Dillon Read, Inc. (Maturity Value $458,924)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $221,981,674) 100.1% 227,898,378
------------
OTHER ASSETS, LESS LIABILITIES (.1%) (122,120)
------------
NET ASSETS 100.0% $227,776,258
============
</TABLE>

(b)See Note 1(c) regarding joint repurchase agreement.

116 See notes to financial statements.

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS

STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT FRANKLIN
SECURITIES FUND SECURITIES FUND BOND FUND
-------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .................................... $ 28,862,032 $ 321,282,773 $ 34,084,825
=================================================
Value ................................... 28,943,162 299,455,245 34,384,313
Repurchase agreements, at value and cost . -- -- 3,118,399
Receivables:
Investment securities sold .............. 11,566 260,317 --
Capital shares sold ..................... 47,035 855,821 76,570
Dividends and interest .................. -- -- 364,059
Offering Costs ........................... -- -- 59,404
-------------------------------------------------
Total assets ............................ 29,001,763 300,571,383 38,002,745
-------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......... -- -- 2,035,372
Capital shares redeemed ................. 35,975 1,244,598 23,835
Affiliates .............................. 21,730 248,807 --
Shareholders ............................ 8,021 765,440 --
Variation margin (Note 1) ............... -- -- 47,626
Distributions to shareholders ............ 32,860 -- --
Other liabilities ........................ 10,797 14,947 75,326
-------------------------------------------------
Total liabilities ....................... 109,383 2,273,792 2,182,159
-------------------------------------------------
Net assets, at value ...................... $ 28,892,380 $ 298,297,591 $ 35,820,586
=================================================
Net assets consist of:
Undistributed net investment income ...... $ -- $ 687,275 $ 172,883
Net unrealized appreciation (depreciation) 81,130 (21,827,528) 305,917
Accumulated net realized gain (loss) ..... (933,420) (85,478,611) 175,522
Capital shares ........................... 29,744,670 404,916,455 35,166,264
-------------------------------------------------
Net assets, at value ...................... $ 28,892,380 $ 298,297,591 $ 35,820,586
=================================================
</TABLE>

See notes to financial statements. 117

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998

* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

118 See notes to financial statements.

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ................................................ $ 197,483,936 $ 403,590,782 $ 113,845,936 $ 217,518,738
=====================================================================
Value ............................................... 182,079,542 471,060,295 108,514,705 223,435,442
Repurchase agreements, at value and cost ............. 27,983,365 39,365,375 5,942,000 4,462,936
Cash ................................................. -- -- 568 --
Receivables:
Investment securities sold .......................... 3,444,232 1,502,022 -- --
Capital shares sold ................................. 436,737 1,123,518 373,179 740,023
Dividends and interest .............................. 1,746,185 1,198,306 3,234,929 3,564,475
Unrealized gain on forward exchange contracts (Note 6) -- -- 121,093 --
---------------------------------------------------------------------
Total assets ........................................ 215,690,061 514,249,516 118,186,474 232,202,876
---------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 2,137,603 3,119,582 -- --
Capital shares redeemed ............................. 828,524 620,231 234,271 3,677,328
Affiliates .......................................... 353,737 729,888 112,862 172,778
Shareholders ........................................ 245,821 431,698 235,554 188,624
Distributions to shareholders ........................ -- -- 229 373,190
Unrealized loss on forward exchange contracts (Note 6) -- -- 126,840
Other liabilities .................................... 22,598 41,992 61,026 14,698
---------------------------------------------------------------------
Total liabilities ..................................... 3,588,283 4,943,391 770,782 4,426,618
---------------------------------------------------------------------
Net assets, at value .................................. $ 212,101,778 $ 509,306,125 $ 117,415,692 $ 227,776,258
=====================================================================
Net assets consist of:
Undistributed net investment income .................. $ 916,488 $ 581,251 $ -- $ 11,371
Accumulated distributions in excess
of net investment income ............................ -- -- (792,503) --
Net unrealized appreciation (depreciation) ........... (15,404,394) 67,469,513 (5,305,107) 5,916,704
Accumulated net realized gain (loss) ................. (8,652,572) 27,863,957 (1,961,405) (5,654,073)
Capital shares ....................................... 235,242,256 413,391,404 125,474,707 227,502,256
---------------------------------------------------------------------
Net assets, at value ................................ $ 212,101,778 $ 509,306,125 $ 117,415,692 $ 227,776,258
=====================================================================
</TABLE>

See notes to financial statements 119

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998

* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

120 See notes to financial statements.

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT FRANKLIN
SECURITIES FUND SECURITIES FUND BOND FUND+
-------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends ............................................... $ 1,373,011 $ 18,453,876 $ --
Interest ................................................ -- -- 334,080
-------------------------------------------------
Total investment income .................................. 1,373,011 18,453,876 334,080
-------------------------------------------------
Expenses:
Management fees (Note 3) ................................ -- -- 24,877
Administrative fees (Note 3) ............................ 23,128 313,856 11,707
Distribution fees Class I (Note 3) ...................... 58,759 809,874 2,075
Transfer agent fees (Note 3) ............................ 22,304 313,982 182
Custodian fees .......................................... 97 -- 45
Reports to shareholders ................................. 4,110 83,140 567
Registration and filing fees ............................ 23,979 19,025 --
Professional fees ....................................... 827 8,840 2,266
Trustees' fees and expenses ............................. 1,657 23,657 1,100
Amortization of offering costs (Note 1) ................. -- -- 19,801
Other ................................................... 233 6,182 500
-------------------------------------------------
Total expenses ........................................... 135,094 1,578,556 63,120
Expenses waived/paid by affiliate (Note 3) ............... -- -- (46,412)
-------------------------------------------------
Net expenses ............................................ 135,094 1,578,556 16,708
-------------------------------------------------
Net investment income .................................... 1,237,917 16,875,320 317,372
-------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................ (2,319) (2,511,193) 45,853
Financial futures contracts ............................ -- -- 129,669
-------------------------------------------------
Net realized gain (loss) ................................. (2,319) (2,511,193) 175,522
Net unrealized appreciation (depreciation) on investments (45,501) (1,201,807) 305,917
-------------------------------------------------
Net realized and unrealized gain (loss) .................. (47,820) (3,713,000) 481,439
-------------------------------------------------
Net increase in net assets resulting from operations ..... $ 1,190,097 $ 13,162,320 $ 798,811
=================================================
</TABLE>

+ For the period August 3, 1998 (effective date) to October 31, 1998.

See notes to financial statements. 121

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED OCTOBER 31, 1998

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:*
Dividends .................................... $ 5,318,127 $ 18,152,795 $ 2,226 $ --
Interest ..................................... 8,817,126 1,793,468 10,086,769 11,919,283
------------------------------------------------------------------
Total investment income ............... 14,135,253 19,946,263 10,088,995 11,919,283
------------------------------------------------------------------
Expenses:
Management fees (Note 3) ..................... 1,377,487 2,419,689 722,502 1,118,373
Distribution fees (Note 3)
Class I ..................................... 517,505 1,042,557 125,026 174,534
Class II .................................... 453,456 684,791 34,970 --
Transfer agent fees (Note 3) ................. 303,885 589,860 142,000 139,669
Custodian fees ............................... 6,262 16,569 33,000 2,538
Reports to shareholders ...................... 70,161 154,192 56,960 38,143
Registration and filing fees ................. 33,298 81,426 36,647 33,097
Professional fees ............................ 12,772 23,339 8,100 10,054
Trustees' fees and expenses .................. 19,167 35,140 9,200 14,424
Other ........................................ 8,377 9,764 2,134 6,406
------------------------------------------------------------------
Total expense ......................... 2,802,370 5,057,327 1,170,539 1,537,238
------------------------------------------------------------------
Net investment income ............... 11,332,883 14,888,936 8,918,456 10,382,045
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................. (8,543,572) 27,867,847 598,149 546,710
Foreign currency transactions ............... 5,033 (8,225) (372,948) --
------------------------------------------------------------------
Net realized gain (loss) .............. (8,538,539) 27,859,622 225,201 546,710
Net unrealized appreciation (depreciation) on:
Investments ................................. (28,430,686) 1,597,287 (2,347,713) 3,385,195
Translation of assets and liabilities
denominated in foreign currencies .......... -- (1,103) (307,346) --
------------------------------------------------------------------
Net unrealized appreciation (depreciation) .... (28,430,686) 1,596,184 (2,655,059) 3,385,195
------------------------------------------------------------------
Net realized and unrealized gain (loss) ....... (36,969,225) 29,455,806 (2,429,858) 3,931,905
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .............................. $(25,636,342) $ 44,344,742 $ 6,488,598 $ 14,313,950
==================================================================
</TABLE>

* Net of foreign taxes of $149,292 for the Franklin Equity Income Fund.

122 See notes to financial statements.

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
FRANKLIN ADJUSTABLE U.S. GOVERNMENT FRANKLIN
RATE SECURITIES FUND SECURITIES FUND BOND FUND
------------------------------------------------------------------------
1998 1997 1998 1997 1998+
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,237,917 $ 1,127,160 $ 16,875,320 $ 21,143,881 $ 317,372
Net realized gain (loss) from investments (2,319) (144,543) (2,511,193) (4,382,996) 175,522
Net unrealized appreciation (depreciation)
on investments (45,501) 369,436 (1,201,807) 8,545,202 305,917
------------------------------------------------------------------------
Net increase in net assets
resulting from operations 1,190,097 1,352,053 13,162,320 25,306,087 798,811
Distributions to shareholders from:
Net investment income:
Class I (1,237,917) (1,127,160) (17,143,101) (20,946,338) (17,709)
Advisor Class -- -- -- -- (140,700)
------------------------------------------------------------------------
Total distributions to shareholders (1,237,917) (1,127,160) (17,143,101) (20,946,338) (158,409)
Capital share transactions: (Note 2)
Class I 7,802,861 5,205,073 (32,712,089) (66,447,672) 4,124,727
Advisor Class -- -- -- -- 31,055,457
------------------------------------------------------------------------
Total capital share transactions 7,802,861 5,205,073 (32,712,089) (66,447,672) 35,180,184
------------------------------------------------------------------------
Net increase (decrease) in net assets 7,755,041 5,429,966 (36,692,870) (62,087,923) 35,820,586
Net assets:
Beginning of year $21,137,339 $15,707,373 $334,990,461 $397,078,384 $ --
------------------------------------------------------------------------
End of year $28,892,380 $21,137,339 $298,297,591 $334,990,461 $ 35,820,586
========================================================================
Undistributed net investment income
included in net assets:
End of year $ -- $ -- $ 687,275 $ 955,056 $ 172,883
========================================================================
</TABLE>

+ For the period August 3, 1998 (effective date) to October 31, 1998.

See notes to financial statements. 123

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
SECURITIES FUND INCOME FUND
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 11,332,883 $ 8,839,586 $ 14,888,936 $ 11,811,637
Net realized gain (loss) from investments and
foreign currency transactions ........................... (8,538,539) 18,354,800 27,859,622 16,999,297
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ........... (28,430,686) 9,072,653 1,596,184 41,583,856
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ (25,636,342) 36,267,039 44,344,742 70,394,790
Distributions to shareholders from:
Net investment income:
Class I ................................................ (9,877,888) (7,148,153) (13,224,776) (10,821,047)
Class II ............................................... (1,820,566) (764,202) (1,678,440) (874,988)
Net realized gains:
Class I ................................................ (15,493,732) (9,004,822) (15,051,100) (5,098,255)
Class II ............................................... (2,734,235) (857,185) (1,938,931) (396,739)
-------------------------------------------------------------------
Total distributions to shareholders ...................... (29,926,421) (17,774,362) (31,893,247) (17,191,029)
Capital share transactions: (Note 2)
Class I ................................................. 3,266,565 65,369,154 64,638,393 57,149,819
Class II ................................................ 16,484,480 22,239,207 34,384,586 22,298,986
-------------------------------------------------------------------
Total capital share transactions ......................... 19,751,045 87,608,361 99,022,979 79,448,805
-------------------------------------------------------------------
Net increase (decrease) in net assets ............. (35,811,718) 106,101,038 111,474,474 132,652,566
Net assets:
Beginning of year ........................................ $ 247,913,496 $ 141,812,458 $ 397,831,651 $ 265,179,085
-------------------------------------------------------------------
End of year .............................................. $ 212,101,778 $ 247,913,496 $ 509,306,125 $ 397,831,651
===================================================================
Undistributed net investment income included in net assets:
End of year ........................................... $ 916,488 $ 1,287,973 $ 581,251 $ 603,756
===================================================================
</TABLE>

124 See notes to financial statements.

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONTINUED)

STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
FRANKLIN GLOBAL GOVERNMENT FRANKLIN SHORT-INTERMEDIATE
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 8,918,456 $ 9,191,413 $ 10,382,045 $ 10,505,611
Net realized gain (loss) from investments and
foreign currency transactions ................. 225,201 (76) 546,710 98,482
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies . (2,655,059) (3,329,899) 3,385,195 229,386
-------------------------------------------------------------------
Net increase in net assets resulting
from operations ......................... 6,488,598 5,861,438 14,313,950 10,833,479
Distributions to shareholders from:
Net investment income:
Class I ....................................... (7,742,300) (9,096,985) (10,749,725) (10,697,486)
Class II ...................................... (339,885) (249,829) -- --
Advisor Class ................................. (51,592) (39,987) (118,627) (12,468)
In excess of net investment income:
Class I ....................................... (578,601) (178,945) -- --
Class II ...................................... (25,400) (4,914) -- --
Advisor Class ................................. (3,856) (787) -- --
-------------------------------------------------------------------
Total distributions to shareholders ............. (8,741,634) (9,571,447) (10,868,352) (10,709,954)
Capital share transactions: (Note 2)
Class I ....................................... (5,329,387) (15,684,110) 28,693,996 (4,111,244)
Class II ...................................... 1,335,288 869,332 -- --
Advisor Class ................................. 99,883 762,031 3,201,489 381,098
-------------------------------------------------------------------
Total capital share transactions ................ (3,894,216) (14,052,747) 31,895,485 (3,730,146)
-------------------------------------------------------------------
Net increase (decrease) in net assets .... (6,147,252) (17,762,756) 35,341,083 (3,606,621)
Net assets:
Beginning of year ............................... $ 123,562,944 $ 141,325,700 $ 192,435,175 $ 196,041,796
-------------------------------------------------------------------
End of year ..................................... $ 117,415,692 $ 123,562,944 $ 227,776,258 $ 192,435,175
===================================================================
Undistributed net investment income (Accumulated
distributions in excess of net investment income)
included in net assets:
End of year .................................... $ (792,503) $ (184,646) $ 11,371 $ 497,678
===================================================================
</TABLE>

See notes to financial statements. 125

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Investors Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end investment company, consisting of
seven separate series (the Funds). All Funds included in this report are
diversified except Franklin Global Government Income Fund. The Funds and their
investment objectives are:

<TABLE>
<CAPTION>
GLOBAL INCOME GROWTH AND INCOME INCOME
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Global Government Convertible Securities Fund Adjustable Rate Securities Fund
Income Fund Equity Income Fund Adjustable U.S. Government Securities Fund
Bond Fund
Short-Intermediate U.S. Government
Securities Fund
</TABLE>

The Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund invest substantially all of their assets in the Adjustable Rate
Securities Portfolio and the U.S. Government Adjustable Rate Mortgage Portfolio
(the Portfolios), respectively. Both are registered under the Investment Company
Act of 1940 as diversified, open-end investment companies having the same
investment objectives as the Adjustable Rate Securities Fund and the Adjustable
U.S. Government Securities Fund, respectively. The financial statements of the
Portfolios, including the Statements of Investments, are included elsewhere in
this report and should be read in conjunction with the Funds' financial
statements.

The following summarizes the Funds' significant accounting policies.

a. SECURITY VALUATION:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.

The Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund hold portfolio shares that are valued at their proportionate
interest in the net asset values of the Adjustable Rate Securities Portfolio and
the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. At October
31, 1998, the Adjustable Rate Securities Fund owns 99% of the Adjustable Rate
Securities Portfolio and the Adjustable U.S. Government Securities Fund owns 99%
of the U.S. Government Adjustable Rate Mortgage Portfolio. The Portfolios'
shares held by the Funds are valued at the net asset value of the Portfolios.

b. FOREIGN CURRENCY TRANSLATION:

Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.

The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.

126

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)

b. FOREIGN CURRENCY TRANSLATION: (CONT.)

and foreign withholding taxes and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and losses
arise from changes in foreign exchange rates on foreign denominated assets and
liabilities other than investments in securities held at the end of the
reporting period.

c. JOINT REPURCHASE AGREEMENT:

The Bond Fund, the Convertible Securities Fund, the Equity Income Fund and the
Short-Intermediate U.S. Government Securities Fund may enter into a joint
repurchase agreement whereby their uninvested cash balances are deposited into a
joint cash account to be used to invest in one or more repurchase agreements.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest. A repurchase agreement is accounted for
as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At October 31, 1998, all
outstanding repurchase agreements had been entered into on October 30, 1998.

d. FUTURES CONTRACT:

The Bond Fund may enter into financial futures contacts and options on futures
contracts to hedge the risk of changes in interest rates. Required initial
margin deposits of cash or securities are maintained by the Fund's custodian in
segregated accounts as disclosed in the Statement of Investments. Subsequent
payments, known as variation margin are made or received by the Fund depending
on the daily fluctuations in the value of the underlying securities. Such
variation margin is accounted for as unrealized gains or losses until the
contract is closed, at which time the gains or losses are reclassified to
realized. Realized and unrealized gains and losses are included in the Statement
of Operations.

e. FORWARD EXCHANGE CONTRACT:

The Global Government Income Fund may enter into forward exchange contracts to
hedge against foreign exchange risks. These contracts are valued daily and the
Fund's equity therein is included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses are included in the Statement of
Operations.

f. INCOME TAXES:

No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

127

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)

g. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.

Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.

Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.

Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.

h. ACCOUNTING ESTIMATES:

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.

i. OFFERING COSTS:

Offering costs are amortized on a straight-line basis over twelve months.

2. SHARES OF BENEFICIAL INTEREST

The classes of shares offered within each of the Funds are indicated below. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.

<TABLE>
<CAPTION>
CLASS I CLASS I & CLASS II CLASS I & ADVISOR CLASS CLASS I, CLASS II, & ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjustable Rate Securities Fund Convertible Securities Fund Bond Fund Global Government Income Fund
Adjustable U.S. Government Securities Fund Equity Income Fund Short-Intermediate U.S.
Government Securities Fund

</TABLE>

128

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

2. SHARES OF BENEFICIAL INTEREST (cont.)

At October 31, 1998, there was an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:

<TABLE>
<CAPTION>
ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND*
--------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I SHARES:
1998
Shares sold ..................... 2,428,247 $ 24,202,326 17,728,448 $ 167,216,987 428,859 $ 4,337,530
Shares issued in reinvestment
of distributions ............... 95,071 947,120 1,090,772 10,268,136 545 5,651
Shares redeemed ................. (1,741,821) (17,346,585) (22,292,627) (210,197,212) (21,120) (218,454)
--------------------------------------------------------------------------------------
Net increase (decrease) ......... 781,497 $ 7,802,861 (3,473,407) $ (32,712,089) 408,284 $ 4,124,727
======================================================================================

1997
Shares sold ..................... 2,515,583 $ 24,890,014 19,504,396 $ 183,679,079
Shares issued in reinvestment
of distributions ............... 91,780 910,284 1,309,703 12,299,705
Shares redeemed ................. (2,076,570) (20,595,225) (27,867,699) (262,426,456)
------------------------------------------------------------
Net increase (decrease) ......... 530,793 $ 5,205,073 (7,053,600) $ (66,447,672)
============================================================

ADVISOR CLASS:

1998
Shares sold ..................... 3,061,438 $31,245,247
Shares issued in reinvestment
of distributions ............... 12,432 128,923
Shares redeemed ................. (30,728) (318,713)
------------------------
Net increase .................... 3,043,142 $31,055,457
========================
</TABLE>

*For the period August 3, 1998 (effective date) to October 31, 1998.

129

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

2. SHARES OF BENEFICIAL INTEREST (cont.)

<TABLE>
<CAPTION>
CONVERTIBLE EQUITY GLOBAL GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I SHARES:
1998
Shares sold ................. 4,772,514 $ 64,822,630 9,015,338 $ 180,490,789 2,683,291 $ 22,280,584
Shares issued in reinvestment
of distributions ........... 1,402,784 18,865,612 1,236,040 24,317,467 556,177 4,608,867
Shares redeemed ............. (6,083,262) (80,421,677) (7,026,650) (140,169,863) (3,877,271) (32,218,838)
-----------------------------------------------------------------------------------------------
Net increase (decrease) ..... 92,036 $ 3,266,565 3,224,728 $ 64,638,393 (637,803) $ (5,329,387)
===============================================================================================

1997
Shares sold ................. 7,074,889 $ 98,888,262 6,936,844 $ 125,149,684 2,472,734 $ 20,945,795
Shares issued in reinvestment
of distributions ........... 916,933 12,136,488 762,734 13,249,367 576,140 4,904,638
Shares redeemed ............. (3,302,613) (45,655,596) (4,489,818) (81,249,232) (4,879,312) (41,534,543)
-----------------------------------------------------------------------------------------------
Net increase (decrease) ..... 4,689,209 $ 65,369,154 3,209,760 $ 57,149,819 (1,830,438) $ (15,684,110)
===============================================================================================

CLASS II SHARES:
1998
Shares sold ................. 1,925,827 $ 26,217,204 2,664,562 $ 53,316,585 405,491 $ 3,372,424
Shares issued in reinvestment
of distributions ........... 267,020 3,567,903 166,092 3,261,574 27,768 229,929
Shares redeemed ............. (1,045,779) (13,300,627) (1,103,002) (22,193,573) (273,562) (2,267,065)
-----------------------------------------------------------------------------------------------
Net increase ................ 1,147,068 $ 16,484,480 1,727,652 $ 34,384,586 159,697 $ 1,335,288
===============================================================================================

1997
Shares sold ................. 1,693,202 $ 23,703,881 1,537,907 $ 27,820,253 314,368 $ 2,666,891
Shares issued in reinvestment
of distributions ........... 96,754 1,282,945 64,902 1,133,280 18,565 157,895
Shares redeemed ............. (197,081) (2,747,619) (364,896) (6,654,547) (228,727) (1,955,454)
-----------------------------------------------------------------------------------------------
Net increase ................ 1,592,875 $ 22,239,207 1,237,913 $ 22,298,986 104,206 $ 869,332
===============================================================================================
</TABLE>

130

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

2. SHARES OF BENEFICIAL INTEREST (cont.)

<TABLE>
<CAPTION>
GLOBAL GOVERNMENT
INCOME FUND
---------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
ADVISOR CLASS:
1998

Shares sold ........................................ 30,190 $ 249,021
Shares issued in reinvestment
of distributions .................................. 6,299 52,063
Shares redeemed ................................... (24,127) (201,201)
---------------------
Net increase ....................................... 12,362 $ 99,883
=====================

1997+
Shares sold ........................................ 102,752 $ 885,499
Shares issued in reinvestment
of distributions .................................. 4,741 40,043
Shares redeemed .................................... (19,378) (163,511)
---------------------
Net increase ....................................... 88,115 $ 762,031
=====================
</TABLE>

<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
CLASS I SHARES:
1998
Shares sold .................................... 21,448,883 $ 221,708,093
Shares issued in reinvestment
of distributions .............................. 627,776 6,477,086
Shares redeemed ................................ (19,311,848) (199,491,183)
----------------------------
Net increase ................................... 2,764,811 $ 28,693,996
============================

1997
Shares sold .................................... 9,455,984 $ 96,723,865
Shares issued in reinvestment
of distributions .............................. 610,793 6,250,094
Shares redeemed ................................ (10,469,896) (107,085,203)
----------------------------
Net decrease ................................... (403,119) $ (4,111,244)
============================
</TABLE>

+For the period January 2, 1997 (effective date) to October 31, 1997.

131

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

2. SHARES OF BENEFICIAL INTEREST (cont.)

<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
-----------------------
SHARES AMOUNT
-----------------------
<S> <C> <C>
Advisor Class:
1998
Shares sold ...................................... 312,657 $ 3,216,468
Shares issued in reinvestment
of distributions ................................ 10,199 105,389
Shares redeemed .................................. (11,650) (120,368)
-----------------------
Net increase ..................................... 311,206 $ 3,201,489
=======================

1997+
Shares sold ...................................... 37,960 $ 387,372
Shares issued in reinvestment
of distributions ................................ 393 4,015
Shares redeemed .................................. (1,004) (10,289)
-----------------------
Net increase ..................................... 37,349 $ 381,098
=======================
</TABLE>

+For the period January 2, 1997 (effective date) to October 31, 1997.

3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Funds are also officers and/or directors of
the following entities:

<TABLE>
<CAPTION>
ENTITY AFFILIATION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, Inc. (FTServices) Administrative manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer agent
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Templeton Investment Counsel, Inc. (TICI) Investment manager
The Adjustable Rate Securities Portfolio The Fund in which the Adjustable Rate Securities Fund invests
The U.S. Government Adjustable Rate Mortgage Portfolio The Fund in which the Adjustable U.S. Government Securities
Fund invests
</TABLE>

The Convertible Securities Fund, the Equity Income Fund, the Global Government
Income Fund and the Short-Intermediate U.S. Government Securities Fund pay an
investment management fee to Advisers based on the average net assets of the
Funds, as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE MONTH END NET ASSETS
----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
</TABLE>

132

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES (cont.)

The Bond Fund pays an investment management fee to Advisers of .425% of the
first $500 million of the Fund's average daily net assets. Fees are further
reduced on net assets over $500 million.

The Bond Fund pays an administrative fee to FT Services of .20% per year of the
Fund's average daily net assets.

The Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund pay an administrative fee to Advisers based on the average net
assets of the Funds, as follows:

<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-------------------------------------------------------------
<S> <C>
.10% First $5 billion
.09% Over $5 billion, up to and including $10 billion
.08% Over $10 billion
</TABLE>

Under an agreement with Advisers, FT Services provides administrative services
to the Convertible Securities Fund, the Equity Income Fund, the Global
Government Income Fund and the Short-Intermediate U.S Government Securities
Fund. The fee is paid by Advisers based on the average daily net assets, and is
not an additional expense of the Funds.

Under a subadvisory agreement, TICl provides subadvisory services to the Global
Government Income Fund and receives from Advisers fees based on the month end
net assets of the Fund.

The Adjustable Rate Securities Fund, the Adjustable U.S. Government Securities
Fund, and the Bond Fund reimburse Distributors up to .25% per year of their
average daily net assets of Class I, the Short-Intermediate U.S. Government
Securities Fund reimburses Distributors up to .10% per year of the average daily
net assets of Class I, the Convertible Securities Fund and the Equity Income
Fund reimburse Distributors up to .25% and 1.00% per year of the average daily
net assets of Class I and Class II, respectively, the Global Government Income
Fund reimburses Distributors up to .15% and .65% per year of the average daily
net assets of Class I and Class II, respectively, for costs incurred in
marketing the Funds' shares.

Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:

Contingent deferred
sales charges ...... $ 4,402 $ -- $ -- $ 24,871 $ 25,388 $ 2,369 $ --
</TABLE>

133

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

4. INCOME TAXES

At October 31, 1998, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:

<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 ............. $ -- $ 1,925,614 $ -- $ -- $ --
2001 ............. -- 7,701,615 -- -- --
2002 ............. 414,821 41,867,757 -- -- 1,788,818
2003 ............. 286,740 18,176,270 -- 1,959,011 3,564,637
2004 ............. 66,100 8,741,194 -- -- 300,618
2005 ............. 95,706 4,484,844 -- -- --
2006 ............. 21,042 2,564,334 8,652,572 -- --
==================================================================================
$ 884,409 $ 85,461,628 $ 8,652,572 $ 1,959,011 $ 5,654,073
==================================================================================
</TABLE>

Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and offering costs.

Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.

At October 31, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:

<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at
cost ........... $28,911,041 $321,299,756 $37,203,224 $ 225,467,301 $442,967,637 $119,790,330 $221,981,674
===============================================================================================================
Unrealized
appreciation ... 32,121 -- 367,192 8,273,285 81,705,544 2,509,259 5,916,704
Unrealized
depreciation ... -- (21,844,511) (67,704) (23,677,679) (14,247,511) (7,842,884) --
-----------------------------------------------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) . $ 32,121 $ (21,844,511) $ 299,488 $ (15,404,394) $ 67,458,033 $ (5,333,625) $ 5,916,704
==================================================================================================================
</TABLE>

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 were as follows:

134

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bond Fund and the Global Government Income Fund have been parties to
financial instruments with off-balance sheet risk, primarily financial futures
contracts and forward exchange contracts in order to minimize the impact on the
Funds from adverse changes in interest rates and in the relationship between the
U.S. dollar and foreign currencies. These instruments involve market risk in
excess of the amount recognized on the Statements of Assets and Liabilities.

A financial futures contract is an agreement between two parties to buy or sell
a security for a set price on a future date. The use of futures transactions
involves risk of imperfect correlation in movements in the price of futures
contracts, interest rates, and the underlying hedged assets.

At October 31, 1998, the Bond Fund had the following contracts outstanding:

<TABLE>
<CAPTION>
NUMBER OF DELIVERY UNREALIZED
CONTRACTS TO BUY CONTRACTS DATES GAIN
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. 5YR Treasury Notes (CBT)Dec98 35 12/1/98 - 12/31/98 $ 2,344
U.S. Treasury Notes (CBT)Dec98 26 12/1/98 - 12/31/98 4,085
----------
Net unrealized gain on future contracts $ 6,429
==========
</TABLE>

A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. Some of the
market risks associated with forward exchange contracts are minimized by
offsetting contracts. Risks arise from the possible inability of counterparties
to meet the terms of their contracts, future movement in currency values,
interest rates and contract positions that are not exact offsets. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.

At October 31, 1998, all forward exchange contracts in the Global Government
Income Fund were offset.

7. CREDIT RISK

The Convertible Securities Fund has 45.2% of its portfolio invested in lower
rated and comparable quality unrated high yield securities, which tend to be
more sensitive to economic conditions than higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer.

The Global Government Income Fund has investments in excess of 10% of its total
net assets in Germany. Such concentration may subject the Fund more
significantly to economic changes occurring within that country.

135

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)

8. RESTRICTED SECURITIES

The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at October 31, 1998 are as follows:

<TABLE>
<CAPTION>
Shares Issuer Acquisition Date Cost Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Securities Fund
73,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.86% of Net Assets) .... 6/18/97 $ 3,650,000 $ 3,946,563
-----------
Equity Income Fund
80,000 CMS Energy Trust I, 7.75%, cvt. pfd. (.85% of Net Assets) ..... 6/18/97 4,000,000 4,325,000
-----------
</TABLE>

136

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Independent Auditors' Report

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF FRANKLIN INVESTORS SECURITIES TRUST

In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds constituting the
Franklin Investors Securities Trust (hereafter referred to as the "Trust") at
October 31, 1998, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Francisco, California
December 9, 1998

137

<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Tax Information

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Funds hereby
designates the following amounts as capital gain dividends for the fiscal year
ended October 31, 1998.

<TABLE>
<CAPTION>
Capital
Gains
------------
<S> <C>
Franklin Bond Fund .............................................. $ 81,659
Franklin Equity Income Fund ..................................... $ 25,407,218
</TABLE>

Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the following percentage amounts of the ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
October 31, 1998.

<TABLE>
<CAPTION>
Convertible Equity
Securities Fund Income Fund
---------------------------------
<S> <C>
17.37% 61.90%
</TABLE>

138

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights

U.S. Government Adjustable Rate Mortgage Portfolio

<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)

Net asset value, beginning of year ................. $ 9.48 $ 9.37 $ 9.33 $ 9.19 $ 9.82
----------------------------------------------------------
Income from investment operations:
Net investment income ............................. .553 .593 .589 .572 .415
Net realized and unrealized gain (loss) ........... (.110) .110 .040 .140 (.630)
----------------------------------------------------------
Total from investment operations ................... .443 .703 .629 .712 (.215)
Less distributions from net investment income ...... (.553) (.593) (.589) (.572) (.415)
----------------------------------------------------------
Net asset value, end of year ....................... $ 9.37 $ 9.48 $ 9.37 $ 9.33 $ 9.19
==========================================================
Total return* ...................................... 4.80% 7.74% 6.95% 7.99% (2.22)%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 302,434 $ 342,541 $ 406,431 $ 522,802 $ 747,471
Ratios to average net assets:
Expenses .......................................... .26% .25% .25% .18% .02%
Expenses excluding waiver and payments by affiliate .43% .43% .42% .43% .42%
Net investment income ............................. 5.88% 6.31% 6.31% 6.17% 4.01%
Portfolio turnover rate ............................ 38.92% 20.84% 24.63% 20.16% 56.43%
</TABLE>

*Total return is not annualized.

See notes to financial statements

139

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998

FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.375%, 11/01/16 $ 3,604,698 $ 3,652,503
FHLMC, Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 7.311%, 7/01/18 3,035,450 3,106,513
FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.636%, 4/01/18 5,125,530 5,274,679
FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.42%, 9/01/19 4,294,753 4,398,236
FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.464%, 12/01/16 2,291,885 2,332,384
FHLMC, Cap 13.175%, Margin 2.223% + CMT, Resets Annually, 7.637%, 5/01/25 4,422,891 4,556,221
FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.591%, 10/01/18 1,591,122 1,639,216
FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.589%, 3/01/19 1,841,423 1,887,464
FHLMC, Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.528%, 3/01/18 3,200,924 3,279,511
FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.502%, 4/01/19 7,409,563 7,590,059
FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.607%, 7/01/20 4,653,200 4,796,345
FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.586%, 11/01/19 2,318,521 2,392,596
FHLMC, Cap 13.879%, Margin 2.089% + CMT, Resets Annually, 7.486%, 4/01/18 6,411,605 6,582,541
FHLMC, Cap 13.948%, Margin 2.133% + CMT, Resets Annually, 7.533%, 11/01/19 2,879,655 2,996,227
FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.781%, 12/01/21 1,224,667 1,279,504
FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.113%, 2/01/19 1,819,653 1,888,873
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $57,967,294) 57,652,872
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 64.2%

FNMA, Cap 12.097%, Margin 2.135% + CMT, Resets Annually, 7.37%, 11/01/23 12,503,875 12,937,266
FNMA, Cap 12.233%, Margin 1.702% + COFI, Resets Monthly, 6.636%, 1/01/19 7,627,846 7,774,310
FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 7.639%, 11/01/18 1,818,913 1,900,661
FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.926%, 11/01/17 13,316,154 13,677,421
FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.437%, 3/01/19 2,706,530 2,787,983
FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 6.83%, 1/01/19 8,005,270 8,154,460
FNMA, Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.888%, 1/01/19 2,911,071 2,938,174
FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 9/01/18 8,747,026 8,792,948
FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.445%, 1/01/19 2,340,008 2,398,345
FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 7.487%, 11/01/20 2,670,043 2,755,003
FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.186%, 5/01/19 3,744,336 3,823,498
FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.869%, 6/01/17 2,127,134 2,239,676
FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.243%, 10/01/17 3,405,770 3,602,845
FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 7.246%, 7/01/17 5,143,467 5,324,170
FNMA, Cap 12.93%, Margin 2.24% + CMT, Resets Annually, 7.101%, 2/01/27 4,547,275 4,717,041
FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 2/01/19 3,113,374 3,129,719
FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 7.496%, 12/01/19 2,405,758 2,478,998
FNMA, Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 7.769%, 11/01/17 3,858,901 4,012,140
FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.585%, 6/01/19 3,342,419 3,441,680
FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.914%, 2/01/20 7,988,252 8,060,147
FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.034%, 12/01/20 4,157,151 4,246,497
FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.672%, 4/01/19 4,633,126 4,769,624
FNMA, Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.418%, 6/01/19 3,611,211 3,720,183
FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 7.285%, 4/01/19 4,040,723 4,149,964
FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 7.53%, 11/01/26 1,938,541 2,027,911
FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 7.354%, 6/01/19 1,945,517 1,999,732
FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.445%, 10/01/19 5,472,332 5,641,528
FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.216%, 4/01/03 4,226,775 4,275,383
FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 7.528%, 9/01/22 9,229,324 9,517,144
</TABLE>

140

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (cont.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
FNMA, Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 7.364%, 6/01/18 $ 4,247,553 $ 4,351,882
FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 7.61%, 3/01/21 3,557,021 3,673,313
FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 7.602%, 12/01/20 5,551,506 5,734,770
FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.628%, 3/01/19 1,779,340 1,834,235
FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.777%, 7/01/24 4,432,225 4,529,487
FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.75%, 2/01/19 3,113,508 3,210,499
FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.804%, 12/01/18 2,030,337 2,093,964
FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.51%, 1/01/19 4,614,293 4,754,997
FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.175%, 5/01/21 6,890,219 7,272,025
FNMA, Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 7.489%, 3/01/20 2,787,614 2,906,943
FNMA, Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.100%, 1/01/16 6,214,005 6,317,544
FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.008%, 5/01/19 2,237,458 2,335,072
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $194,697,467) 194,309,182
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 11.6%
GNMA, Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/24 4,917,984 4,986,199
GNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 8/20/22 6,919,159 6,991,399
GNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 9/20/22 6,032,008 6,094,281
GNMA, Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 8.00%, 7/20/25 2,919,555 3,027,308
GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/23 4,239,605 4,302,388
GNMA, Cap 12.00%, Margin 1.50% + CMT, Resets Annually, 7.00%, 10/20/24 9,649,531 9,758,939
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $35,358,726) 35,160,514
------------
(a)REPURCHASE AGREEMENTS 3.9%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $11,723,622) (Cost $11,718,397) 11,718,397 11,718,397
Barclays Capital Group, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Deutsche Morgan Granfell/C.J. Lawrence, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
NationsBanc Montgomery Securities, L.L.C.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $299,741,884) 98.8% 298,840,965
OTHER ASSETS, LESS LIABILITIES 1.2% 3,592,778
------------
NET ASSETS 100.0% $302,433,743
============
</TABLE>

<TABLE>
<CAPTION>
PORTFOLIO ABBREVIATIONS:
<S> <C>
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate
</TABLE>

(a) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1998, all repurchase
agreements held by the Fund had been entered into on October 30, 1998.

See notes to financial statements. 141

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights

ADJUSTABLE RATE SECURITIES PORTFOLIO

<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 9.95 $ 9.86 $ 9.81 $ 9.69 $ 10.03
-------------------------------------------------------
Income from investment operations:
Net investment income ............................. .595 .616 .607 .625 .469
Net realized and unrealized gain (loss) ........... (.011) .090 .050 .120 (.340)
-------------------------------------------------------
Total from investment operations ................... .584 .706 .657 .745 .129
Less distributions from net investment income ...... (.594) (.616) (.607) (.625) (.469)
-------------------------------------------------------
Net asset value, end of year ....................... $ 9.94 $ 9.95 $ 9.86 $ 9.81 $ 9.69
=======================================================
Total return* ...................................... 6.03% 7.38% 6.91% 7.94% 1.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 29,287 $ 22,540 $ 20,534 $ 27,079 $ 41,619
Ratios to average net assets:
Expenses .......................................... .26% .25% .25% .25% .25%
Expenses excluding waiver and payments by affiliate .45% .44% .47% .47% .43%
Net investment income ............................. 5.95% 6.20% 6.19% 6.36% 4.55%
Portfolio turnover rate ............................ 76.41% 138.32% 46.78% 50.29% 192.06%
</TABLE>

*Total return is not annualized

142 See notes to financial statements.

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998

<TABLE>
<CAPTION>
PRINCIPAL
ADJUSTABLE RATE SECURITIES PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 77.4%
FNMA, Cap 11.10%, Margin 2.00% + CMT, Resets Annually, 7.397%, 3/01/22 $ 740,499 $ 760,103
FNMA, Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%, 10/01/28 682,783 697,201
FNMA, Cap 12.85%, Margin 1.97% + CMT, Resets Annually, 7.41%, 12/01/17 703,380 722,786
FNMA, Cap 13.54%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 8/01/26 899,637 907,649
FNMA, Cap 13.69%, Margin 1.88% + CMT, Resets Annually, 7.266%, 8/01/16 286,645 293,628
FNMA, Cap 13.77%, Margin 2.13% + 3CMT, Resets Every 3 Years, 8.192%, 3/01/22 746,559 780,529
FNMA, Cap 13.87%, Margin 1.98% + CMT, Resets Annually, 7.385%, 3/01/18 1,670,926 1,713,532
FNMA, Cap 14.78%, Margin 2.130% + 3CMT, Resets Every 3 Years, 7.978%, 8/01/22 1,578,934 1,648,612
GNMA, Cap 10.50%, Margin 1.50% +CMT, Resets Annually, 7.00%, 8/20/22 1,884,411 1,904,086
GNMA, Cap 11.00%, Margin 1.50% +CMT, Resets Annually, 7.00%, 11/20/21 1,403,054 1,423,647
Home Owners Federal Savings, Cap 13.00%, Margin 1.75% + CMT, Resets
Annually, 7.171%, 1/25/18 684,077 688,780
Merrill Lynch Mortgage Investors, Inc., Margin 0.40% + 1 Month LIBOR, Resets
Monthly, 6.087%, 6/15/18 788,440 780,310
PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 7.971%, 7/25/22 528,745 527,423
PHMS, Cap 13.00%, Margin 2.53% + CMT, Resets Annually, 7.962%, 8/25/21 487,324 484,583
PHMS, Cap 13.40%, Margin 2.50% + CMT, Resets Annually, 7.914%, 7/25/18 1,402,704 1,411,472
RFC, Cap 10.00%, Margin 0.85% + COFI, Resets Monthly, 5.749%, 2/25/22 365,397 365,469
RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.704%, 11/25/22 809,512 807,615
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 6.759%, 1/25/25 933,989 931,193
Ryland Mortgage Securities Corp., Cap 12.41%, Margin 1.80% + CMT, Resets
Annually, 7.183%, 3/25/20 1,169,365 1,167,538
Ryland Mortgage Securities Corp., Cap 14.82%, Margin 2.29% + 6 Month TB, Resets
Semi-Annually, 7.398%, 8/25/23 757,180 755,557
Ryland Mortgage Securities Corp., Cap 15.34%, Margin 1.83% + CMT, Resets
Annually, 7.281%, 6/25/20 589,154 590,259
Salomon Brothers Mortgage Securities VII, Cap 14.00%, Margin 0.96% + NACR, Resets
Annually, 7.761%, 12/25/17 953,794 951,708
Saxon Mortgage Securities Corp., Cap 10.78%, Margin 2.78%, + 6 Month LIBOR, Resets
Semi-Annually, 8.611%, 5/25/24 482,463 485,931
Sears Mortgage Securities, Cap 10.78%, Margin 1.10% + COFI, Resets Monthly,
6.011%, 7/25/21 414,444 404,990
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25% + CMT, Resets
Annually, 7.724%, 12/25/18 588,382 585,624
Western Federal Savings and Loan Association, Cap 12.25%, Margin 0.75%
+ 1 Month LIBOR, Resets Monthly, 6.398%, 6/25/20 370,004 364,570
Western Federal Savings and Loan Association, Cap 12.75%, Margin 0.75%
+ 1 Month LIBOR, Resets Monthly, 6.398%, 7/25/20 344,508 338,587
Western Federal Savings and Loan Association, Cap 13.00%, Margin 1.80%
+ COFI, Resets Monthly, 6.681%, 3/25/19 175,873 175,654
-----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost $22,821,120) 22,669,036
-----------
FIXED RATE MORTGAGE SECURITIES 1.4%
Countrywide Mortgage-Backed Securities, Inc., Series 1994-I, Class A8,
6.25%, 7/25/09 (Cost $395,892) 407,086 405,766
-----------
OTHER ADJUSTABLE RATE SECURITIES 3.3%
SBA, Cap 12.62%, Margin -0.12% + Prime, Resets Quarterly, 8.125%,
8/25/20 (Cost $960,939) 891,305 957,039
-----------
U.S. GOVERNMENT SECURITIES 10.4%
U.S. Treasury Notes, 5.375%, 1/31/00 1,000,000 1,012,188
U.S. Treasury Notes, 5.375%, 7/31/00 1,000,000 1,017,501
U.S. Treasury Notes, 5.875%, 2/15/00 1,000,000 1,018,751
-----------
TOTAL U.S. GOVERNMENT SECURITIES (COST $3,005,000) 3,048,440
-----------
</TABLE>

143

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998 (cont.)

<TABLE>
<CAPTION>
PRINCIPAL
ADJUSTABLE RATE SECURITIES PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)REPURCHASE AGREEMENTS 3.7%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity
Value $1,093,243) (Cost $1,092,756) $1,092,756 $ 1,092,756
Barclays Capital Group, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
NationsBanc Montgomery Securities, L.L.C.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills and Notes
-----------
TOTAL INVESTMENTS (COST $28,275,707) 96.2% 28,173,037
OTHER ASSETS, LESS LIABILITIES 3.8% 1,114,270
-----------
NET ASSETS 100.0% $ 29,287,307
============
</TABLE>

<TABLE>
<CAPTION>
PORTFOLIO ABBREVIATIONS
<S> <C>
3CMT - 3 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
LIBOR - London Interbank Contract Rate
NACR - National Average Contract Rate
NCI - National Median Cost of Funds Index
PHMS - Prudential Home Mortgage Securities
RFC - Residential Finance Corp.
RTC - Resolution Trust Corp.
SBA - Small Business Administration
TB - Treasury Bill Rate
</TABLE>

(a)Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1998, all repurchase
agreements held by the Fund had been entered into on October 30, 1998.

144 See notes to financial statements.

<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements

STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1998

<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
----------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost ................................................... $ 299,741,884 $ 28,275,707
==================================
Value .................................................. 298,840,965 28,173,037
Receivables:
Investment securities sold ............................. 1,865,682 963,022
Interest ............................................... 2,068,672 185,936
Affiliates ............................................. 51,559 --
----------------------------------
Total assets ........................................ 302,826,878 29,321,995
----------------------------------
Liabilities:
Payables:
Capital shares redeemed ................................ 270,188 12,537
Affiliates ............................................. 101,886 9,956
Other liabilities ....................................... 21,061 12,195
----------------------------------
Total liabilities ................................... 393,135 34,688
----------------------------------
Net assets, at value ................................ $ 302,433,743 $ 29,287,307
==================================
Net assets consist of:
Net unrealized depreciation ............................ $ (900,919) $ (102,670)
Accumulated net realized loss .......................... (136,855,767) (2,803,982)
Capital shares ......................................... 440,190,429 32,193,959
----------------------------------
Net assets, at value .................................... $ 302,433,743 $ 29,287,307
==================================
Shares outstanding ...................................... 32,277,857 2,945,779
==================================
Net asset value and maximum offering price per share .... $ 9.37 $ 9.94
==================================
</TABLE>

See notes to financial statements. 145

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)

STATEMENTS OF OPERATIONS
for the year ended October 31, 1998

<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------------------------
<S> <C> <C>
Investment income:
Interest .......................................................... $ 19,548,300 $ 1,503,199
-------------------------------------------
Expenses: ..........................................................
Management fees (Note 3) .......................................... 1,272,933 96,734
Custodian fees .................................................... 3,254 247
Professional fees ................................................. 51,080 5,568
Trustee's fees and expenses ....................................... 8,519 694
Other ............................................................. 17,381 6,027
-------------------------------------------
Total expenses ................................................... 1,353,167 109,270
Expenses waived/paid by affiliate (Note 3) ....................... (514,508) (45,345)
-------------------------------------------
Net expenses .................................................... 838,659 63,925
-------------------------------------------
Net investment income .......................................... 18,709,641 1,439,274
-------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 271,114 (75,829)
Net unrealized appreciation (depreciation) on investments ......... (3,967,154) 40,875
-------------------------------------------
Net realized and unrealized loss ................................... (3,696,040) (34,954)
-------------------------------------------
Net increase in net assets resulting from operations ............... $ 15,013,601 $ 1,404,320
===========================================
</TABLE>

146 See notes to financial statements.

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)

Statements of Changes in Net Assets
for the years ended October 31, 1998 and 1997

<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
--------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 18,709,641 $ 23,464,424 $ 1,439,274 $ 1,500,611
Net realized gain (loss) from investments ........ 271,114 693,708 (75,829) 14,469
Net unrealized appreciation
(depreciation) on investments ................... (3,967,154) 3,675,679 40,875 260,606
--------------------------------------------------------------------
Net increase in net assets
resulting from operations ......................... 15,013,601 27,833,811 1,404,320 1,775,686
Distributions to shareholders from:
Net investment income ............................ (18,709,641) (23,464,424) (1,438,180) (1,500,611)
Capital share transactions (Note 2) .............. (36,411,307) (68,259,294) 6,781,305 1,730,540
--------------------------------------------------------------------
Net increase (decrease) in net assets .............. (40,107,347) (63,889,907) 6,747,445 2,005,615
Net assets (there is no undistributed net investment
income at beginning or end of year):
Beginning of year ................................ 342,541,090 406,430,997 22,539,862 20,534,247
--------------------------------------------------------------------
End of year ...................................... $ 302,433,743 $ 342,541,090 $ 29,287,307 $ 22,539,862
====================================================================
</TABLE>

See notes to financial statements. 147

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Adjustable Rate Securities Portfolios (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, diversified investment company,
consisting of two separate portfolios (the Portfolios) the U.S. Government
Adjustable Rate Mortgage Portfolio (Mortgage Portfolio) and the Adjustable Rate
Securities Portfolio (Securities Portfolio). The shares of the Trust are issued
in private placements and are thus exempt from registration under the Securities
Act of 1933. The investment objective of each Portfolio is to seek current
income.

The following summarizes the Portfolios' significant accounting policies:

a. SECURITY VALUATION:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.

b. INCOME TAXES:

No provision has been made for income taxes because each Portfolio's policy is
to qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.

c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividends from net
investment income are normally declared daily and distributed monthly to
shareholders.

Common expenses incurred by the Trust are allocated among the Portfolios based
on the ratio of net assets of each Portfolio to the combined net assets. Other
expenses are charged to each Portfolio on a specific identification basis.

d. ACCOUNTING ESTIMATES:

148

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)

2. SHARES OF BENEFICIAL INTEREST

At October 31, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in each of the Portfolios' shares were as follows:

<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
--------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended October 31, 1998
Shares sold .................................... 11,366,772 $ 107,271,915 1,878,813 $ 18,706,872
Shares issued on reinvestment of distributions . 1,982,722 18,703,706 144,487 1,437,947
Shares redeemed ................................ (17,212,608) (162,386,928) (1,343,424) (13,363,514)
--------------------------------------------------------------------------
Net increase (decrease) ..................... (3,863,114) $ (36,411,307) 679,876 $ 6,781,305
==========================================================================
Year ended October 31, 1997
Shares sold .................................... 14,468,647 $ 136,195,699 2,195,631 $ 21,698,569
Shares issued on reinvestment of distributions . 2,492,654 23,464,406 151,507 1,500,610
Shares redeemed ................................ (24,217,403) (227,919,399) (2,164,571) (21,468,639)
--------------------------------------------------------------------------
Net increase (decrease) ..................... (7,256,102) $ (68,259,294) 182,567 $ 1,730,540
==========================================================================
</TABLE>

3. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), the Portfolios' investment manager (a
wholly-owned subsidiary of Franklin Resources, Inc.) and trustees of Franklin
Investors Securities Trust and Institutional Fiduciary Trust.

The Portfolios pay an investment management fee to Advisers based on the average
net assets of the Portfolios as follows:

<TABLE>
<CAPTION>
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------------
<S> <C>
0.400% First $5 billion
0.350% Over 5 billion, up to and including $10 billion
0.330% Over $10 billion, up to and including $15 billion
</TABLE>

Fees are further reduced on net assets over $15 billion.

Advisers agreed in advance to waive management fees, as noted in the Statement
of Operations.

149

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)

3. TRANSACTIONS WITH AFFILIATES (cont.)

At October 31, 1998, 32,277,857 shares of the Mortgage Portfolio were owned by
the following:

<TABLE>
<CAPTION>
PERCENTAGE OF
NAME SHARES OWNED OUTSTANDING SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Adjustable U.S. Government Securities Fund 31,958,938 99%
Franklin Institutional Adjustable U.S. Government Securities Fund 318,919 1%
</TABLE>

At October 31, 1998, 2,945,779 shares of the Securities Portfolio were owned by
the following:

<TABLE>
<CAPTION>
PERCENTAGE OF
NAME SHARES OWNED OUTSTANDING SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Fund 2,911,787 99%
Franklin Institutional Adjustable Securities Fund 32,386 1%
Franklin Resources, Inc. 1,606 --
</TABLE>

4. INCOME TAXES

At October 31, 1998, the Portfolios had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:

<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2000 ................................. $ 44,474,794 $ 42,138
2001 ................................. 17,182,002 50,908
2002 ................................. 67,102,060 1,987,888
2003 ................................. 7,677,608 609,391
2004 ................................. 419,303 37,828
2006 ................................. -- 75,829
------------------------------------------
$ 136,855,767 $ 2,803,982
==========================================
</TABLE>

At October 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes were as follows:

<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------------------
<S> <C> <C>
Investment at cost $ 299,741,884 $ 28,275,707
============= ============
Unrealized appreciation 1,117,279 95,367
Unrealized depreciation (2,018,198) (198,037)
------------- ------------
Net unrealized depreciation $ (900,919) $ (102,670)
============= ============
</TABLE>

150

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1998 were as follows:

<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-----------------------------------------
<S> <C> <C>
Purchases $119,138,749 $23,002,344
Sales $159,164,467 $17,721,533
</TABLE>

151

<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Independent Auditors' Report

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
ADJUSTABLE RATE SECURITIES PORTFOLIOS

In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the two Portfolios constituting the
Adjustable Rate Securities Portfolios, (hereafter referred to as the "Trust") at
October 31, 1998, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.

PricewaterhouseCoopers LLP

San Francisco, California
December 9, 1998

152

SPECIAL SHAREHOLDERS MEETING OF
FRANKLIN ADJUSTABLE RATE SECURITIES FUND

April 9, 1999

The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, Deborah R. Gatzek and Larry
L. Greene, and each of them, proxies of the undersigned with full power of
substitution to vote all shares of Franklin Adjustable Rate Securities Fund
(the "Adjustable Rate Fund") which the undersigned is entitled to vote at
Adjustable Rate Fund's Special Meeting to be held at 777 Mariners Island
Blvd., San Mateo, CA 94403-7777 at 3:00 p.m. Pacific time on April 9, 1999,
including any adjournment thereof, upon such business as may properly be
brought before the Meeting.

No. 1 To approve a Plan of Reorganization between Adjustable Rate Fund
and Franklin Adjustable U.S. Government Securities Fund
("Adjustable USG Fund"), that provides for the acquisition of
substantially all of the assets of Adjustable Rate Fund in
exchange for shares of Adjustable USG Fund, the distribution of
such shares to the shareholders of Adjustable Rate Fund, and the
dissolution of Adjustable Rate Fund (the "Reorganization").

FOR AGAINST ABSTAIN

| | | | | |

To grant the proxyholders the authority to vote in their
discretion and vote upon any other business which may legally
come before the Special Shareholders Meeting or any adjournment
thereof.

GRANT WITHHOLD

| | | |

PLEASE SEE REVERSE SIDE

PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FRANKLIN
INVESTORS SECURITIES TRUST. IT WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THIS PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1,
REGARDING THE REORGANIZATION OF THE FRANKLIN ADJUSTABLE RATE SECURITIES FUND
PURSUANT TO THE PLAN OF REORGANIZATION WITH FRANKLIN ADJUSTABLE U.S.
GOVERNMENT SECURITIES FUND. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE
MEETING ABOUT WHICH THE PROXYHOLDERS WERE NOT AWARE PRIOR TO THE TIME OF THE
SOLICITATION, AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE
WITH THE VIEWS OF MANAGEMENT ON SUCH MATTERS. THE MANAGEMENT IS NOT AWARE OF
ANY SUCH MATTERS.

Dated:______________________________________

Signature___________________________________

Note: Please sign exactly as your name appears on the proxy. If signing for
estates, trusts or corporations, title or capacity should be stated. If
shares are held jointly, each holder must sign.

IMPORTANT: PLEASE SIGN IN YOUR PROXY. . . TODAY!
YOU ARE URGED TO DATE AND SIGN THE ATTACHED PROXY AND RETURN IT PROMPTLY.
THIS WILL HELP SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE
NOT RESPONDED.

PART B

STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND

Acquisition of the Assets of the
FRANKLIN ADJUSTABLE RATE SECURITIES FUND

By and in exchange for Shares of the
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND

This Statement of Additional Information (the "SAI") relates
specifically to the proposed delivery of substantially all of the assets of
the Franklin Adjustable Rate Securities Fund (the "Adjustable Rate Fund") for
shares of Franklin Adjustable U.S. Government Securities Fund.

This SAI consists of this Cover Page and the following documents. Each
of these documents is attached and is legally considered to be a part of this
SAI:

1. Statement of Additional Information of Franklin Adjustable
U.S. Government Securities Fund dated March 1, 1998.

2. Annual Report of Franklin Investors Securities Trust for the
fiscal year ended October 31, 1997.

This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated February __, 1999, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN or by writing to Franklin Adjustable Rate
Securities Fund, 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA
94403-7777, or to Franklin Adjustable Rate Adjustable USG Fund, 777 Mariners
Island Boulevard, P.O. Box 7777, San Mateo, CA 94403-7777. The date of this
SAI is February __, 1999.

Statement of Additional Information of Franklin Adjustable U.S. Government
Securities Fund and Franklin Adjustable Rate Securities Fund dated March
1, 1998, as supplemented 1/1/99.

SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999

Class A - Formerly Considered Class I

SUPPLEMENT DATED JANUARY 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN INVESTORS SECURITIES TRUST
(FIST2 - FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND)
DATED MARCH 1, 1998

The Statement of Additional Information is amended as follows:

I. As of January 1, 1999, the Fund's shares are considered Class A shares
for redemption, exchange and other purposes. Before January 1, 1999, the
Fund's shares were considered Class I shares.

All references in the Statement of Additional Information to Class I
shares are replaced with Class A.

II. On December 15, 1998, the Board approved a proposal to merge the
Adjustable Rate Securities Fund into the Adjustable U.S. Government
Fund, subject to shareholder approval. The investment objective of both
the Adjustable Rate Securities Fund and the Adjustable U.S. Government
Fund is to seek a high level of current income, consistent with lower
volatility of principal. The Board believes this proposed merger will
benefit shareholders.

It is anticipated that in early 1999 shareholders of the Adjustable Rate
Securities Fund will receive a proxy and proxy statement requesting
their votes on the proposed merger.

The Adjustable Rate Securities Fund was closed to new investors after
the close of business on December 15, 1998. If you were a shareholder of
record as of the close of business on December 15, 1998, you may
continue to add to your account, subject to your applicable minimum
additional investment amount, or buy additional shares through the
reinvestment of dividend or capital gain distributions.

Although you may redeem your shares, please keep in mind that if you
sell all the shares in your account, your account will be closed and you
will not be allowed to buy additional shares of the Adjustable Rate
Securities Fund or to reopen your account in that Fund.

III. The first sentence in the section "Additional Information on
Exchanging Shares," found under "How Do I Buy, Sell and Exchange
Shares?", is replaced with the following:

If you request the exchange of the total value of your Adjustable U.S.
Government Fund account, declared but unpaid income dividends and
capital gain distributions will be reinvested in the Fund and exchanged
into the new fund at Net Asset Value when paid.

IV. The following paragraph is added under "Miscellaneous Information":

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

Please keep this supplement for future reference.

FRANKLIN INVESTORS SECURITIES TRUST

FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND

STATEMENT OF ADDITIONAL INFORMATION

MARCH 1, 1998

777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN

TABLE OF CONTENTS

How Does the Fund Invest Its Assets?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Portfolio Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendices
Summary of Procedures to
Monitor Conflicts of Interest..............................
Description of Ratings......................................

- -----------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
- -----------------------------------------------------------------------

The Franklin Adjustable U.S. Government Securities Fund (the "Adjustable U.S.
Government Fund") and the Franklin Adjustable Rate Securities Fund (the
"Adjustable Rate Securities Fund") are diversified series of Franklin
Investors Securities Trust (the "Trust"), an open-end management investment
company. Each series may individually or together be referred to as the
"Fund(s)".

The Fund's investment objective is to seek a high level of current income,
consistent with lower volatility of principal. The Adjustable U.S. Government
Fund seeks to achieve its objective by investing all of its assets in shares
of the U.S. Government Adjustable Rate Mortgage Portfolio (the "Mortgage
Portfolio"). The Mortgage Portfolio in turn invests primarily in
adjustable-rate mortgage securities ("ARMS") or other securities
collateralized by or representing an interest in mortgages and that have
interest rates that reset at periodic intervals. The Mortgage Portfolio will
only invest in mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.

The Adjustable Rate Securities Fund seeks to achieve its objective by
investing all of its assets in shares of the Adjustable Rate Securities
Portfolio (the "Securities Portfolio"). The Securities Portfolio in turn
invests primarily in adjustable-rate securities collateralized by or
representing an interest in mortgages, including ARMS, issued or guaranteed
by private institutions or by the U.S. government, its agencies or
instrumentalities, and other adjustable-rate asset-backed securities
(collectively, "ARS"), which have interest rates that reset at periodic
intervals. The Securities Portfolio will only invest in securities rated at
least AA by S&P or Aa by Moody's, two nationally recognized statistical
rating agencies. The Securities Portfolio may also invest in unrated
securities if Advisers determines that they are of comparable quality to the
ratings above.

The Mortgage Portfolio and the Securities Portfolio may individually or
together be referred to as the "Portfolio(s)". The Portfolio is a series of
the Adjustable Rate Securities Portfolios. Its investment objective is the
same as the Fund's.

The Prospectus, dated March 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund.
For a free copy, call 1-800/DIAL BEN.

THIS 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 FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.

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

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

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

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

HOW DOES THE FUND INVEST ITS ASSETS?

The following provides more detailed information about some of the securities
the Portfolio may buy and its investment policies. You should read it
together with the section in the Prospectus entitled "How Does the Fund
Invest Its Assets?"

The investment policies of the Fund are substantially similar to those
described below for the corresponding Portfolio except, in all cases, the
Fund may pursue its policies by investing in an open-end management
investment company with the same investment objective and substantially
similar policies and restrictions as the Fund.

The Portfolio may invest without limit in obligations of the U.S. government
or of corporations chartered by Congress as federal government
instrumentalities. The Portfolio may buy securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, such as those issued
by the Government National Mortgage Association ("GNMA"). GNMA guarantees are
backed by the full faith and credit of the U.S. Treasury. No assurances,
however, can be given that the U.S. government will provide financial support
to the obligations of other U.S. government agencies or instrumentalities in
which the Portfolio may invest. Securities issued by these agencies and
instrumentalities are supported by the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. government to buy certain obligations of
an agency or instrumentality, or the credit of the agency or instrumentality.

Several of the Franklin Templeton Funds, including the Portfolio, are major
buyers of government securities. Advisers will seek to negotiate attractive
prices for government securities and pass on any savings from these
negotiations to shareholders in the form of higher current yields.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS ("REMICS"). To the extent indicated in the Prospectus,
the Portfolio may invest in CMOs, and the Securities Portfolio may also
invest in REMICs. CMOs and REMICs may be issued by governmental or
government-related entities or by private entities such as banks, savings and
loan institutions, private mortgage insurance companies, mortgage bankers,
and other secondary market issuers and are secured by pools of mortgages
backed by residential or various types of commercial properties. Privately
issued CMOs and REMICs include obligations issued by private entities that
are collateralized by (a) mortgage securities issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association, or
GNMA, (b) pools of mortgages that are guaranteed by an agency or
instrumentality of the U.S. government, or (c) pools of mortgages that are
not guaranteed by an agency or instrumentality of the U.S. government and
that may or may not be guaranteed by the private issuer. The Mortgage
Portfolio will not invest in privately issued CMOs or REMICs.

ASSET-BACKED SECURITIES. The Securities Portfolio may invest in asset-backed
securities. The rate of principal payments on asset-backed securities
generally depends on the rate of principal payments received on the
underlying assets. The payment rate may be affected by various economic and
other factors. Therefore, the yield may be difficult to predict, and actual
yield to maturity may be more or less than the anticipated yield to maturity.

The credit quality of most asset-backed securities depends primarily on the
credit quality of the underlying assets, how well the issuers of the
securities are insulated from the credit risk of the originator or affiliated
entities, and the amount of credit support provided to the securities.

Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of
failures by obligors on the underlying assets to make payments, asset-backed
securities may contain elements of credit support. Credit support falls into
two categories: (i) liquidity protection and (ii) protection against losses
from the default by an obligor on the underlying assets. Liquidity protection
refers to advances, generally provided by the entity administering the pool
of assets, to ensure that the receipt of payments due on the underlying pool
is timely. Protection against losses from the default by an obligor enhances
the likelihood of payments of the obligations on at least some of the assets
in the pool. This protection may be provided through guarantees, insurance
policies, or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction, or through a
combination of these approaches. The Securities Portfolio will not pay any
additional fees for credit support, although the existence of credit support
may increase the price of a security.

Examples of credit support arising out of the structure of the transaction
include "senior subordinated securities" (multiple class securities with one
or more classes that are subordinate to the other classes with respect to the
payment of principal and interest, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from
a portion of the payments on the underlying assets, are held in reserve
against future losses), and "over-collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceeds that
required to make payments on the securities and pay any servicing or other
fees). The degree of credit support provided is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated
could adversely affect the return on an investment in the securities.

FLOATERS. The Securities Portfolio may invest up to 5% of its total assets in
inverse floaters. Inverse floaters are instruments with floating or variable
interest rates that move in the opposite direction of short-term interest
rates and move at an accelerated speed. The Securities Portfolio may also
invest up to 5% of its total assets in super floaters. Super floaters are
instruments that float at a greater than 1 to 1 ratio with the London
Interbank Offered Rate ("LIBOR") and are used as a hedge against the risk
that LIBOR floaters become "capped" and can no longer float higher.

CASH AND CASH EQUIVALENTS. The Portfolio may retain its underlying assets in
cash and cash equivalents, including Treasury bills, commercial paper, and
short-term bank obligations such as CDs, bankers' acceptances, and repurchase
agreements. The Portfolio intends, however, to retain in cash only as much of
its underlying assets as is considered desirable or expedient under existing
market conditions.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval 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, whichever is less. The Fund MAY NOT:

1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 20% 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
securities of each Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of that Fund's
total assets at the time of the most recent loan. The entry into repurchase
agreements is not considered a loan for purposes of this restriction.

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,
except that all or substantially all of the assets of each Fund may be
invested in another registered investment company having the same investment
objective and policies of that Fund.

5. Invest more than 5% of the value of the gross assets of each Fund in the
securities of any one issuer, but this limitation does not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities, except that all or substantially all of the
assets of each Fund may be invested in another registered investment company
having the same investment objective and policies of that Fund.

6. Purchase the securities of any issuer which would result in owning more
than 10% of any class of the outstanding voting securities of such issuer,
except that all or substantially all of the assets of each Fund may be
invested in another registered investment company having the same investment
objective and policies of that Fund. To the extent permitted by exemptions
granted under the 1940 Act, the Funds may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates.

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

8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the
operation of a predecessor, except that, to the extent this restriction is
applicable, all or substantially all of the assets of each Fund may be
invested in another registered investment company having the same investment
objective and policies of that Fund.

9. Acquire, lease or hold real estate.

10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs.

11. Invest in companies for the purpose of exercising control or management,
except that, to the extent this restriction is applicable, all or
substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and
policies of that Fund.

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

13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the Funds from entering into repurchase
agreements or making borrowings, mortgages and pledges as permitted by
restriction #1 above.

The investment restrictions of the Portfolio are the same as the investment
restrictions of the Fund, except as indicated below and except as necessary
to reflect the policy of the Funds to invest all of their assets in the
shares of the Mortgage Portfolio or Securities Portfolio, as applicable.
The Mortgage Portfolio MAY NOT:

1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount
up to 20% of total asset value. The Portfolio will not purchase additional
investment securities while borrowings in excess of 5% of total assets are
outstanding.

2. Buy any securities on "margin" or sell any securities "short," except for
any delayed delivery or when-issued securities as described in the Prospectus.

3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by Advisers or its affiliates. (The Fund's
investment restriction in this respect is stated in far more detail.)

The Securities Portfolio MAY NOT:

1. Borrow money or mortgage or pledge any of its assets in an amount
exceeding 33 1/3% of the value of the Portfolio's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing was made.

2. Buy any securities on "margin" or sell any securities "short," except for
any delayed delivery or when-issued securities as described in this
registration statement.

3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or pursuant to an exemption therefrom, granted by
the SEC. To the extent permitted by exemptions which may be granted under the
1940 Act, the Portfolio may invest in shares of one or more money market
funds managed by Advisers or its affiliates. (The Fund's investment
restriction in this respect is stated in far more detail.)

The Adjustable U.S. Government Fund may also be subject to investment
limitations imposed by foreign jurisdictions in which the Fund sells its
shares.

If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the
Fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.

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

OFFICERS AND TRUSTEES

The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk(*).

POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE
YEARS

Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111

Trustee

President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.

Harris J. Ashton (65)
191 Clapboard Ridge
Greenwich, CT 06830

Trustee

Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 52 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).

S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945

Trustee

Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 54 of the investment companies in the
Franklin Templeton Group of Funds; and formerly Director, General Host
Corporation (nursery and craft centers).

Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016

Trustee

Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); formerly, chairman (1995-1997) and trustee
(1993-1997) of National Child Research Center, assistant to the President of
the United States and Secretary of the Cabinet (1990-1993), general counsel
to the United States Treasury Department (1989-1990) and counselor to the
Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989); and trustee or
director of 24 of the investment companies in the Franklin Templeton Group of
Funds.

*Edward B. Jamieson (49)
777 Mariners Island Blvd.
San Mateo, CA 94404

President and Trustee

Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of five of the investment companies in the Franklin
Templeton Group of Funds.

*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404

Chairman of the Board and Trustee

President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).

*Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Trustee

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

Frank W.T. LaHaye (68)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014

Trustee

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

Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817

Trustee

Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.

Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 56 of the investment
companies in the Franklin Templeton Group of Funds.

Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Chief Financial Officer

Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.

Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Secretary

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.

Charles E. Johnson (41)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091

Vice President

Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.

Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404

Treasurer and Principal Accounting Officer

Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.

Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President

Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.

The officers and Board members of the Trust are also officers and trustees of
the Adjustable Rate Securities Portfolios, except as follows: Edward B.
Jamieson, President and Trustee of the Trust, is not an officer or trustee of
the Adjustable Rate Securities Portfolios. Charles E. Johnson, Vice President
of the Trust, is President and Trustee of the Adjustable Rate Securities
Portfolios. The following trustee of the Adjustable Rate Securities
Portfolios is not an officer or trustee of the Trust.

POSITIONS AND OFFICES
WITH THE ADJUSTABLE RATE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS SECURITIES PORTFOLIOS DURING THE PAST FIVE
YEARS

William J. Lippman (73)
One Parker Plaza
Fort Lee, NJ 07024

Trustee

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

Mr. Lippman is considered an "interested person" of the Portfolios under the
1940 Act.

The tables above show the officers, Board members and the trustees of the
Adjustable Rate Securities Portfolios who are affiliated with Distributors
and Advisers. Nonaffiliated members of the Board are currently paid $925 per
month plus $925 per meeting attended. Nonaffiliated trustees of Adjustable
Rate Securities Portfolios are currently paid $50 per month plus $50 per
meeting attended. As shown above, the nonaffiliated Board members and
trustees of the Adjustable Rate Securities Portfolios also serve as directors
or trustees of other investment companies in the Franklin Templeton Group of
Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members
and trustees of the Adjustable Rate Securities Portfolios by the Trust, by
the Adjustable Rate Securities Portfolios, and by other funds in the Franklin
Templeton Group of Funds.
TOTAL FEES NUMBER OF
TOTAL FEES RECEIVED FROM BOARDS IN THE
TOTAL FEES RECEIVED THE FRANKLIN FRANKLIN
RECEIVED FROM THE TEMPLETON TEMPLETON GROUP
NAME FROM THE PORTFOLIOS* GROUP OF OF FUNDS ON
TRUST* FUNDS** WHICH EACH
SERVES***
- --------------------------------------------------------------------------------

Frank H. Abbott, III$21,275 $1,150 $165,937 28
Harris J. Ashton 21,275 1,150 344,642 52
S. Joseph Fortunato 21,275 1,150 361,562 54
David W. Garbellano+ 16,650 900 91,317 N/A
Edith Holiday++ 0 0 72,875 24
Frank W.T. LaHaye 20,350 1,100 141,433 27
Gordon S. Macklin 21,275 1,150 337,292 51

*For the fiscal year ended October 31, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members and trustees of Adjustable Rate Securities
Portfolios are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S.
based funds or series.
+Deceased, September 27, 1997.
++ELECTED TO THE BOARD JANUARY 15, 1998.

Nonaffiliated members of the Board and trustees of the Adjustable Rate
Securities Portfolios are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No
officer or Board member or trustee of the Adjustable Rate Securities
Portfolios received any other compensation, including pension or retirement
benefits, directly or indirectly from the Fund, the Adjustable Rate
Securities Portfolios, or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members and trustees of the Adjustable Rate
Securities Portfolios who are shareholders of 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 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 221
shares of the Adjustable U.S. Government Fund and 210 shares of the
Adjustable Rate Securities Fund, or less than 1% of the total outstanding
shares of each Fund's shares. Many of the Board members also own shares in
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.

INVESTMENT MANAGEMENT AND OTHER SERVICES

INVESTMENT MANAGER AND ADMINISTRATOR AND SERVICES PROVIDED. Advisers is the
investment manager of the Portfolio and is also the administrator of the
Fund. Advisers provides investment research and portfolio management
services, including the selection of securities for the Portfolio to buy,
hold or sell and the selection of brokers through whom the Portfolio's
portfolio transactions are executed. Advisers' activities are subject to the
review and supervision of the Board of Trustees of the Adjustable Rate
Securities Portfolios to whom Advisers renders periodic reports of the
Portfolio's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund
and the Portfolio.

Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Portfolio.
Similarly, with respect to the Portfolio, Advisers is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that Advisers and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisers is not obligated to refrain from investing in securities held
by the Portfolio or other funds that it manages. Of course, any transactions
for the accounts of Advisers and other access persons will be made in
compliance with the Portfolio's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."

MANAGEMENT AND ADMINISTRATION FEES. Under its management agreement, the
Portfolio pays Advisers a management fee equal to an annual rate of 40/100 of
1% of average daily net assets up to and including $5 billion; 35/100 of 1%
of net assets in excess of $5 billion up to and including $10 billion; 33/100
of 1% of net assets in excess of $10 billion up to and including $15 billion;
and 30/100 of 1% of net assets in excess of $15 billion. The fee is computed
at the close of business on the last business day of each month.

Advisers provides various administrative, statistical, and other services to
the Fund. Under its administration agreement, the Fund pays Advisers an
administration fee equal to an annual rate of 10/100 of 1% of the value of
the Fund's average daily net assets up to and including $5 billion; 9/100 of
1% of net assets in excess of $5 billion up to and including $10 billion; and
8/100 of 1% of net assets in excess of $10 billion. The fee is computed at
the close of business on the last business day of each month.

For the fiscal years ended October 31, 1995, 1996 and 1997, management fees
of the Mortgage Portfolio, before any advance waiver, totaled $2,456,413,
$1,891,159, and $1,487,256, respectively. For the same periods,
administration fees totaling $584,957, $462,426, and $363,663 were paid to
Advisers by the Adjustable U.S. Government Fund. For the same period,
management fees of the Securities Portfolio, before any advance waiver,
totaled $119,324, $89,969, and $96,727, respectively. Administration fees of
the Adjustable Rate Securities Fund, before any advance waiver, totaled
$19,936, $15,384, and $19,960. Under an agreement by Advisers to limit its
fees, the Mortgage Portfolio paid management fees totaling $968,077,
$1,090,876 and $830,598, the Securities Portfolio paid management fees
totaling $55,384, $41,378 and $51,453, and the Adjustable Rate Securities
Fund paid administration fees totaling $14,087, $15,384 and $19,960 for the
same periods.

MANAGEMENT AGREEMENT. The management agreement for the Portfolio is in effect
until February 28, 1999. It may continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a
vote of the Board of Trustees of the Adjustable Rate Securities Portfolios or
by a vote of the holders of a majority of the Portfolio's outstanding voting
securities, and in either event by a majority vote of the trustees of the
Adjustable Rate Securities Portfolios who are not parties to the management
agreement or interested persons of any such party (other than as members of
the Board of Trustees of the Adjustable Rate Securities Portfolios), cast in
person at a meeting called for that purpose. The management agreement may be
terminated without penalty at any time by the Board of Trustees of the
Adjustable Rate Securities Portfolios or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities on 60 days' written
notice to Advisers, or by Advisers on 60 days' written notice to the
Portfolio, and will automatically terminate in the event of its assignment,
as defined in the 1940 Act.

SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these
services per benefit plan participant Fund account per year may not exceed
the per account fee payable by the Fund to Investor Services in connection
with maintaining shareholder accounts.

CUSTODIAN. Investor Services, in its capacity as the transfer agent for the
Portfolio, effectively acts as the Fund's custodian and holds the Fund's
shares of the Portfolio on its books. Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, New York 10286, acts as custodian
of the Fund's cash, pending investment in shares of the Portfolio. Bank of
New York also acts as custodian of the securities and other assets of the
Portfolio. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.

AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended October 31, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended October 31, 1997.

HOW DOES THE PORTFOLIO BUY SECURITIES FOR ITS PORTFOLIO?

The Fund will not incur any brokerage or other costs in connection with its
purchase or redemption of shares of the Portfolio.

Since most purchases by the Portfolio are principal transactions at net
prices, the Portfolio incurs little or no brokerage costs. The Portfolio
deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Portfolio seeks to obtain prompt execution of orders at
the most favorable net price. Transactions may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.

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

Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Portfolio tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Portfolio, any portfolio securities tendered by the Portfolio
will be tendered through Distributors if it is legally permissible to do so.
In turn, the next management fee payable to Advisers will be reduced by the
amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.

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

During the fiscal years ended October 31, 1995, 1996 and 1997, the Portfolio
paid no brokerage commissions.

As of October 31, 1997, neither the Fund nor the Portfolio owned securities
of its regular broker-dealers.

HOW DO I BUY, SELL AND EXCHANGE SHARES?

ADDITIONAL INFORMATION ON BUYING SHARES

The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.

Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? -
Quantity
Discounts" in the Prospectus.

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

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

Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares 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%

OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may 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 to $2 million, plus 0.60% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.

Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. 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 dealer if shares are sold 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.

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

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

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

LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Fund shares, as described in the Prospectus. At any time within 90 days after
the first investment that you want to qualify for a reduced sales charge, you
may file with the Fund a signed shareholder application with the Letter of
Intent 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 on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, 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 on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
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 until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If 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
total purchases, less redemptions, exceed the amount specified under the
Letter and is an amount that 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 the purchases had been made at a single time. Upon 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 before 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.

If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.

REINVESTMENT DATE. Shares of the Adjustable U.S. Government Fund acquired
through the reinvestment of dividends will be purchased at the Net Asset
Value determined on the business day following the dividend record date
(sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount or value of
the shares acquired.

ADDITIONAL INFORMATION ON EXCHANGING SHARES

If you request the exchange of the total value of your Adjustable U.S.
Government Fund account, declared but unpaid income dividends and capital
gain distributions will be exchanged into the new fund and will be invested
at Net Asset Value. If you request the exchange of the total value of your
Adjustable Rate Securities Fund account, accrued but unpaid income dividends
and capital gain distributions will be reinvested in the Fund at the Net
Asset Value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund. Backup withholding and information
reporting may apply. Information regarding the possible tax consequences of
an exchange is included in the tax section in this SAI and in the Prospectus.

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

The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The sale of Fund shares to complete an
exchange will be effected at Net Asset Value at the close of business on the
day the request for exchange is received in proper form. Please see "May I
Exchange Shares for Shares of Another Fund?" in the Prospectus.

ADDITIONAL INFORMATION ON SELLING SHARES

SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.

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

The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the Fund receives notification
of the shareholder's death or incapacity.

THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.

REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.

GENERAL INFORMATION

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

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

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

All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.

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

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

HOW ARE FUND SHARES VALUED?

We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the Fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. 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 the Portfolio,
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 that 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 Advisers.

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

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

ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund earns income and gains on
its investment in the Portfolio. The Portfolio, in turn, earns income
generally in the form of interest, original issue, market, and acquisition
discount, and other income derived from its investments. This income,
together with the excess of any net short-term capital gain over net
long-term capital loss realized by the Portfolio, less expenses incurred in
the operation of the Portfolio, is paid to the Fund as ordinary dividend
income. The ordinary dividend income received from the Portfolio, less
expenses incurred in the operation of the Fund, constitute the Fund's net
investment income from which dividends may be paid to you. Any distributions
by the Fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS. The Fund may receive capital gain
distributions from the Portfolio in which it invests, consisting of the
excess of any net long-term capital gain over net short-term capital loss
realized by the Portfolio on sale or disposition of its underlying portfolio
securities. The Fund may also derive capital gains and losses in connection
with the sale of portfolio shares. Distributions derived from the excess of
net short-term capital gain over net long-term capital loss will be taxable
to you as ordinary income. Distributions derived from the excess of net
long-term capital gain over net short-term capital loss, including capital
gain distributions received from the Portfolio, will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in
the Fund. Any net short-term or long-term capital gains realized by the Fund
(net of any capital loss carryovers) generally will be distributed once each
year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income taxes on the Fund.

Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required
to report the capital gain distributions paid to you from gains realized on
the sale of portfolio securities using the following categories:

"28% RATE GAINS": gains resulting from securities the Fund sold after July
28, 1997, that it held for more than one year but not more than 18 months,
and securities the Fund sold before May 7, 1997, that it held for more than
one year. These gains will be taxable to individual investors at a maximum
rate of 28%.

"20% RATE GAINS": gains resulting from securities the Fund sold after July
28, 1997, that it held for more than 18 months, and under a transitional
rule, securities the Fund sold between May 7 and July 28, 1997, (inclusive)
that it held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.

The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000, and are held for more than 5 years. Taxpayers subject to tax at
the higher rates may also make an election for shares held on January 1,
2001, to recognize gain on their shares in order to qualify such shares as
qualified 5-year property.

The Fund will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to
include 1997 Act tax law changes, and may be obtained by calling Fund
Information. You should consult your personal tax advisor for questions
concerning your personal tax reporting.

CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November, or December and paid to you in January of the following
year will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The Fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.

TAXES

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the Fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such
case, the Fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the Fund's available earnings
and profits.

In order to qualify as a regulated investment company for tax purposes, the
Fund must meet certain specific requirements, including the following:

o The Fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Fund's
total assets, and, with respect to 50% of the Fund's total assets, no
investment (other than cash and cash items, U.S. government securities,
and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;

o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities, or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and

o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.

EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The Fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.

REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
Any loss incurred on the redemption or exchange of shares held for six months
or less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the Fund on those shares. The
holding periods and categories of capital gain that apply under the 1997 Act
are described above in the "DISTRIBUTIONS" section.

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

DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the Fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the Fund or in another fund in the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.

U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government. It is anticipated, however, that no portion of the Fund's
distributions will qualify for exemption from state and local personal income
tax as dividends paid from interest earned on direct obligations of the U.S.
government. Even if the Portfolio invests in direct obligations of the U.S.
government, the Fund does so only indirectly by investing in Portfolio
shares.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Fund's income is
attributable primarily to interest derived by the Portfolio, no portion of
the Fund's distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the Fund for the
most recent fiscal year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.

CONVERSION TRANSACTIONS. Gains realized by the Portfolio from transactions
that are deemed to be "conversion transactions" under the Code, and that
would otherwise produce capital gain, may be recharacterized as ordinary
income to the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Portfolio's expected return is
attributable to the time value of the Portfolio's net investment in such
transaction, and any one of the following criteria are met:

1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.

The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.

INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. The
Portfolio's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed-interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the Portfolio to recognize income and make
distributions to the Fund prior to its receipt of cash payments. Zero coupon
and delayed-interest bonds are normally issued at a discount and are
therefore generally subject to tax reporting as OID obligations. The
Portfolio is required to accrue as income a portion of the discount at which
these securities were issued, and to distribute such income each year (as
ordinary dividends) in order to maintain its qualification as a regulated
investment company and to avoid income reporting and excise taxes at the
Portfolio level. PIK bonds are subject to similar tax rules concerning the
amount, character, and timing of income required to be accrued by the
Portfolio. Bonds acquired in the secondary market for a price less than
their stated redemption price, or revised issue price in the case of a bond
having OID, are said to have been acquired with market discount. For these
bonds, the Portfolio may elect to accrue market discount on a current basis,
in which case the Portfolio will be required to distribute any such accrued
discount. If the Portfolio does not elect to accrue market discount into
income currently, gain recognized on sale will be recharacterized as ordinary
income instead of capital gain to the extent of any accumulated market
discount on the obligation.

DEFAULTED OBLIGATIONS. The Portfolio may be required to accrue income on
defaulted obligations and to distribute such income to the Fund even though
it is not currently receiving interest or principal payments on such
obligations. In order to generate cash to satisfy these distribution
requirements, the Portfolio may be required to dispose of its underlying
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Portfolio shares.

THE FUND'S UNDERWRITER

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

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

In connection with the offering of the Adjustable U.S. Government Fund's
shares, aggregate underwriting commissions for the fiscal years ended October
31, 1995, 1996 and 1997 were $121,256, $151,651, and $160,892, respectively.
In connection with the offering of the Adjustable Rate Securities Fund's
shares, aggregate underwriting commissions for the same periods were $12,586,
$24,584 and $95,835, respectively. After allowances to dealers, Distributors
retained $12,155, $19,401 and $22,069 for the Adjustable U.S. Government Fund
and $1,366, $3,268 and $14,072 for the Adjustable Rate Securities Fund in net
underwriting discounts and commissions and received $0, $35 and $0 in
connection with redemptions or repurchases of Adjustable U.S. Government Fund
shares for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.

THE RULE 12B-1 PLAN

The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to
Rule 12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum
of 0.25% per year of its average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of its shares.

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

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

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

To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the Fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.

The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the
Fund's outstanding shares. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.

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

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

For the fiscal year ended October 31, 1997, Distributors had eligible
expenditures of $951,379 and $60,668 for the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund, respectively, for advertising,
printing, and payments to underwriters and broker-dealers pursuant to the
plan, of which the Fund paid Distributors $891,507 and $40,208, respectively.

HOW DOES THE FUND MEASURE PERFORMANCE?

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

TOTAL RETURN

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

The average annual total return for the indicated periods ended October 31,
1997, was as follows:

INCEPTION ONE-YEAR FIVE-YEAR TEN-YEAR FROM
DATE PERIOD PERIOD PERIOD INCEPTION
Adjustable U.S.
Government Fund 10/20/8 74.72% 3.76% 5.75% 5.73%
Adjustable Rate
Securities Fund 12/26/9 14.32% 4.89% N/A 5.02%

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 each period at the end of each period

CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above.

The cumulative total return for the indicated periods ended October 31, 1997,
was as follows:

INCEPTION ONE-YEAR FIVE-YEAR TEN-YEAR FROM
DATE PERIOD PERIOD PERIOD INCEPTION
Adjustable U.S.
Government Fund 10/20/8 74.72% 20.29% 74.92% 74.92%
Adjustable Rate
Securities Fund 12/26/91 4.32% 26.98% N/A 33.13%

YIELD

CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated 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 Adjustable U.S. Government Fund's yield for the 30-day period ended
October 31, 1997, was 5.53%, and the Adjustable Rate Securities Fund's yield
for the same period was 5.68%.

This figure was obtained using the following SEC formula:

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

where:

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

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. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is usually computed
by annualizing the dividends paid per share during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gains, and is calculated over a
different period of time. The Adjustable U.S. Government Fund's current
distribution rate for the 30-day period ended October 31, 1997, was 5.69% and
the Adjustable Rate Securities Fund's current distribution rate for the same
period was 5.68%.

VOLATILITY

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

OTHER PERFORMANCE QUOTATIONS

The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative 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.

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

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

COMPARISONS

To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
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(R)
Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.

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

c) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis, Lipper - Mutual Fund Yield Survey, and Lipper - Mutual
Fund Indices - 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) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.

f) Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.

g) 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.

h) 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.

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

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

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

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

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

n) Other taxable investments, including CD's, money market deposit, checking
accounts, savings accounts, money market mutual funds, and repurchase
agreements.

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

p) Internal Business Communications Money Fund Report - industry averages for
seven-day annualized and compounded yields of taxable, tax-free and
government money funds.

q) Merrill Lynch Corporate Master Index - reflects Investment Grade (BB/Baa
or better) corporate debt. It represents a cross-section of industries with
maturities ranging from 1 to 15 years.

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

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

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

In assessing 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 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 Fund will continue its
performance as compared to these other averages.

From time to time, the Adjustable U.S. Government Fund may advertise offers
for the general public to attend free seminars where a guest speaker will
discuss the benefits of investing in Franklin's professionally managed
portfolio of U.S. government securities.

In addition, in promoting the sale of Fund shares, advertisements or
information for the Fund may also include quotes from Benjamin Franklin,
especially Poor Richard's Almanac.

The Adjustable U.S. Government Fund was the first investment company in the
U.S. to invest primarily in mortgage-backed securities based upon adjustable
rate mortgage obligations.

MISCELLANEOUS INFORMATION

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

The Fund is a member 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 49 years
and now services more than 2.9 million shareholder accounts. In 1992,
Franklin, a leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $221 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
120 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.

Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectus, shares of the Fund are generally
sold through Securities Dealers. Investment representatives of such
Securities Dealers are experienced professionals who can offer advice on the
type of investment suitable to your unique goals and needs, as well as the
types of risks associated with such investment.

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.

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

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

SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.

FINANCIAL STATEMENTS

The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended October 31, 1997,
including the auditors' report, are incorporated herein by reference.

USEFUL TERMS AND DEFINITIONS

1940 ACT - Investment Company Act of 1940, as amended

ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and
the Fund's administrator

BOARD - The Board of Trustees of the Trust

CD - Certificate of deposit

CLASS I - Certain funds in the Franklin Templeton Funds offer multiple
classes of shares. The different classes have proportionate interests in the
same portfolio of investment securities. They differ, however, primarily in
their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.

CODE - Internal Revenue Code of 1986, as amended

DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter

FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries

FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds

INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent

IRS - Internal Revenue Service

LETTER - Letter of Intent

MOODY'S - Moody's Investors Service, Inc.

NASD - National Association of Securities Dealers, Inc.

NYSE - New York Stock Exchange

OFFERING PRICE - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 2.25%.

PROSPECTUS - The prospectus for the Fund dated March 1, 1998, as may be
amended from time to time

RESOURCES - Franklin Resources, Inc.

SAI - Statement of Additional Information

S&P - Standard & Poor's Corporation

SEC - U.S. Securities and Exchange Commission

U.S. - United States

WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.

APPENDICES

SUMMARY OF PROCEDURES TO
MONITOR CONFLICTS OF INTEREST

The Board of Trustees of the Adjustable Rate Securities Portfolios, on behalf
of its series ("master funds"), and the Board on behalf of the Fund ("feeder
fund") (both of which, except in the case of three trustees, are composed of
the same individuals) recognize that there is the potential for certain
conflicts of interest to arise between the master fund and the feeder fund in
this format. These potential conflicts of interest could include, among
others: the creation of additional feeder funds with different fee
structures; the creation of additional feeder funds that could have
controlling voting interests in any pass-through voting which could affect
investment and other policies; a proposal to increase fees at the master fund
level; and any consideration of changes in fundamental policies at the master
fund level that may or may not be acceptable to a particular feeder fund.

In recognition of the potential for conflicts of interest to develop, the
Board of Trustees of Adjustable Rate Securities Portfolios and the Board of
the Trust have adopted certain procedures under which i) management of the
master fund and the feeder fund will, on a yearly basis, report to each
board, including the independent members of each board, on the operation of
the master/feeder fund structure; ii) the independent members of each board
will have ongoing responsibility for reviewing all proposals at the master
fund level to determine whether any proposal presents a potential for a
conflict of interest and to the extent any other potential conflicts arise
before the normal annual review, they will act promptly to review the
potential conflict; iii) if the independent members of each board determine
that a situation or proposal presents a potential conflict, they will request
a written analysis from the master fund management describing whether the
apparent potential conflict of interest will impede the operation of the
constituent feeder fund and the interests of the feeder fund's shareholders;
and iv) upon receipt of the analysis, the independent members of each board
shall review the analysis and present their conclusion to the full boards.

If no actual conflict is deemed to exist, the independent board members will
recommend that no further action be taken. If the analysis is inconclusive,
they may submit the matter to and be guided by the opinion of independent
legal counsel issued in a written opinion. If a conflict is deemed to exist,
they may recommend one or more of the following actions: i) suggest a course
of action designed to eliminate the potential conflict of interest; ii) if
appropriate, request that the full boards submit the potential conflict to
shareholders for resolution; iii) recommend to the full boards that the
affected feeder fund no longer invest in its designated master fund and
propose either a search for a new master fund in which to invest the feeder
fund's assets or the hiring of an investment manager to manage the feeder
fund's assets in accordance with its objectives and policies; iv) recommend
to the full boards that a new board be recommended to shareholders for
approval; or v) recommend such other action as may be considered appropriate.

DESCRIPTION OF RATINGS

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

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

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

Ba - 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
to 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.

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

Annual Report of Franklin Investors Securities Trust for the fiscal year
ended October 31, 1997.

Annual Report

October 31, 1997

Franklin Investors Securities Trust

Franklin Global Government Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund

CONTENTS

Shareholder Letter 1
Fund Reports
Franklin Global Government
Income Fund 4
Franklin Short-Intermediate
U.S. Government
Securities Fund 17
Franklin Convertible
Securities Fund 28
Franklin Adjustable
U.S. Government
Securities Fund 39
Franklin Equity
Income Fund 46
Franklin Adjustable
Rate Securities Fund 57
Financial Highlights &
Statement of Investments 63
Financial Statements 90
Notes to
Financial Statements 99
Report of Independent
Accountants 107
Tax Information 108

CELEBRATING 50 YEARS

This year marks 50 years of business for Franklin Templeton. Over these years,
the mutual fund industry has experienced profound changes in technology,
regulations and customer expectations. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest around the globe. We thank you for your past
support and look forward to serving your investment needs in the years ahead.

(PICTURE OMITTED)
Charles B. Johnson
Chairman
Franklin Investors Securities Trust

SHAREHOLDER LETTER

Dear Shareholder:

It's a pleasure to bring you Franklin Investors Securities Trust's annual
report for the period ended October 31, 1997.

Trick or Treat?
During this one-year reporting period, benign inflation and declining
interest rates led to accelerating economic activity. Many financial assets
rose in value, with returns surpassing historical levels, and the Dow Jones(R)
Industrial Average (the Dow) reveled in its meteoric rise. However, October
is -- historically -- a month of volatility, and this year was no exception.
During Halloween week, the mighty roar of the Asian "Tigers" dwindled to a
sickly meow as most markets experienced severe valuation declines. The effect
was widespread: In the U.S., the Dow tumbled a record 554 points, to 7161.15
on October 27.

The decline probably was enough to keep the Federal Reserve Board from acting
to raise interest rates in the near term, but not enough to deter investors.
The morning after saw the market gain back almost half of its losses.
Although the Dow continued to seesaw throughout the remainder of that week,
it closed at 7442.08 on October 31, 1997 -- an impressive 1400 points above
its level of 6029.38 a year earlier.

The Tale of the Tortoise and the Hare
We can't promise that a positive economic environment will continue. It is
important to remember, then, that markets correct -- in our opinion, it is
desirable for them to do so. Consequently, investor concern about volatility
and the market's direction prompts us to comment on the importance of having
your own long-term investment strategy. And when you consider your investment
strategy, are you a tortoise or a hare?

We all know that familiar story: The tortoise won the race because he had a
plan and stuck to it, not allowing the hare's fast start to distract him.
Much like the tortoise, successful investors historically have achieved good
results through setting goals, diversifying their assets, and having
patience. Smart investors think like the tortoise. They know mutual fund
investments are long term, so daily market fluctuations and short-term
volatility have minimal impact on their overall investment goals. They
understand that patience and discipline are keys to successful investing.
Remember, it's time -- not timing -- that makes the difference.

We encourage you to speak with your investment representative about your
financial goals. He or she can address concerns about volatility and help you
stay focused on the long term and diversify your investments. Mutual funds
offer a level of diversification that is almost impossible for individual
investors to achieve on their own.

Regardless of the market's direction, Franklin Templeton's disciplined
investment strategy remains the same: All of our portfolio managers are
dedicated to providing shareholders like you with careful selection and
constant professional supervision. As always, we appreciate your support,
welcome your questions and comments, and look forward to serving your
investment needs in the years ahead.

Sincerely,

Charles B. Johnson
Chairman
Franklin Investors Securities Trust

FRANKLIN GLOBAL
GOVERNMENT INCOME FUND

Your Fund's Objective: Seeks a high level of current income consistent with
preservation of capital, with capital appreciation as a secondary
consideration, through a portfolio of domestic and foreign debt securities.1

1. The risks of investing in a non-diversified global fund, such as currency
fluctuation and increased vulnerability to adverse economic, political or
regulatory developments, are described in the fund's prospectus.

We are pleased to bring you this annual report of the Franklin Global
Government Income Fund, which covers the 12 months ended October 31, 1997.
The fund delivered a +4.31% one-year total return, as discussed in the
Performance Summary on page 8.

General Economic Review
Global bond markets finished the reporting period with mixed results after
experiencing severe volatility along the way. For example, 10-year U.S.
Treasury bond yields fell between 6% and 7%, with each 1% rise or fall in
yield resulting in about a 6% to 7% change in bond value. This volatility was
primarily due to fears of inflation and higher interest rates in the U.S.,
the struggle in Europe to establish a common currency, and the appreciation
of the U.S. dollar relative to most other currencies. Toward the end of the
fund's reporting period, the dollar's appreciation became the most
significant cause for volatility in global bond markets, greatly
overshadowing other factors. A loss of confidence in the currencies of
several East Asian countries caused many investors to liquidate their
holdings in these countries and seek safety through U.S. dollar investments
in what was widely termed the "East Asian currency crisis."

Currency Movements
The single largest event in world currency markets over the reporting period
had little direct impact on the fund. Although many East Asian countries
suffered severe currency devaluations against the U.S. dollar, the fund holds
no investments in these countries and avoided many of the effects of this
crisis. In other markets, activity in the U.S. significantly influenced
foreign bond and currency markets. At the beginning of the one-year period,
European interest rates were relatively low, with many markets experiencing
short-term rates considerably lower than U.S. rates. Attracted by higher
rates in the U.S., foreign investors purchased U.S. dollar assets, and the
dollar began a long, steady appreciation against most foreign currencies.
During the period, for example, the U.S. dollar appreciated 13.79% against
the German mark, from 1.5173 to 1.7265 marks to the dollar. This meant that
the value of the fund's German bond holdings declined by 12.12% in U.S.
dollar terms.

However, the decline in many foreign currencies relative to the U.S. dollar
was not exclusively the result of events in the United States. Domestic
conditions in Europe, particularly events surrounding the formation of a
common European currency, also were contributing factors. In attempting to
meet requirements for membership in the European Monetary Union, the French,
Italian, and Spanish governments cut their budgets aggressively, leading to
declines in European interest rates and depreciation of most European
currencies relative to the U.S. dollar. Although prospects for a common
currency generally improved during the period under review, a heightened
sense of uncertainty remained, and many European currencies experienced
significant volatility as the process unfolded.

Portfolio Notes
Responding to what we considered to be buying opportunities, largely in the
German market, we increased the fund's European bond holdings from 38.0% on
October 31, 1996 to 41.8% of total net assets on October 31, 1997, while
selling modest amounts of securities from Denmark, Ireland, Spain, and the
United Kingdom. We also shifted assets into Latin America from other U.S.
dollar-denominated holdings, such as Australia. Our holdings of Latin
American securities increased, during the period, from 12.4% to 19.2% of
total net assets, with the largest increases occurring in our Brazilian and
Venezuela holdings. Our focus on what we believe to be the strong underlying
strengths of the Latin American bond market, enabled us to avoid most of the
ill effects of the East Asian currency crisis, which afflicted many of the
emerging markets in Asia.

The fund's average maturity was 5.9 years at the end of the period, compared
with 5.6 years at the beginning. During the period, we slightly reduced the
average maturity of our holdings from industrial countries, while modestly
increasing the average maturity of Latin American holdings.

In our opinion, the greatest risk to the bond values of those countries the
fund invests in is expanding economic growth. Should this trend continue,
global bond markets could become more volatile over the intermediate term
because such growth could increase the risk of scarcity in certain key
resources, particularly labor, leading to wage and price increases. Because
central banks generally raise interest rates in an effort to slow growth to
non-inflationary levels, such a scenario could result in higher interest
rates and lower bond prices. However, controlled interest rate increases
before inflation occurs could lead to greater long-term, global financial
stability.

Regarding global currencies, we believe that the U.S. dollar's fundamentals
at the end of the reporting period continued to support its value against
currencies of most European countries experiencing high labor costs and high
unemployment. Unless this situation changes, we would expect to maintain our
emphasis on U.S. dollar-denominated assets.

Please remember, this discussion reflects our views and opinions as of
October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly which may affect our strategies
and portfolio holdings. Although historic performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.

Sincerely,

Thomas J. Dickson
Portfolio Manager
Franklin Global Government Income Fund

Franklin Global Government Income Fund
Country Distribution

As a Percentage of Total Net Assets

Country 10/31/9610/31/97

United States 24.7% 24.3%
Germany 2.2% 12.3%
Italy 12.4% 11.7%
Canada 11.9% 8.5%
Spain 7.4% 7.0%
Argentina 4.9% 6.0%
Brazil 3.1% 5.8%
Sweden 3.0% 5.7%
Mexico 4.5% 5.0%
Australia 9.5% 4.2%
United Kingdom 7.5% 3.3%
Venezuela 0.0% 2.2%
New Zealand 3.1% 2.0%
Denmark 4.2% 1.8%
Panama 0.0% 0.2%
Irish Republic 1.2% 0.0%
South Africa 0.4% 0.0%

PERFORMANCE SUMMARY

Class I
Franklin Global Government Income Fund - Class I share price, as measured by
net asset value, decreased 24.0 cents, from $8.65 on October 31, 1996, to
$8.41 on October 31, 1997.

During the reporting period, the fund paid distributions of 60.0 cents
($0.60) per share in dividend income, and a special year-end distribution of
2.0 cents ($0.02) per share. Distributions will vary depending on income
earned by the fund and any profits realized from the sale of securities in
the portfolio. Past distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 5.0 cents ($0.05)
per share and the maximum offering price of $8.78 on October 31, 1997, your
fund's distribution rate was 6.83%.

The fund reported a cumulative total return of +4.31% for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

The graph on page 10 compares the performance of the fund's Class I shares,
since inception, with that of the JP Morgan Global Government Bond Index. As
the graph illustrates, the fund's performance has closely followed that of JP
Morgan's index.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Global Government Income Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

Franklin Global
Government Income Fund
Class I
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
Total 60.0 cents

GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Global Government Income Fund - Class I

Periods ended 10/31/97
Since
Inception
1-Year 5-Year (3/15/88)
Cumulative Total Return1 4.31% 43.95% 103.15%
Average Annual Total Return2 (0.12)% 6.63% 7.09%
Distribution Rate3 6.83%
30-Day Standardized Yield4 5.43%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the current, maximum
4.25% initial sales charge.
3. Distribution rate is based on an annualization of October's 5.0 cents per
share monthly dividend and the maximum offering price of $8.78 on October 31,
1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total return.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

Class II
Franklin Global Government Income Fund - Class II share price, as measured by
net asset value, decreased 24.0 cents, from $8.65 on October 31, 1996, to
$8.41 on October 31, 1997.

During the reporting period, the fund paid distributions of 55.31 cents
($0.5531) per share in dividend income, and a special year-end distribution
of 2.0 cents ($0.02) per share.

Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 4.64 cents
($0.0464) per share and the offering price of $8.49 on October 31, 1997, your
fund's distribution rate was 6.56%.

The fund reported a cumulative total return of +3.74% for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include sales charges.

The graph on page 13 compares the performance of the fund's Class II shares
since inception, with that of the JP Morgan Global Government Bond Index. As
the graph illustrates, the fund's performance has closely followed that of JP
Morgan's index.

Franklin Global
Government Income Fund
Class II
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 4.68 cents
December 4.68 cents
January 4.58 cents
February 4.58 cents
March 4.58 cents
April 4.58 cents
May 4.58 cents
June 4.58 cents
July 4.61 cents
August 4.61 cents
September 4.61 cents
October 4.64 cents
Total 55.31 cents

GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Global Government Income Fund - Class II
Periods ended 10/31/97
Since
Inception
1-Year (5/1/95)
Cumulative Total Return1 3.74% 23.42%
Average Annual Total Return2 1.64% 8.09%
Distribution Rate3 6.56%
30-Day Standardized Yield4 4.87%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and includes the 1.0% initial
sales charge and 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of October's 4.64 cents per
share monthly dividend and the offering price of $8.49 on October 31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

Franklin Global Government
Income Fund
Advisor Class
Dividend Distributions

1/2/97 - 10/31/97

Dividend
Month per Share
January 5.07 cents
February 5.07 cents
March 5.07 cents
April 5.07 cents
May 5.07 cents
June 5.07 cents
July 5.07 cents
August 5.07 cents
September 5.07 cents
October 5.07 cents
Total 50.70 cents

Advisor Class

Franklin Global Government Income Fund - Advisor Class share price, as
measured by net asset value, decreased 30.0 cents, from $8.71 on January 2,
1997 (day of commencement of sales), to $8.41 on October 31, 1997.

During the reporting period, the fund paid distributions of 50.70 cents
($0.5070) per share in dividend income. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.

Based on an annualization of October's monthly dividend of 5.07 cents
($0.0507) per share and the fund's net asset value price of $8.41 on October
31, 1997, your fund's distribution rate was 7.23%.

The fund reported a cumulative total return of +2.49% for the ten-month
period ended October 31, 1997. Cumulative total return measures the change in
value of an investment, assuming reinvestment of all distributions.

The graph on page 16 compares the performance of the fund's Advisor Class
shares with that of the JP Morgan Global Government Bond Index. For the
periods prior to January 2, 1997, the fund performance is that of the fund's
Class I shares, excluding the initial sales charge, but including Class I
expenses. As the graph illustrates, the fund's performance has closely
followed that of JP Morgan's index.

GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Global Government Income Fund - Advisor Class

Periods ended 10/31/97
Since Inception
of the Fund
1-Year* 5-Year* (3/15/88)*
Cumulative Total Return1 4.63% 44.39% 103.78%
Average Annual Total Return1 4.63% 6.69% 7.12%
Distribution Rate2 7.23%
30-Day Standardized Yield3 5.53%

*Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class
does not have sales charges nor Rule 12b-1 plans. Performance quotations have
been calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
maximum initial sales charge, but including the effect of Class I expenses,
including Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures
reflect actual Advisor Class performance including the deduction of all
charges and fees applicable only to that class. Since January 2, 1997
(commencement of sales), the cumulative total return of Advisor Class shares
was 2.49%.
1. Cumulative total return measures the change in value of an investment over
the indicated periods. Average annual total return represents the average
annual change in value of an investment over the specified periods.
2. Distribution rate is based on an annualization of October's 5.07 cents per
share monthly dividend and the fund's net asset value price of $8.41 on
October 31, 1997.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND

Your Fund's Objective: Seeks to provide investors with a high level of
current income, while seeking to preserve shareholders' capital, by investing
primarily in U.S. government securities with maturities between two and five
years.

Franklin Short-Intermediate U.S. Government Securities Fund generated a
+5.88% cumulative total return for the 12-month period ended October 31,
1997, as discussed in the Performance Summary on page 20.

During the reporting period, economic conditions in the U.S. were extremely
favorable for investors. Economic growth in the fourth quarter of 1996 began
on a slow note, but by the end of the year and into the first quarter of
1997, it increased. Interest rates -- which had declined between the third and
fourth quarters of 1996 -- reversed course and nudged higher. Investors feared
that a tight labor market, combined with strong growth, would continue to
push up wages, eventually leading to higher prices for consumers. To no one's
surprise, the Federal Reserve Board (the Fed) bumped the federal funds rate
to 5.50% from 5.25% at the Federal Open Market Committee meeting in March,
citing heightened inflation risk for this quarter-point increase. The Fed's
hope to slow economic growth and inflationary pressures occurred as second
quarter growth declined relative to the first quarter's; however, indications
are that the economy is regaining momentum because of strong consumer
spending in the third quarter of 1997.

The fund's total return for the year, however, was below that of the
unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index, which ended at
6.83% for the same period.1 Unlike the fund, the Lehman Brothers Index does
not include any management expenses. This fact, coupled with the fund's
conservative investment strategy, led to the relative underperformance.

1. One cannot invest directly in an index.

Overall, the fund's returns for the year are almost exclusively from coupon
income. On October 31, 1997, compared with October 31, 1996, short-term
interest rates, short-term U.S. Treasury note prices and the fund's share
value remained virtually unchanged. However, high volatility throughout the
reporting period caused us to monitor the Fed's activities closely as we
attempted to position the portfolio to avoid interest rate risk. We continue
to maintain the portfolio's weighted average maturity very close to our
minimum of two years.

When the Fed raised the benchmark for the federal funds rate in March, we
already were investing 35% of the fund's assets in overnight investments. We
maintained a relatively high cash position until the summer, when favorable
inflation news and continued improvements with lowering the budget deficit
made it clear the Fed was unlikely to raise rates further. Accordingly, we
reduced the fund's position in overnight investments, from approximately 15%
of total net assets in June, to less than 2% by the end of September.

Although the Fed currently maintains a bias towards tightening monetary
policy, we believe it is unlikely that they will raise interest rates in the
very near term. For this reason, 98% of the portfolio remains invested in
U.S. Treasury notes.

Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly and our strategies and portfolio
holdings may be different at this time. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.

Looking forward, we remain committed to our disciplined, value-oriented
approach, which has historically produced consistent and favorable long-term
results. We thank you for your participation in the Franklin
Short-Intermediate U.S. Government Securities Fund and look forward to
serving you in the future. Please feel free to contact us with any questions
or comments.

Sincerely,

David Capurro
Portfolio Manager
Franklin Short-Intermediate U.S. Government Securities Fund

PERFORMANCE SUMMARY

Class I
Franklin Short-Intermediate U.S. Government Securities Fund - Class I share
price, as measured by net asset value, increased 1.0 cent, from $10.28 on
October 31, 1996, to $10.29 on October 31, 1997.

During the reporting period, the fund paid distributions of 57.60 cents
($0.5760) per share in dividend income. Dividends will vary, depending on the
fund's income, and past distributions are not indicative of future trends.

Based on an annualization of the current monthly dividend of 4.8 cents
($0.048) per share and the maximum offering price of $10.53 on October 31,
1997, your fund's distribution rate was 5.47%.

The fund reported a cumulative total return of +5.88% for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

The graph on page 22 compares the performance of the fund's Class I shares,
for the past 10 years, with that of the Lehman Brothers Short U.S. Treasury
1-5 Year Index** and the Consumer Price Index (CPI). As the graph
illustrates, the fund's performance has exceeded the increase in the CPI,
which means your investment returns have surpassed the rate of inflation, a
primary goal of any investment. The fund also closely followed the benchmark
index.

**The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to five
years.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Short-Intermediate U.S. Government
Securities Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.

Franklin Short-Intermediate U.S. Government Securities Fund
Class I
Dividend Distributions

11/1/96 - 10/31/97*

Dividend
Month per Share
November 4.80 cents
December 4.80 cents
January 4.80 cents
February 4.80 cents
March 4.80 cents
April 4.80 cents
May 4.80 cents
June 4.80 cents
July 4.80 cents
August 4.80 cents
September 4.80 cents
October 4.80 cents
Total 57.60 cents

*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
day you purchased your shares and any account activity during the month.
Income distributions and total return calculations include all accrued income
earned by the fund during the reporting period.

GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Short-Intermediate
U.S. Government Securities Fund - Class I
Periods ended 10/31/97
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
Cumulative Total Return1 5.88% 29.42 %97.06% 103.80%
Average Annual Total Return2 3.46% 4.82% 6.77% 6.75%
Distribution Rate3 5.47%
30-Day Standardized Yield4 4.97%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the maximum 2.25%
initial sales charge.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $10.53 on October
31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. Past expense reductions by the fund's manager increased the
fund's total returns.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

Franklin Short-Intermediate U.S. Government Income Fund
Advisor Class
Dividend Distributions

1/2/97 - 10/31/97*

Dividend
Month per Share
January 4.55 cents
February 4.86 cents
March 4.86 cents
April 4.86 cents
May 4.84 cents
June 4.86 cents
July 4.88 cents
August 4.88 cents
September 4.88 cents
October 4.89 cents
Total 48.36 cents

Advisor Class

Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
share price, as measured by net asset value, increased 6.0 cents, from $10.24
on January 2, 1997 (day of commencement of sales), to $10.30 on October 31,
1997.

During the reporting period, the fund paid distributions of 48.36 cents
($0.4836) per share in dividend income. Dividends will vary, depending on the
fund's income, and past distributions are not indicative of future trends.

Based on an annualization of the current monthly dividend of 4.89 cents
($0.0489) per share and the fund's net asset value price of $10.30 on October
31, 1997, your fund's distribution rate was 5.70%.

The fund reported a cumulative total return of +5.45% for the ten-month
period ended October 31, 1997. Cumulative total return measures the change in
value of an investment, assuming reinvestment of all distributions.

The graph on page 26 compares the performance of the fund's Advisor Class
shares with that of the Lehman Brothers Short U.S. Treasury 1-5 Year Index**
and the Consumer Price Index (CPI). For the periods prior to January 2, 1997,
the fund performance is that of the Fund's Class I shares, excluding the
initial sales charge, but including Class I expenses. As the graph
illustrates, the fund's performance has exceeded the increase in the CPI,
which means your investment returns have surpassed the rate of inflation, a
primary goal of any investment. The fund also closely followed the benchmark
index.

**The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to five
years.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Short-Intermediate U.S. Government
Securities Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.

GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Short-Intermediate
U.S. Government Securities Fund - Advisor Class
Periods ended 10/31/97
Since Inception
of the Fund
1-Year* 5-Year* 10-Year*(4/15/87)*
Cumulative Total Return1 5.92% 29.46% 97.13% 103.87%
Average Annual Total Return1 5.92% 5.30% 7.02% 6.99%
Distribution Rate2 5.70%
30-Day Standardized Yield3 5.17%

*Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class
does not have sales charges nor Rule 12b-1 plans. Performance quotations have
been calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
maximum initial sales charge, but including the effect of Class I expenses,
including Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures
reflect actual Advisor Class performance including the deduction of all
charges and fees applicable only to that class. Since January 2, 1997
(commencement of sales), the cumulative total return of Advisor Class shares
was 5.45%.
1. Cumulative total return measures the change in value of an investment over
the indicated periods. Average annual total return represents the average
annual change in value of an investment over the specified periods.
2. Distribution rate is based on an annualization of the current 4.89 cent
per share monthly dividend and the fund's price of $10.30 on October 31, 1997.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN CONVERTIBLE
SECURITIES FUND

Your Fund's Objective: Seeks to maximize total return consistent with
reasonable risk through a portfolio of convertible securities.

Franklin Convertible Securities Fund - Class I produced a +22.47% cumulative
total return for the one-year period ended October 31, 1997, as discussed in
the Performance Summary on page 32.

Our investment strategy is to purchase convertible securities that we believe
have strong total return potential and favorable risk/return profiles. We
look for securities that allow us to capture a significant portion of the
underlying equity's price appreciation while attempting to limit our exposure
to potential price declines. To identify investments that meet our criteria,
we screen the convertible security universe, narrowing our options to those
companies we believe have superior business prospects and attractive
valuation levels.

During the one-year reporting period, benign inflation and declining interest
rates led to accelerating economic activity, higher employment, and tighter
capacity utilization, resulting in increased earnings for economically
sensitive companies operating at above-average levels. We purchased the
securities of companies benefiting from this cyclical upswing, including
Roper Industries Inc., Atchison Castings, CNF Transportation Corp.,
International Paper, and Atlantic Coast Airlines.

In addition, we invested in the economically sensitive real estate market,
where a relatively tight supply/demand balance permitted above-average
pricing flexibility. Positions in this sector include FelCor Suites Hotels,
Host Marriott, Sholodge, Hilton Hotels, and Burnham Pacific. We also own the
convertibles of real estate investment trusts (REITs) OMEGA Healthcare
Investors, Inc. and Macerich Co.

In the past, we have held significant positions in technology companies
(14.8% of total net assets on October 31, 1997) whose products allow their
customers to lower costs, reduce inventory, decrease time-to-market, and
improve customer satisfaction. Although the logic seems simple,
implementation has been difficult. For example, Dovatron International Inc.
(DII) Group, our largest position, had problems increasing earnings, but our
patience with this security was rewarded. DII turned in an outstanding
performance during the reporting period, with its stock price rising from the
$90s to over $170 before declining in profit taking.

We also had exposure to a variety of industries in the midst of
consolidation, which resulted in the issuance of many securities that helped
the fund's performance over the fiscal year. For example, companies may
acquire small, inefficient operators in highly fragmented industries and
implement labor-saving technology, centralized purchasing, and reduce
overhead. In doing so, a consolidator can increase its revenues, profit
margins and earnings per share. Some of our positions within the
media/broadcasting and services sectors that benefited from such activity
were Triathlon Broadcasting and Veterinary Centers of America. We found
additional consolidation-based investment opportunities in the oil and energy
sectors, where we own Seacor Holdings Inc., Parker Drilling, McDermott
International Inc., and Halter Marine.

Franklin Convertible Securities Fund
Franklin Convertible
Securities Fund
Portfolio Breakdown

10/31/96 vs. 10/31/97

Portfolio

Sector 10/31/96 10/31/97
Convertible
Bonds 63.0% 57.8%
Convertible
Preferred Stocks 20.5% 23.0%
Corporate Bonds 3.1% 0.0%
Common Stocks
& Warrants 3.0% 10.1%
Cash &
Short-Term
Equivalents 10.4% 9.1%

Franklin Convertible
Securities Fund
Top Five Holdings

10/31/97

Company

(Type of Security) % of Total
INDUSTRY Net Assets
Dovatron (DII) Group
(Convertible Bond)
ELECTRONICS 3.12%
SPACEHAB
(Convertible Bond)
AEROSPACE/DEFENSE 2.03%
WBKSTRYPES
(Convertible Preferred Stock)
FINANCIAL SERVICES 1.91%
Rite Aid
(Convertible Bond)
RETAIL 1.74%
ESCMedical
(Convertible Bond)
HEALTH CARE 1.74%

For a complete list of portfolio holdings, please see page 74 of this report.

Our Argentina-based positions also contributed to the fund's positive
performance, posting strong returns as the Argentine economy continued its
emergence from recession. However, during the 12-month period, we trimmed our
holdings to half of our original allocation as the shares of YPF, Telefonica
de Argentina, and Banco de Galicia, SA experienced price appreciation.

Since many of our holdings rose in price over the reporting period -- and
because we strive to maintain a strong upside/downside profile in the fund --
portfolio turnover was high. We actively took profits and invested in the new
issue marketplace where some of the most attractively valued securities could
be found. We purchased new issues from Costco, Rite Aid, Technomatix, Tower
Automotive, Assisted Living Concepts, and the previously mentioned Halter
Marine, among others.

Most disappointing to us has been the performance of our U.S. Diagnostic
convertible bonds, for which we had high hopes. The company had both legal
and accounting problems that, in turn, interfered with its fundamental
prospects and stock price performance. Still, industry dynamics remain
attractive and we believe U.S. Diagnostic is preparing for renewed growth
after a year of retrenchment.

Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly and our strategies and portfolio
holdings may be diferent at this time. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.

Looking forward, we see investment potential in the Asian markets that have
been rocked by currency speculation and devaluation, political stonewalling,
and slowing growth. This environment generally breeds opportunity, and we
will be searching for those companies and securities that meet our stringent
investment criteria. We thank you for your participation in the Franklin
Convertible Securities Fund and look forward to serving you in the future.
Please feel free to contact us with any questions or comments.

Sincerely,

Edward B. Jamieson
Portfolio Manager

PERFORMANCE SUMMARY

Class I
Franklin Convertible Securities Fund - Class I share price, as measured by
net asset value, increased $1.29, from $13.45 on October 31, 1996, to $14.74
on October 31, 1997.

During the reporting period, the fund paid distributions of 60.0 cents
($0.60) per share in dividend income and 90.1 cents ($0.901) per share in
capital gains, of which 72.5 cents ($0.725) represented short-term gains and
17.6 cents ($0.176) represented long-term gains.

Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 5.0 cents ($0.05)
per share and the maximum offering price of $15.43 on October 31, 1997, your
fund's distribution rate was 3.89%.

The fund reported a +22.47% cumulative total return for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

The graph on page 34 compares the performance of the fund's Class I shares,
for the past 10 years, with that of the Goldman Sachs Convertible 100 Bond
Index.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Convertible Securities Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

Franklin Convertible
Securities Fund
Class I
Dividend Distributions

11/1/96 - 10/31/97

GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Convertible Securities Fund - Class I

Periods ended 10/31/97
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
Cumulative Total Return1 22.47% 115.74% 275.51% 241.84%
Average Annual Total Return2 16.99% 15.55% 13.62% 11.87%
Distribution Rate3 3.89%
30-Day Standardized Yield4 3.02%
Value of $10,000 Investment5 $11,699 $20,600 $35,850 $32,630
1993 1994 1995 1996 1997
Fiscal Year Total Return6 28.26% 2.17% 15.18% 16.71% 22.47%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the current, maximum
4.5% initial sales charge.
3. Distribution rate is based on an annualization of October's 5.0 cent per
share monthly dividend and the maximum offering price of $15.43 on October
31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the initial sales charge.
6. Total return represents the change in value of an investment and exclude
sales charges.
Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total return.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

Franklin Convertible
Securities Fund
Class II
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 4.32 cents
December 4.32 cents
January 4.13 cents
February 4.13 cents
March 4.13 cents
April 4.22 cents
May 4.22 cents
June 4.22 cents
July 4.23 cents
August 4.23 cents
September 4.23 cents
October 4.08 cents
Total 50.46 cents

Class II

Franklin Convertible Securities Fund - Class II share price, as measured by
net asset value, increased $1.27, from $13.41 on October 31, 1996, to $14.68
on October 31, 1997.

During the reporting period, the fund paid distributions of 50.46 cents
($0.5046) per share in dividend income and 90.1 cents ($0.901) per share in
capital gains, of which 72.5 cents ($0.725) represented short-term gains and
17.6 cents ($0.176) represented long-term gains.

Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 4.08 cents
($0.0408) per share and the offering price of $14.83 on October 31, 1997,
your fund's distribution rate was 3.30%.

The fund reported a +21.54% cumulative total return for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include sales charges.

The graph on page 38 compares the performance of the fund's Class II shares,
since inception, with that of the Goldman Sachs Convertible 100 Bond Index.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Convertible Securities Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.

GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Convertible Securities Fund - Class II

Periods ended 10/31/97
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 21.54% 38.03%
Average Annual Total Return2 19.29% 16.20%
Distribution Rate3 3.30%
30-Day Standardized Yield4 2.36%
Value of $10,000 Investment5 $11,929 $13,667

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the maximum 1.0%
initial sales charge and 1.0% contingent deferred sales charge, applicable to
shares redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of October's 4.08 cent per
share monthly dividend and the offering price of $14.83 on October 31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charges.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND

Your Fund's Objective: Seeks to provide a high level of current income
consistent with lower volatility of principal by investing in a portfolio
consisting primarily of adjustable-rate, U.S. government agency-guaranteed,
mortgage-backed securities.1

1. Individual securities in the underlying portfolio, but not shares of the
fund, are guaranteed by the U.S. government, its agencies or
instrumentalities, as to the timely payment of principal and interest. Yield
and share price are not guaranteed and will fluctuate with market conditions.

Franklin Adjustable U.S. Government Securities Fund enjoyed a positive year,
posting a cumulative total return of +7.18% for the 12-month period ended
October 31, 1997, as discussed in the Performance Summary on page 43.

Your fund's underlying portfolio consists primarily of Adjustable Rate
Mortgages (ARMs). It also contains other securities linked to or
collateralized by mortgages issued or guaranteed by the U.S. government, its
agencies or instrumentalities.2 These include obligations of the Federal
National Mortgage Association (FNMA or Fannie Mae), the Federal Home Loan
Mortgage Corporation (FHLMC or Freddie Mac) and the Government National
Mortgage Association (GNMA or Ginnie Mae). Such securities retain high credit
quality.

2. The fund invests a substantial amount of its assets in the U.S. Government
Adjustable Rate Portfolio, whose investment objective is the same as the
fund's. Individual securities in the underlying portfolio, but not shares of
the fund, are guaranteed by the U.S. government, its agencies or
instrumentalities, as to the timely payment of interest and principal.

GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT

At the close of the period, your fund's distribution rate was 5.69%. As shown
in the graph above, this rate remained competitive, slightly outperforming
the yield of the one-year Treasury bill. Of course, the value and interest
rate of Treasuries, if held to maturity, are fixed, and principal is
guaranteed. In contrast, the investment return and share price of Franklin
Adjustable U.S. Government Securities Fund will fluctuate with market
conditions. In addition, monthly payments of agency mortgage securities
include both principal and interest, while semiannual payments of U.S.
Treasury securities represent interest only.

The fund's fiscal year was characterized by strong economic growth. Concerned
that this growth would cause increased inflation, the Federal Reserve Board
raised the federal funds rate by 25 basis points in March, from 5.25% to
5.50%. However, this increased inflation never materialized, leading to lower
interest rates and higher bond prices.

While interest rates remain at levels similar to a year ago, the differential
between long-term and short-term rates has narrowed. For example, the
difference between 30-year and 2-year Treasuries has contracted by roughly 30
basis points since last fall. Mortgage securities, and adjustable rate
mortgages (ARMs) in particular, benefited from this yield tightening.

ARMs' coupons reset at periodic intervals to reflect current rates, and are
subject to annual caps which limit how much their coupons can change. ARM
price movements in the portfolio remained modest and ARM caps were not in any
danger of being reached. However, after being fairly dormant earlier in the
year, ARM prepayments, which limit the appreciation potential of these
securities, increased with the overall decline in interest rates.

In an effort to reduce the negative impact ARM prepayments can have on the
underlying portfolio, we maintained an overweighting in seasoned,
nonconvertible ARMs, which are less likely to experience high levels of
prepayments. These securities have performed extremely well over the past
year. In addition, our investment choices remained with those securities that
adjust rapidly, such as reflected in the Constant Maturity Treasury Index
(CMT). We remain underweighted in ARMs tied to the Eleventh District Cost of
Funds Index (COFI), which tend to lag market movements.

We anticipate an economy with moderate growth and no sharp inflationary
rises. This should produce stable-to-slightly higher interest rates with
continued low interest-rate volatility. We are attempting to position the
fund to perform well in this environment. At the same time, we are striving
to keep portfolio turnover low to reduce transaction costs. Our main concern
continues to be stability of principal, while maintaining a yield competitive
with other short-term alternatives.

Looking forward, we remain committed to our disciplined, value-oriented
approach, which has historically produced consistent and favorable long-term
results. We thank you for your participation in the Franklin Adjustable U.S.
Government Securities Fund and look forward to serving you in the future.
Please feel free to contact us with any questions or comments.

Sincerely,

Jack Lemein
Portfolio Manager
Franklin Adjustable U.S. Government Securities Fund

PERFORMANCE SUMMARY

Franklin Adjustable U.S. Government Securities Fund's share price, as
measured by net asset value, increased 11.0 cents, from $9.37 on October 31,
1996, to $9.48 on October 31, 1997.

During the reporting period, the fund paid distributions of 54.3 cents
($0.543) per share in dividend income. Dividends will vary depending on
income earned by the fund, and past distributions are not indicative of
future trends.

Based on an annualization of October's monthly dividend of 4.6 cents ($0.046)
per share and the maximum offering price of $9.70 on October 31, 1997, your
fund's distribution rate was 5.69%.

The fund reported a cumulative total return of +7.18% for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

The graph on page 44 compares the performance of the fund's shares, for the
past 10 years, with that of the Lehman Brothers Short U.S. Government 1-2
Year Index and the Payden & Rygel 6-Month CD Index.*

*Six-month certificates of deposit total returns are an average of the top
rates paid by major New York banks. CDs are insured by the FDIC up to
$100,000 and have principal and interest rate guarantees. The unmanaged
Lehman Brothers Short U.S. Government 1-2 Year Index invests in U.S.
government securities with maturities from one to two years.

Franklin Adjustable
U.S. Government
Securities Fund
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 4.4 cents
December 4.4 cents
January 4.4 cents
February 4.4 cents
March 4.5 cents
April 4.6 cents
May 4.6 cents
June 4.6 cents
July 4.6 cents
August 4.6 cents
September 4.6 cents
October 4.6 cents
Total 54.3 cents

GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Adjustable U.S. Government Securities
Fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one
cannot invest in it directly.

Franklin Adjustable U.S. Government Securities Fund
Periods ended 10/31/97
Since
Inception
1-Year 5-Year (10/20/87)
Cumulative Total Return1 7.18% 23.09% 78.94%
Average Annual Total Return2 4.72% 3.76% 5.73%
Distribution Rate3 5.69%
30-Day Standardized Yield4 5.53%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the maximum 2.25%
initial sales charge.
3. Distribution rate is based on an annualization of October's 4.6 cent per
share monthly dividend and the maximum offering price of $9.70 on October 31,
1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, has agreed in advance to waive a portion of its
fees, which reduces expenses and increases distribution rate, yield, and
total return to shareholders. Without these reductions, the fund's total
return and distribution rate would have been somewhat lower, and the yield
for the period would have been 5.34%. The fee waiver may be discontinued at
any time upon notice to the fund's Board of Trustees.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN EQUITY INCOME FUND

Your Fund's Objective: Seeks to maximize total return, emphasizing high,
current income and capital appreciation, consistent with reasonable risk,
through a portfolio of common stocks with above-average yields.

Over the past year, the U.S. economy continued its steady course of moderate
growth, with Gross Domestic Product (GDP) growing at just under 3.5%. Despite
the economy's seventh consecutive year of expansion, inflation has remained
surprisingly tame. In fact, the Consumer Price Index (CPI) declined from an
annual growth rate of 3.4% in the fourth quarter of 1996, to a current rate
of 2.2%, the lowest level since 1965.1 Following these economic trends,
corporate profits continued their climb and stock market valuations rose to
the expensive end of their historical ranges.

1. Source: Bloomberg, 10/31/97.

As a result, our search for both attractively valued and above-average
yielding stocks became a somewhat more difficult task. We responded
proactively by seeking investment opportunities in all sectors and markets
that met our investment criteria. Reversing the trend seen through most of
1996, large capitalization stocks modestly outperformed small capitalization
issues, and traditional value stocks registered improved relative performance
compared with growth stocks. The recent performance of the Franklin Equity
Income Fund, which invests in large cap value stocks, reflects this shift.
The fund's Class I shares generated a +24.40% cumulative total return for the
one-year period ended October 31, 1997, as discussed in the Performance
Summary on page 51. We believe this is largely a result of our disciplined,
value-oriented investment philosophy.

The fund seeks to invest in stocks that are selling at attractive prices
according to such measurements as relative dividend yield, book value,
revenues, and normalized earnings. We often find such stocks in companies
that appear to be fundamentally strong, but have experienced temporary
earnings disappointments, or those in industries with uncertain prospects for
near-term earnings growth.

We continue to believe that stocks of various utilities, especially electric
companies, represent an investment opportunity as many companies are selling
at their most attractive relative valuations in over two decades. Lack of
meaningful earnings growth in recent years and uncertainty regarding future
industry deregulation have resulted in the industry's underperformance
against the general stock market averages over the last several years.
Although the fund's electric utility stocks registered disappointing relative
returns during the fiscal year, we took advantage of the sector's weakness by
investing in the stocks of MidAmerica Energy, Northern States Power, Entergy
and the convertible preferred stock of CMS Energy, all of which are
high-quality, low-cost electricity producers. Conversely, we eliminated
investments in weaker-positioned electric utilities that did not meet earlier
expectations. Among those positions sold were PECO Energy, Public Service
Enterprises, and Unicom. Investments in electric utilities represented 11.2%
of the fund's total net assets on October 31, 1997.

Franklin Equity Income Fund
Top 10 Holdings
10/31/97

Company % of Total
INDUSTRY Net Assets
Atlantic Richfield Co.
OIL 2.86%
Penney (J.C.) Co., Inc.
RETAIL 2.14%
Bell Atlantic
TELEPHONE UTILITIES 2.13%
Southern New England
Telecommunications Corp.
TELEPHONE UTILITIES 2.12%
Texaco, Inc.
OIL 1.92%
U.S. West Communications
Group
TELEPHONE UTILITIES 1.77%
Chevron Crop.
OIL 1.77%
FelCor Suite Hotels, Inc.
REIT 1.74%
Equity Residential
Properties Trust
REIT 1.69%
YPF, SA, ADR
OIL 1.65%

For a complete list of portfolio holdings, please see page 84 of this report.
Franklin Equity Income Fund
Top Five Investment Sectors

10/31/96 vs. 10/31/97

10/31/96
Oil Integrated 15.8%
Electric Utilities 14.7%
Telecommunications 10.2%
Financial Services 6.5%
REITs 5.8%

10/31/97

Oil Integrated 14.1%
Electric Utilities 11.2%
Telecommunications 9.3%
Financial Services 8.4%
REITs 7.7%

Stocks of telephone companies also represent a significant portion of the
portfolio, accounting for 9.3% of the fund's total net assets at fiscal year
end. The overall industry weighting did not alter significantly during the
year, but we did make several changes. Most notably, we initiated a position
in AT&T amid price weakness, and realized profits in two of our foreign-based
investments -- Hong Kong Telecom and British Telecom, which had met price
targets.

Energy stocks remain the fund's largest investment sector, at 14.1% of total
net assets on October 31, 1997. The combination of strong cash flows,
attractive current fundamentals, and above-average dividend yields made many
stocks in this industry ideal investment candidates for our portfolio.
Moreover, we believe future prospects are also favorable, as worldwide demand
for oil and gas -- relative to exploration and production activity -- should
lead to strong prices and profit growth for the industry's leaders. Energy
investments represent four of the fund's top 10 positions and include
Atlantic Richfield, Texaco, YPF Sociedad Anonima, and Chevron.

Overall, the weighting of our financial services investments (banks,
insurance and real estate companies) rose during the year, and we found
attractive investments in this sector. New bank positions included Beneficial
Corp. and the convertible preferred stock of National Australia Bank.
Insurance stocks, despite having favorable industry fundamentals and
attractive valuations, have underperformed banks in recent years. Among the
fund's new insurance positions was Mid Ocean Ltd., a Bermuda-based
property/casualty company which offered a 5.6% dividend yield and sold at
less than 10 times 1997 estimated earnings at time of purchase. Investments
in real estate companies, primarily REITs, were up to 7.7% of total net
assets on October 31, 1997, compared with 5.8% a year ago. New investments
and additions to existing positions during the year included industry-leading
REITs such as Equity Office Properties, Equity Residential, FelCor Suites
Hotels, and Simon DeBartolo. On the other hand, we took profits in
foreign-based Christiania Bank and domestic-based savings bank Great Western
Financial, which was subject to an acquisition bid during the year. We also
sold our investment in Catellus Corp., a California-based real estate owner
and developer, as it reached its price target during the period, and
eliminated Oasis, a Las Vegas-based apartment REIT that did not meet
expectations.

Among consumer staple stocks, we continued to realize profits in some of the
pharmaceutical positions we initiated in 1993 and 1994 during uncertainty
over health care reform. We eliminated the fund's holding of American Home
Products and reduced Bristol Myers Squibb in the last six months, both at
gains in excess of 100% of cost. On the other hand, an investment opportunity
in Pharmacia & Upjohn arose as a result of the stock's recent price declines.
The stock had come under pressure as a result of recent earnings
disappointment that we believe will not adversely affect the company's
favorable, long-term growth prospects. Pharmacia & Upjohn is a position we
owned in the past, and we were able to reinvest in the stock at a 25% lower
price than when we sold it in 1996. Investment changes among food and
household products stocks were also made during the reporting period. We
found buying opportunities in Heinz and Cadbury Schweppes based on their
relative valuations and recent restructurings that were designed to lead to
improved share value. Also, we initiated a new position in Amway Asia, which
had declined in price by over 40% from its high earlier in the year. Although
the company is suffering from the effects of currency woes in Indonesia and
Malaysia, not to mention an economic slowdown in China, its longer-term
prospects appear excellent.

Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly and our strategies and portfolio
holdings may be diferent at this time. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.

Looking forward, we remain committed to our disciplined, value-oriented
approach, which has historically produced consistent and favorable long-term
results. We thank you for your participation in the Franklin Equity Income
Fund and look forward to serving you in the future. Please feel free to
contact us with any questions or comments.

Sincerely,

Frank Felicelli
Portfolio Manager

PERFORMANCE SUMMARY

Class I

Franklin Equity Income Fund - Class I share price, as measured by net asset
value, increased $2.90, from $16.41 on October 31, 1996, to $19.31 on October
31, 1997.

During the reporting period, the fund paid distributions of 62.4 cents
($0.6240) per share in dividend income, a special 1996 year-end distribution
of 2.1 cents ($0.021) per share, and 32.5 cents ($0.325) per share in
long-term capital gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 5.2 cents ($0.052)
per share, and the maximum offering price of $20.22 on October 31, 1997, your
fund's distribution rate was 3.09%.

The fund reported a +24.40% cumulative total return for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

The graph on page 52 compares the performance of the fund's Class I shares,
since inception, with that of the unmanaged Standard and Poor's 500 Stock
Index, and the Consumer Price Index (CPI). As you can see, the fund's
performance exceeded the increase in the CPI, which means your investment
returns have surpassed the rate of inflation, a primary goal of any
investment.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Equity Income Fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance, and one cannot invest in it
directly.

Franklin Equity Income Fund
Class I
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 5.20 cents
December 5.20 cents
January 5.20 cents
February 5.20 cents
March 5.20 cents
April 5.20 cents
May 5.20 cents
June 5.20 cents
July 5.20 cents
August 5.20 cents
September 5.20 cents
October 5.20 cents
Total 62.40 cents

GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Equity Income Fund - Class I
Periods ended 10/31/97
Since
Inception
1-Year 5-Year (3/15/88)

Cumulative Total Return1 24.40% 107.24% 251.79%
Average Annual Total Return2 18.83% 14.64% 13.41%
Distribution Rate3 3.09%
30-Day Standardized Yield4 3.05%
Value of $10,000 Investment5 $11,883 $19,799 $33,601
1993 1994 1995 1996 1997
Fiscal Year Total Return6 24.11% 1.95% 14.17% 15.32% 24.40%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the current, maximum
4.5% initial sales charge.
3. Distribution rate is based on an annualization of October's 5.2 cent per
share monthly dividend and the maximum offering price of $20.22 on October
31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the initial sales charge.
6. Total return represents the change in value of an investment and exclude
sales charges.
Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total returns.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

Franklin Equity Income Fund
Class II
Dividend Distributions

11/1/96 - 10/31/97

Dividend
Month per Share
November 4.38 cents
December 4.38 cents
January 4.07 cents
February 4.07 cents
March 4.07 cents
April 4.49 cents
May 4.49 cents
June 4.49 cents
July 4.12 cents
August 4.12 cents
September 4.12 cents
October 3.95 cents
Total 50.75 cents

Class II

Franklin Equity Income Fund - Class II share price, as measured by net asset
value, increased $2.88, from $16.38 on October 31, 1996, to $19.26 on October
31, 1997.

During the reporting period, the fund paid distributions of 50.75 cents
($0.5075) per share in dividend income, a special 1996 year-end distribution
of .57 cent ($0.0057) per share, and 32.5 cents ($0.325) per share in
long-term capital gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.

Based on an annualization of October's monthly dividend of 3.95 cents
($0.0395) per share, plus a 12b-1 differential adjustment of .06 cents
($0.0006), and the offering price of $19.45 on October 31, 1997, your fund's
distribution rate was 2.47%.

The fund reported a +23.40% cumulative total return for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include sales charges.

The graph on page 56 compares the performance of the fund's Class II shares,
since inception, with that of the unmanaged Standard and Poor's 500 Stock
Index, and the Consumer Price Index (CPI). As you can see, the fund's
performance exceeded the increase in the CPI, which means your investment
returns have surpassed the rate of inflation, a primary goal of any
investment.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Equity Income Fund's had been applied to
the index, its performance would have been lower. Please remember that an
index is simply a measure of performance, and one cannot invest in it
directly.

GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Equity Income Fund - Class II

Periods ended 10/31/97
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 23.40% 40.39%
Average Annual Total Return2 21.15% 17.16%
Distribution Rate3 2.47%
30-Day Standardized Yield 42.39%

Value of $10,000 Investment5 $12,115 $13,903

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the maximum 1.0%
initial sales charge and 1.0% contingent deferred sales charge, applicable to
shares redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of October's 3.95 cent per
share monthly dividend, plus a 12b-1 differential adjustment, and the
offering price of $19.45 on October 31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
5. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN ADJUSTABLE
RATE SECURITIES FUND

Your Fund's Objective: Seeks to provide a high level of current income
consistent with lower volatility of principal than a fund that invests in
fixed-rate securities, by investing in a portfolio of adjustable-rate
securities.

Franklin Adjustable Rate Securities Fund enjoyed a positive year, posting a
cumulative total return of +6.75% for the 12-month period ended October 31,
1997, as discussed in the Performance Summary on page 60.

At the close of the period, your fund's distribution rate was 5.68%. As shown
in the graph on page 58, this rate remained competitive, slightly
outperforming the yield of the one-year Treasury bill. Of course, the value
and interest rate of Treasuries, if held to maturity, are fixed, and
principal is guaranteed. In contrast, the investment return and share price
of Franklin Adjustable Rate Securities Fund will fluctuate with market
conditions.

The fund's fiscal year was characterized by strong economic growth. Concerned
that this growth would cause increased inflation, the Federal Reserve Board
raised the federal funds rate by 25 basis points in March, from 5.25% to
5.50%. However, increased inflation never materialized, leading to lower
interest rates and higher bond prices.

GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT

We anticipate an economy with moderate growth and no sharp inflationary
rises. This should produce stable-to-slightly higher interest rates with
continued low interest-rate volatility. We are attempting to position the
fund to perform well in this environment. At the same time, we are striving
to keep portfolio turnover low to reduce transaction costs. Our main concern
continues to be stability of principal while maintaining a yield competitive
with other short-term alternatives.

Please remember, this discussion accurately reflects our views and opinions
as of October 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly and our strategies and portfolio
holdings may be diferent at this time. Although historic performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.

Looking forward, we remain committed to our disciplined, value-oriented
approach, which has historically produced consistent and favorable long-term
results. We thank you for your participation in the Franklin Adjustable Rate
Securities Fund and look forward to serving you in the future. Please feel
free to contact us with any questions or comments.

Sincerely,

Jack Lemein
Portfolio Manager
Franklin Adjustable Rate Securities Fund

PERFORMANCE SUMMARY

Franklin Adjustable Rate Securities Fund's share price, as measured by net
asset value, increased 9.0 cents, from $9.87 on October 31, 1996, to $9.96 on
October 31, 1997.

During the reporting period, the fund paid distributions of 55.8605 cents
($0.558605) per share in dividend income. Dividends will vary depending on
income earned by the fund, and past distributions are not indicative of
future trends.

Based on an annualization of the current monthly dividend of 4.9423 cents
($0.049423) per share and the maximum offering price of $10.19 on October 31,
1997, your fund's distribution rate was 5.68%.

The fund reported a cumulative total return of +6.75% for the one-year period
ended October 31, 1997. Cumulative total return measures the change in value
of an investment, assuming reinvestment of all distributions, and does not
include the sales charge.

Franklin Adjustable
Rate Securities Fund
Dividend Distributions

11/1/96 - 10/31/97*
Dividend
Month per Share
November 4.6403 cents
December 5.0142 cents
January 4.4881 cents
February 4.5415 cents
March 4.6330 cents
April 4.4653 cents
May 3.9798 cents
June 4.6550 cents
July 4.8916 cents
August 4.4980 cents
September 5.1114 cents
October 4.9423 cents
Total 55.8605 cents

The graph on page 62 compares the performance of the fund's shares, since
inception, with that of the Lehman Brothers Short U.S. Government 1-2 Year
Index and the Payden & Rygel 6-Month CD Index.** As you can see, though the
fund underperformed the Lehman Brother's Index, it slightly outperformed the
Payden & Rygel Index.

**Six-month certificates of deposit total returns are an average of the top
rates paid by major New York banks. CDs are insured by the FDIC up to
$100,000 and have principal and interest rate guarantees. The unmanaged
Lehman Brothers Short U.S. Government 1-2 Year Index invests in U.S.
government securities with maturities from one to two years.

Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management
fees to cover salaries of security analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need to have cash on hand
to redeem shares. In addition, the performance shown for the fund includes
the maximum initial sales charge, all fund expenses and account fees. If
operating expenses such as Franklin Adjustable Rate Securities Fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot
invest in it directly.

GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT

Franklin Adjustable Rate Securities Fund

Periods ended 10/31/97
Since
Inception
1-Year 5-Year (12/26/91)
Cumulative Total Return1 6.75% 29.89% 36.19%
Average Annual Total Return2 4.32% 4.89% 5.02%
Distribution Rate3 5.68%
30-Day Standardized Yield4 5.68%

1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the specified periods and reflects the maximum 2.25%
initial sales charge.
3. Distribution rate is based on an annualization of the 4.9423 cent per
share monthly dividend and the maximum offering price of $10.19 on October
31, 1997.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1997.
Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, has agreed in advance to waive a portion of its
fees, which reduces expenses and increases distribution rate, yield, and
total return to shareholders. Without these reductions, the fund's total
return and distribution rate would have been somewhat lower, and the yield
for the period would have been 5.62%. The fee waiver may be discontinued at
any time upon notice to the fund's Board of Trustees.
All total return calculations assume reinvestment of dividends and any
capital gains at net asset value. Your investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when
you sell your shares.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Global Government Income Fund

Class I
--------------------------------------------------------
Year Ended October 31,
--------------------------------------------------------
1997 1996 1995 1994 1993***
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $8.65 $8.31 $8.06 $9.33 $8.61
--------------------------------------------------------
Income from investment operations:
Net investment income ............................ .60 .61 .67 1.30 .58
Net realized and unrealized gain (loss) .......... (.22) .33 .29 (1.81) .72
--------------------------------------------------------
Total from investment operations .................. .38 .94 .96 (.51) 1.30
--------------------------------------------------------
Less distributions from:
Net investment income ............................ (.61) (.60) (.64) (.08) (.58)
In excess of net investment income ............... (.01) -- -- -- --
Net realized gains ............................... -- -- -- (.08) --
Tax return of capital ............................ -- -- (.07) (.60) --
--------------------------------------------------------
Total distributions ............................... (.62) (.60) (.71) (.76) (.58)
--------------------------------------------------------
Net asset value, end of year ...................... $8.41 $8.65 $8.31 $8.06 $9.33
========================================================
Total return* ..................................... 4.31% 11.80% 12.65% (5.72%) 15.14%

Ratios/supplemental data
Net assets, end of year (000's) ................... $118,348 $137,626 $164,970 $187,204 $195,627
Ratios to average net assets:
Expenses ......................................... .90% .85% .96% .89% .77%**
Net investment income ............................ 6.97% 7.68% 8.29% 8.54% 6.74%**
Portfolio turnover rate ........................... 193.30% 139.71% 103.49% 80.69% 67.36%

Class II
--------------------------------------
Year Ended October 31,
--------------------------------------
1997 1996 1995***
--------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................................... $8.65 $8.31 $8.03
--------------------------------------
Income from investment operations:
Net investment income .................................................. .55 .56 .31
Net realized and unrealized gain (loss) ................................ (.22) .33 .30
--------------------------------------
Total from investment operations ........................................ .33 .89 .61
--------------------------------------
Less distributions from:
Net investment income .................................................. (.56) (.55) (.30)
In excess of net investment income ..................................... (.01) -- --
Tax return of capital .................................................. -- -- (.03)
--------------------------------------
Total distributions ..................................................... (.57) (.55) (.33)
--------------------------------------
Net asset value, end of year ............................................ $8.41 $8.65 $8.31
======================================
Total return* ........................................................... 3.74% 11.19% 7.09%

Ratios/supplemental data
Net assets, end of year (000's) ......................................... $4,473 $3,700 $1,193
Ratios to average net assets:
Expenses ............................................................... 1.46% 1.40% 1.54%**
Net investment income .................................................. 6.43% 7.17% 7.41%**
Portfolio turnover rate ................................................. 193.30% 139.71% 103.49%

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***For the period May 1, 1995 (effective date) to October 31, 1995.

Advisor Class
-----------------
1997***
-----------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................................................... $8.71
-----------------
Income from investment operations:
Net investment income ....................................................................... .49
Net realized and unrealized (loss) .......................................................... (.28)
-----------------
Total from investment operations ............................................................. .21
-----------------
Less distributions from:
Net investment income ....................................................................... (.49)
-----------------
In excess of net investment income .......................................................... (.02)
Total distributions .......................................................................... (.51)
-----------------
Net asset value, end of period ............................................................... $8.41
=================
Total return* ................................................................................ 2.49%

Ratios/supplemental data
Net assets, end of period (000's) ............................................................ $741
Ratios to average net assets:
Expenses** .................................................................................. .82%
Net investment income** ..................................................................... 7.08%
Portfolio turnover rate ...................................................................... 193.30%

*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (effective date) to October 31, 1997.

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997

PRINCIPAL
Franklin Global Government Income Fund AMOUNT* VALUE
<S> <C> <C>
Government Bonds 95.9%

Argentina 6.0%
Republic of Argentina

10.95%, 11/01/99 ...................................................... $ 3,215,000 $ 3,335,563
8.75%, 5/09/02 ........................................................ 3,100,000 2,821,000
8.375%, 12/20/03 ...................................................... 510,000 458,363
11.375%, 1/30/17 ...................................................... 325,000 321,344
9.75%, 9/19/27 ........................................................ 600,000 513,750
-------------
7,450,020
-------------
Australia 4.2%
Government of Australia, 9.50%, 8/15/03 ............................... 6,255,000 AUD 5,219,164
-------------
Brazil 5.8%
Brazil C-Bond, 8.00%, 4/15/14 ......................................... 3,044,498 2,138,978
Government of Brazil
6.938%, 4/15/09 ....................................................... 3,950,000 2,848,938
10.125%, 5/15/27 ...................................................... 1,700,000 1,348,100
Series L, cvt., FRN, 6.938%, 4/15/12 .................................. 1,250,000 871,875
-------------
7,207,891
-------------
Canada 8.5%
Government of Canada
10.50%, 7/01/00 ....................................................... 4,675,000 CAD 3,784,516
10.50%, 3/01/01 ....................................................... 5,000,000 CAD 4,149,892
10.00%, 5/01/02 ....................................................... 3,005,000 CAD 2,553,616
-------------
10,488,024
-------------
Denmark 1.9%
Kingdom of Denmark
9.00%, 11/15/00 ....................................................... 3,385,000 DKK 570,987
8.00%, 5/15/03 ........................................................ 10,065,000 DKK 1,707,602
-------------
2,278,589
-------------
Germany 12.3%
Federal Republic of Germany
7.75%, 2/21/00 ........................................................ 14,310,000 DEM 8,875,056
8.00%, 7/22/02 ........................................................ 9,735,000 DEM 6,333,567
-------------
15,208,623
-------------
Italy 11.7%
Buoni Poliennali Del Tes
12.00%, 1/17/99 ....................................................... 1,925,000,000 ITL 1,211,624
10.00%, 8/01/03 ....................................................... 1,780,000,000 ITL 1,255,147
Government of Italy
10.50%, 7/15/00 .......................................................13,995,000,000 ITL 9,245,132
10.50%, 4/28/14 ....................................................... 1,200,000 GBP 2,683,743
-------------
14,395,646
-------------

Mexico 5.0%
United Mexican States
9.75%, 2/06/01 ........................................................ $ 2,425,000 $ 2,506,844
9.875%, 1/15/07 ....................................................... 1,375,000 1,390,469
11.375%, 9/15/16 ...................................................... 1,115,000 1,186,081
Series A, with warrants, 6.25%, 12/31/19............................... 1,450,000 1,150,937
-------------
6,234,331
-------------
New Zealand 2.0%
Government of New Zealand, 6.50%, 2/15/00 ............................. 3,995,000 NZD 2,468,455
-------------
Panama .2%
Republic of Panama, 8.875%, 9/30/27 ................................... 325,000 283,562
-------------
Spain 7.0%
Government of Spain
12.25%, 3/25/00 ....................................................... 609,440,000 ESP 4,851,389
10.10%, 2/28/01 ....................................................... 323,900,000 ESP 2,554,105
10.90%, 8/30/03 ....................................................... 139,140,000 ESP 1,202,303
-------------
8,607,797
-------------
Sweden 5.7%
Kingdom of Sweden
13.00%, 6/15/01 ....................................................... 7,800,000 SEK 1,281,508
10.25%, 5/05/03 ....................................................... 28,100,000 SEK 4,484,336
8.00%, 8/15/07 ........................................................ 8,500,000 SEK 1,267,311
-------------
7,033,155
-------------
United Kingdom 3.3%
United Kingdom, 8.00%, 12/07/00 ....................................... 2,350,000 GBP 4,072,060
-------------
United States 20.1%
U.S. Treasury Bond, 6.375%, 8/15/02 ................................... 3,620,000 3,713,895
U.S. Treasury Note
6.25%, 8/31/00 ........................................................ 5,775,000 5,858,021
6.625%, 4/30/02 ....................................................... 7,875,000 8,140,789
7.25%, 8/15/04 ........................................................ 6,564,000 7,074,764
-------------
24,787,469
-------------
Venezuela 2.2%
Republic of Venezuela
9.125%, 6/18/07, 144A.................................................. 1,220,000 1,109,930
9.25%, 9/15/27 ........................................................ 1,930,000 1,660,283
-------------
2,770,213
-------------
cRepurchase Agreement 2.3%
Aubrey G. Lanston & Co., 5.66%, 11/03/97 (Maturity Value $2,786,314)
(Cost $2,785,000) ......................................................... 2,785,000 2,785,000
-------------
Collateralized by U.S. Treasury Notes
Total Investments (Cost $124,273,516) 98.2% ........................... 121,289,999
Other Assets, less Liabilities 1.6% ................................... 2,272,915
-------------
Net Assets 100.0%...................................................... $123,562,944
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes

CURRENCY ABBREVIATIONS:
AUD - Australia
CAD - Canada
DEM - Germany
DKK - Denmark
ESP - Spain
GBP - United Kingdom
ITL - Italy
NZD - New Zealand
SEK - Sweden

*Securities traded in U.S. dollars unless otherwise indicated.
cAt 10/31/97, all repurchase agreements held by the Fund had been entered into
on that date.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Short-Intermediate U.S. Government Securities Fund

Class I
------------------------------------------------------
Year Ended October 31,
------------------------------------------------------
1997 1996 1995 1994 1993***
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $10.28 $10.35 $10.03 $10.80 $10.57
------------------------------------------------------
Income from investment operations:
Net investment income ............................ .57 .58 .56 .49 .38
Net realized and unrealized gain (loss) .......... .02 (.08) .31 (.70) .25
------------------------------------------------------
Total from investment operations .................. .59 .50 .87 (.21) .63
------------------------------------------------------
Less distributions from:
Net investment income ............................ (.58) (.57) (.55) (.47) (.39)
Net realized gains ............................... -- -- -- (.09) (.01)
------------------------------------------------------
Total distributions ............................... (.58) (.57) (.55) (.56) (.40)
------------------------------------------------------
Net asset value, end of year ...................... $10.29 $10.28 $10.35 $10.03 $10.80
======================================================
Total return* ..................................... 5.88% 4.97% 8.90% (1.99%) 5.90%

Ratios/supplemental data
Net assets, end of year (000's) ................... $192,051 $196,042 $208,057 $225,352 $273,678
Ratios to average net assets:
Expenses ......................................... .78% .74% .73% .65% .55%**
Expenses excluding waiver and payments by affiliate -- -- -- .68% .63%**
Net investment income ............................ 5.51% 5.64% 5.42% 4.75% 4.75%**
Portfolio turnover rate ........................... 40.56% 72.62% 56.34% 99.09% 31.71%

Advisor Class
-------------
1997***
-------------
<S> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................................................... $10.24
-------------
Income from investment operations:
Net investment income ....................................................................... .47
Net realized and unrealized gain ............................................................ .07
-------------
Total from investment operations ............................................................. .54
Less distributions from net investment income ................................................ (.48)
-------------
Net asset value, end of period ............................................................... $10.30
=============
Total return* ................................................................................ 5.45%

Ratios/supplemental data
Net assets, end of period (000's) ............................................................ $385
Ratios to average net assets:
Expenses** .................................................................................. .70%
Net investment income** ..................................................................... 5.35%
Portfolio turnover rate ...................................................................... 40.56%

*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (effective date) to October 31, 1997.

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997

PRINCIPAL
Franklin Short-Intermediate U.S. Government Securities Fund AMOUNT VALUE
<S> <C> <C>
U.S. Government Securities 98.1%
U.S. Treasury Notes, 7.50%, 11/15/01 ........................................... $25,000,000 $ 26,554,700
U.S. Treasury Notes, 5.875%, 6/30/00 ........................................... 36,000,000 36,202,536
U.S. Treasury Notes, 6.00%, 8/15/99 ............................................ 51,000,000 51,318,801
U.S. Treasury Notes, 6.375%, 5/15/99 ........................................... 20,000,000 20,218,760
U.S. Treasury Notes, 6.50%, 4/30/99 ............................................ 11,000,000 11,140,943
U.S. Treasury Notes, 6.375%, 1/15/99 ........................................... 23,000,000 23,208,449
U.S. Treasury Notes, 5.875%, 10/31/98 .......................................... 20,000,000 20,062,520
-------------
Total U.S. Government Securities (Cost $186,175,200) ........................... 188,706,709
-------------
bRepurchase Agreements 1.0%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $1,951,747)
(Cost $1,950,825) ............................................................... 1,950,825 1,950,825
-------------
Aubrey G. Lanston & Co., Inc.
B.A. Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Fuji Securities, Inc.
Lehman Brothers, Inc.
Sanwa Securities (USA) Co., L.P.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $188,126,025) 99.1%..................................... 190,657,534
Other Assets, less Liabilities .9% ............................................. 1,777,641
-------------
Net Assets 100.0% .............................................................. $192,435,175
=============

</TABLE>
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At 10/31/97, all repurchase agreements held by the
fund had been entered into on that date.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Convertible Securities Fund

Class I
------------------------------------------------------
Year Ended October 31,
------------------------------------------------------
1997 1996 1995 1994 1993****
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $13.45 $12.73 $12.34 $12.79 $11.44
------------------------------------------------------
Income from investment operations:
Net investment income ............................ .64 .61 .58 .59 .45
Net realized and unrealized gain (loss) .......... 2.15 1.39 1.10 (.33) 1.41
------------------------------------------------------
Total from investment operations .................. 2.79 2.00 1.68 .26 1.86
------------------------------------------------------
Less distributions from:
Net investment income ............................ (.60) (.60) (.59) (.59) (.51)
Net realized gains ............................... (.90) (.68) (.70) (.12) --
------------------------------------------------------
Total distributions ............................... (1.50) (1.28) (1.29) (.71) (.51)
------------------------------------------------------
Net asset value, end of year ...................... $14.74 $13.45 $12.73 $12.34 $12.79
======================================================
Total return* ..................................... 22.47% 16.71% 15.18% 2.07% 16.50%

Ratios/supplemental data
Net assets, end of year (000's) ................... $212,631 $130,951 $83,523 $66,869 $47,440
Ratios to average net assets:
Expenses ......................................... 1.01% 1.02% 1.03% .84% .25%**
Expenses excluding waiver and payments by affiliate -- -- -- .92% .86%**
Net investment income ............................ 4.81% 4.79% 4.82% 4.84% 5.25%**
Portfolio turnover rate ........................... 141.49% 129.83% 108.64% 68.39% 31.05%
Average commission rate paid*** ................... $.0534 $.0495 -- -- --

*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the nine months ended October 31, 1993.

Class II
-----------------------------------
Year Ended October 31,
-----------------------------------
1997 1996 1995****
-----------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................................... $13.41 $12.71 $13.06
-----------------------------------
Income from investment operations:
Net investment income .................................................. .54 .51 .07
Net realized and unrealized gain (loss) ................................ 2.13 1.40 (.37)
-----------------------------------
Total from investment operations ........................................ 2.67 1.91 (.30)
-----------------------------------
Less distributions from:
Net investment income .................................................. (.50) (.53) (.05)
Net realized gains ..................................................... (.90) (.68) --
-----------------------------------
Total distributions ..................................................... (1.40) (1.21) (.05)
-----------------------------------
Net asset value, end of year ............................................ $14.68 $13.41 $12.71
===================================
Total return* ........................................................... 21.54% 15.92% (2.33%)

Ratios/supplemental data
Net assets, end of year (000's) ......................................... $35,282 $10,861 $209
Ratios to average net assets:
Expenses ............................................................... 1.74% 1.79% 1.60%**
Net investment income .................................................. 4.04% 4.00% 3.64%**
Portfolio turnover rate ................................................. 141.49% 129.83% 108.64%
Average commission rate paid*** ......................................... $.0534 $.0495 --

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the period October 1, 1995 (effective date) to October 31, 1995.

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997
<TABLE>
<CAPTION>

SHARES/
Franklin Convertible Securities Fund WARRANTS VALUE
<S> <C> <C>
Common Stocks and Warrants 10.1%
Computers .7%
aJetFax, Inc. .................................................................... 130,000 $ 1,056,250
aVanstar Corp. ................................................................... 50,000 653,125
-------------
1,709,375
-------------
Conglomerates .7%
Sovereign Bancorp, Inc. ......................................................... 90,000 1,597,500
-------------
Energy 2.1%
Duke Energy Corp. ............................................................... 30,000 1,447,500
Enron Corp. ..................................................................... 50,000 1,900,000
aNRG Generating (U.S.), Inc. ..................................................... 24,700 481,650
Southern Co. .................................................................... 58,600 1,344,138
-------------
5,173,288
-------------
Financial Services .6%
Banco de Galicia y Buenos Aires, SA de CV (Argentina) ........................... 10,873 67,453
Banco de Galicia y Buenos Aires, SA de CV, Sponsored ADR (Argentina) ............ 57,282 1,388,214
-------------
1,455,667
-------------
Health Care
aCrescendo Pharmaceuticals Corp. ................................................. 1,404 15,883
-------------
Industrial Services .7%
aMagneTek, Inc. .................................................................. 25,000 507,813
Roper Industries, Inc. .......................................................... 42,700 1,139,556
-------------
1,647,369
-------------
Lodging .2%
aShoLodge, Inc. .................................................................. 32,500 530,156
-------------
Metals & Mining .4%
aAtchison Casting Corp. .......................................................... 50,000 1,028,125
-------------
Oil & Gas .8%
YPF, SA, Sponsored ADR (Argentina) .............................................. 60,000 1,920,000
-------------
Real Estate Investment Trusts .3%
Burnham Pacific Properties, Inc. ................................................ 50,000 731,250
aSecurity Capital Group, Class B, warrants ....................................... 3,439 16,554
-------------
747,804
-------------
Telecommunications 1.0%
Telefonica de Argentina, SA, Sponsored ADR (Argentina) .......................... 90,000 2,531,250
-------------
Tobacco 1.8%
Philip Morris Cos., Inc. ........................................................ 45,000 1,783,125
RJR Nabisco Holdings Corp. ...................................................... 86,000 2,725,125
-------------
4,508,250
-------------

Transportation .8%
Airborne Freight Corp. .......................................................... 15,000 $ 950,625
aFritz Cos., Inc. ................................................................ 80,000 1,105,000
-------------
2,055,625
-------------
Total Common Stocks & Warrants (Cost $23,454,930) ............................... 24,920,292
-------------
Convertible Preferred Stocks 23.0%
Construction .2%
Owens Corning Capital, L.L.C., 6.50% cvt. pfd., 144A............................. 10,000 497,500
-------------
Energy 5.3%
AES Corp., 5.50% cvt. pfd., 144A ................................................ 60,000 3,000,000
eCMS Energy Trust I, 7.75% cvt. pfd. ............................................. 73,000 3,918,414
Enron Corp., 6.25% cvt. pfd. .................................................... 85,000 1,832,813
McDermott International Inc., $2.875 cvt. pfd., Series C, 144A .................. 45,000 2,497,500
Nuevo Financing I, 5.75% cvt. pfd., Series A .................................... 38,100 1,924,050
-------------
13,172,777
-------------
Financial Services 3.9%
Bank One Corp., $3.50 cvt. pfd., Series C ....................................... 20,000 2,008,750
Finova Finance Trust, 5.50% cvt. pfd. ........................................... 28,000 1,764,000
National Australia Bank, 7.875% cvt. pfd. (Australia) ........................... 42,900 1,193,156
WBK STRYPES Trust, 10.00% cvt. pfd. ............................................. 153,100 4,746,100
-------------
9,712,006
-------------
Food & Beverages 1.3%
Ralston Purina/Interstate Bakeries Corp., 7.00% cvt. pfd. ....................... 50,400 3,175,200
-------------
Industrial Services .6%
Elsag Bailey Process Automation, NV, 5.50% cvt. pfd. (Netherlands) .............. 35,000 1,500,625
-------------
Insurance .4%
American Heritage Life Investment Corp., 8.50% cvt. pfd. ........................ 18,300 1,033,950
-------------
Lodging 1.6%
Hilton Hotels Corp., 8.00% cvt. pfd. ............................................ 48,100 1,418,950
Host Marriott Corp., 6.75% cvt. pfd., 144A ...................................... 40,000 2,580,000
-------------
3,998,950
Media & Broadcasting 1.3%
fTriathlon Broadcasting, 9.00% cvt. pfd. ........................................ 315,200 3,152,000
-------------
Metals & Mining 1.3%
Armco, Inc., $3.625 cvt. pfd., Series A ......................................... 13,100 650,088
Titanium Metals, 6.625% cvt. pfd., 144A ......................................... 10,000 527,500
WHX Corp., 6.50% cvt. pfd., Series A ............................................ 41,000 2,019,250
-------------
3,196,838
-------------
Paper & Forest Products .4%
International Paper Co., 5.25% cvt. pfd. ........................................ 20,000 1,010,000
-------------
Real Estate Investment Trusts 1.3%
FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A ............................ 60,000 $ 1,732,500
Security Capital Industrial Trust, 7.00% cvt. pfd. .............................. 22,000 695,750
Security Capital Pacific Trust, $1.75 cvt. pfd., Series A ....................... 30,000 918,750
-------------
3,347,000
-------------
Telecommunications 2.7%
AirTouch Communications, Inc., 6.00% cvt. pfd., Series B ........................ 40,000 1,397,500
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina) ........................ 77,600 3,608,400
Salomon, Inc., 6.25%, cvt. pfd. ................................................. 30,000 1,620,000
-------------
6,625,900
-------------
Textiles & Apparel .7%
Designer Holdings, Ltd., 5.00% cvt. pfd. ........................................ 38,000 1,617,375
-------------
Tobacco .8%
DIMON, Inc., 8.50% cvt. pfd. .................................................... 77,200 1,949,300
-------------
Transportation 1.2%
CNF Transportation, Inc., 5.00% cvt. pfd., Series A ............................. 45,700 2,901,950
-------------
Total Convertible Preferred Stocks (Cost $53,386,185) 56,891,371
-------------

PRINCIPAL
AMOUNT
<S> <C> <C>
Convertible Bonds 57.8%
Aerospace/Defense 2.2%
DRS Technologies, Inc., cvt. senior sub. deb., 9.00%, 10/01/03 .................. $ 375,000 562,500
SPACEHAB, Inc., cvt. sub. notes, 144A, 8.00%, 10/15/07 .......................... 5,000,000 5,025,000
-------------
5,587,500
-------------
Business Services 1.0%
CORESTAFF, Inc., cvt. sub. notes, 2.94%, 8/15/04 ................................ 1,250,000 1,012,500
Personnel Group of America, Inc., cvt. sub. notes, 144A, 5.75%, 7/01/04 ......... 1,250,000 1,456,250
-------------
2,468,750
-------------
Electronics 10.2%
Adaptec, Inc., cvt. sub. notes, 144A, 4.75%, 2/01/04 ............................ 2,000,000 2,335,000
Bay Networks, Inc., cvt. sub. deb., 144A, 5.25%, 5/15/03 ........................ 3,500,000 3,408,125
Cymer, Inc., cvt. sub. deb., 144A, 3.50% coupon to 8/06/00, 7.25%
thereafter, 8/06/04 ............................................................ 2,000,000 1,722,500
Dovatron International, Inc., cvt. sub. notes, 144A, 6.00%, 10/15/02 ............ 5,500,000 7,727,500
Itron, Inc., cvt. sub. notes, 6.75%, 3/31/04 .................................... 500,000 555,000
Itron, Inc., cvt. sub. notes, 144A, 6.75%, 3/31/04 .............................. 1,000,000 1,110,000
Level One Communications, Inc., cvt. sub. notes, 144A, 4.00%, 9/01/04 ........... 500,000 635,625
National Semiconductor Corp., cvt. deb., 144A, 6.50%, 10/01/02 .................. 1,000,000 1,091,250
Park Electrochemical Corp., cvt. sub. notes, 5.50%, 3/01/06 ..................... 1,500,000 1,443,750
Reptron Electronics, Inc., cvt. sub. notes, 6.75%, 8/01/04 ...................... 1,300,000 1,157,000
VLSI Technology, Inc., cvt. sub. notes, 8.25%, 10/01/05 ......................... 1,200,000 1,227,000
Xilinx, Inc., cvt. sub. notes, 144A, 5.25%, 11/01/02 ............................ 3,000,000 2,928,750
-------------
25,341,500
-------------
Environmental Services 1.3%
USA Waste Systems, Inc., cvt. sub. notes, 4.00%, 2/01/02 $3,000,000 $ 3,210,000
-------------
Financial Services 3.2%
Leasing Solutions, Inc., cvt. sub. notes, 6.875%, 10/01/03 ...................... 1,000,000 965,000
Meditrust, cvt. sub. deb., 6.875%, 11/15/98 ..................................... 3,500,000 4,060,000
PIV Investment Finance, cvt. company guaranteed, 144A, 4.50%, 12/01/00 .......... 1,000,000 730,000
PIV Investment Finance, cvt. company guaranteed, 4.50%, 12/01/00 ................ 3,000,000 2,190,000
-------------
7,945,000
-------------
Food & Beverages .8%
Grand Metropolitan, Plc., cvt. unsub. senior notes, 144A, 6.50%, 1/31/00 ........ 1,500,000 1,950,000
-------------
Health Care 5.7%
Alza Corp., cvt. sub. notes, 0.00%, 7/14/14 ..................................... 4,000,000 1,720,000
Assisted Living Concepts, Inc., cvt. sub. deb., 6.00%, 11/01/02 ................. 1,600,000 1,708,000
ESC Medical Systems, Ltd., cvt. sub. notes, 144A, 6.00%, 9/01/02 ................ 4,000,000 4,305,000
Sun Healthcare Group, Inc., sub. notes, 144A, 6.00%, 3/01/04 .................... 3,500,000 3,718,750
Tenet Healthcare Corp., cvt. sub. notes, 6.00%, 12/01/05 ......................... 500,000 499,375
U.S. Diagnostic Labs, Inc., cvt. sub. deb., 144A, 9.00%, 3/31/03 ................ 2,175,000 2,196,750
-------------
14,147,875
-------------
Industrial Services 1.9%
Exide Corp., cvt. sub. notes, 144A, 2.90%, 12/15/05 ............................. 1,400,000 910,000
Mark IV Industries, Inc., cvt. sub. notes, 144A, 4.75%, 11/01/04 ................ 3,000,000 2,891,250
Tower Automotive, Inc., cvt. sub. notes, 144A, 5.00%, 8/01/04 ................... 1,000,000 1,025,000
-------------
4,826,250
-------------
Lodging 2.4%
CapStar Hotel Co., cvt. sub. notes, 4.75%, 10/15/04 ............................. 3,400,000 3,434,000
ShoLodge, Inc., cvt. sub. deb., 7.50%, 5/01/04 .................................. 2,500,000 2,490,625
-------------
5,924,625
-------------
Metals & Mining .8%
Quanex Corp., cvt. sub. deb., 6.88%, 6/30/07 .................................... 2,000,000 2,085,000
-------------
Oil & Gas 5.0%
Consolidated Natural Gas Co., cvt. sub. deb., 7.25%, 12/15/15 ................... 2,000,000 2,177,500
Halter Marine Group, Inc., cvt. sub. notes, 144A, 4.50%, 9/15/04 ................ 1,500,000 1,897,500
Parker Drilling Co., cvt. sub. notes, 5.50%, 8/01/04 ............................ 1,500,000 1,794,375
Pogo Producing Co., cvt. sub. notes, 5.50%, 6/15/06 ............................. 2,000,000 2,127,500
Seacor Holdings, Inc., cvt. sub. notes, 5.375%, 11/15/06 ........................ 1,900,000 2,251,500
Swift Energy Co., cvt. sub. notes, 6.25%, 11/15/06 .............................. 2,000,000 2,105,000
-------------
12,353,375
-------------
Paper & Forest Products 1.3%
APP Global Finance V, Ltd., 144A, 2.00%, 7/25/00 (Cayman Islands) ............... 1,200,000 1,134,000
Metsa-Serla Oyj, cvt. sub. deb., 144A, 4.38%, 10/15/02 (Finland) ................ 2,000,000 1,995,000
-------------
3,129,000
-------------
Pharmaceuticals .5%
Dura Pharmaceuticals, Inc., cvt. sub. notes, 3.50%, 7/15/02 ..................... 1,000,000 1,142,500
-------------
Real Estate Investment Trusts 3.0%
OMEGA Healthcare Investors, Inc., cvt. sub. deb., 8.50%, 2/01/01 ................ $2,750,000 $ 3,509,688
The Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02 ......................... 4,000,000 3,880,000
-------------
7,389,688
-------------
Retail 7.4%
Costco Cos., Inc., cvt. sub. notes, 144A, 0.00%, 8/19/17 ........................ 8,000,000 4,300,000
Home Depot, Inc., cvt. sub. notes, 3.25%, 10/01/01 .............................. 450,000 579,938
Men's Wearhouse, Inc., cvt. sub. notes, 5.25%, 3/01/03 .......................... 500,000 620,625
Michaels Stores, Inc., cvt. sub. notes, 6.75%, 1/15/03 .......................... 3,200,000 3,264,000
Pep Boys, cvt. sub. notes, 144A, 0.00%, 9/20/11 ................................. 4,000,000 2,100,000
Rent-Way, Inc., cvt. sub. deb., 144A, 7.00%, 2/01/07 ............................ 2,200,000 3,146,000
Rite Aid Corp., cvt. sub. notes, 144A, 5.25%, 9/15/02 ........................... 4,000,000 4,310,000
-------------
18,320,563
-------------
Savings & Loans .6%
BankAtlantic Bancorp, Inc., cvt. sub. deb., 6.75%, 7/01/06 ...................... 800,000 1,423,000
-------------
Technology Services 3.9%
HMT Technology Corp., cvt. sub. notes, 5.75%, 1/15/04 ........................... 2,200,000 2,128,500
Read-Rite Corp., cvt. sub. notes, 6.50%, 9/01/04 ................................ 2,000,000 1,800,000
System Software Associates, Inc., cvt. sub. notes, 7.00%, 9/15/02 ............... 1,000,000 995,000
Tecnomatix Technologies, Ltd., cvt. sub. notes, 144A, 5.25%, 8/15/04 ............ 3,500,000 3,390,624
Vantive Corp., cvt. sub. notes, 144A, 4.75%, 9/01/02 ............................ 1,000,000 930,000
Wind River Systems, Inc., cvt. sub. notes, 144A, 5.00%, 8/01/02 ................. 300,000 316,500
-------------
9,560,624
-------------
Telecommunications 2.7%
DSC Communications Corp., cvt. sub. notes, 144A, 7.00%, 8/01/04 ................. 2,500,000 2,378,124
Tel-Save Holdings, Inc., cvt. sub. notes, 144A, 4.50%, 9/15/02 .................. 2,000,000 2,192,500
U.S. Cellular Corp., cvt. notes, 0.00%, 6/15/15 ................................. 6,000,000 2,152,500
-------------
6,723,124
-------------
Transportation 1.0%
Atlantic Coast Airlines, Inc., cvt. sub. notes, 144A, 7.00%, 7/01/04 ............ 2,000,000 2,590,000
-------------
Utilities 1.5%
Huaneng Power International, Inc., Sponsored ADR, cvt. bonds,
144A, 1.75%, 5/21/04 (China)..................................................... 4,000,000 3,760,000
-------------
Veterinary Services 1.4%
Veterinary Centers of America, Inc., cvt. sub. deb., 144A, 5.25%, 5/01/06 ....... 4,500,000 3,532,500
-------------
Total Convertible Bonds (Cost $135,355,130) 143,410,874
-------------

bRepurchase Agreements 6.1%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $15,177,775)
(Cost $15,170,606) ...............................................................$15,170,606 $ 15,170,606
-------------
Aubrey G. Lanston & Co., Inc.
B.A. Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Fuji Securities, Inc.
Lehman Brothers, Inc.
Sanwa Securities (USA) Co., L.P.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $227,366,851) 97.0% ..................................... 240,393,143
Other Assets, less Liabilities 3.0% ............................................. 7,520,353
-------------
Net Assets 100.0% ............................................................... $247,913,496
=============
</TABLE>

aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At 10/31/97, all repurchase agreements held by the
Fund had been entered into on that date.
eSee Note 7 regarding restricted securities.
fThe Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" at 10/31/97
were $3,152,000.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Adjustable U.S. Government Securities Fund

Class I
------------------------------------------------------
Year Ended October 31,
------------------------------------------------------
1997 1996 1995 1994 1993***
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $9.37 $9.34 $9.20 $9.77 $9.86
------------------------------------------------------
Income from investment operations:
Net investment income ............................ .55 .56 .54 .35 .28
Net realized and unrealized gain (loss) .......... .10 .03 .14 (.61) (.09)
------------------------------------------------------
Total from investment operations .................. .65 .59 .68 (.26) .19
Less distributions from net investment income ..... (.54) (.56) (.54) (.31) (.28)
------------------------------------------------------
Net asset value, end of year ...................... $9.48 $9.37 $9.34 $9.20 $9.77
======================================================
Total return* ..................................... 7.18% 6.54% 7.57% (2.65%) 1.99%

Ratios/supplemental data
Net assets, end of year (000's) ................... $334,990 $397,078 $509,371 $700,617 $1,813,504
Ratios to average net assets:
Expenses**** ..................................... .75% .69% .61% .42% .65%**
Expenses excluding waiver and payments by affiliate**** .93% .86% .86% .82% .79%**
Net investment income ............................ 5.81% 5.87% 5.76% 3.67% 3.92%**
Portfolio turnover rate ........................... 43.68% 23.52% 17.81% 5.99% 6.97%

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***For the nine months ended October 31, 1993.
****Includes the Funds' share of the Portfolios' allocated expenses.

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997
<TABLE>
<CAPTION>

Franklin Adjustable U.S. Government Securities Fund SHARES VALUE
Mutual Funds 100.4%

<S> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1) ..................... 35,474,557$336,298,798
-------------
Total Investments (Cost $356,924,519) 100.4% .................................... 336,298,798
Other Assets, less Liabilities (.4)% ............................................ (1,308,337)
-------------
Net Assets 100.0% ............................................................... $334,990,461
=============

</TABLE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Equity Income Fund

Class I
------------------------------------------------------
Year Ended October 31,
------------------------------------------------------
1997 1996 1995 1994 1993****
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $16.41 $15.19 $14.14 $14.91 $13.46
------------------------------------------------------
Income from investment operations:
Net investment income ............................ .64 .64 .63 .62 .60
Net realized and unrealized gain (loss) .......... 3.23 1.63 1.27 (.36) 1.44
------------------------------------------------------
Total from investment operations .................. 3.87 2.27 1.90 .26 2.04
------------------------------------------------------
Less distributions from:
Net investment income ............................ (.64) (.65) (.61) (.72) (.50)
Net realized gains ............................... (.33) (.40) (.24) (.31) (.09)
------------------------------------------------------
Total distributions ............................... (.97) (1.05) (.85) (1.03) (.59)
------------------------------------------------------
Net asset value, end of year ...................... $19.31 $16.41 $15.19 $14.14 $14.91
======================================================
Total return* ..................................... 24.40% 15.39% 14.10% 1.83% 15.27%

Ratios/supplemental data
Net assets, end of year (000's) ................... $352,555 $246,952 $168,897 $92,763 $42,177
Ratios to average net assets:
Expenses ......................................... .97% .98% 1.00% .77% .25%**
Expenses excluding waiver and payments by affiliate -- -- 1.02% .95% .87%**
Net investment income ............................ 3.62% 4.11% 4.44% 4.53% 5.86%**
Portfolio turnover rate ........................... 29.04% 24.15% 27.86% 39.51% 19.33%
Average commission rate paid*** ................... $.0488 $.0514 -- -- --

</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the nine months ended October 31, 1993.

Class II
--------------------------------
Year Ended October 31,
--------------------------------
1997 1996 1995****
--------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................................... $16.38 $15.19 $15.38
--------------------------------
Income from investment operations:
Net investment income .................................................. .50 .52 .05
Net realized and unrealized gain (loss) ................................ 3.22 1.63 (.19)
--------------------------------
Total from investment operations ........................................ 3.72 2.15 (.14)
--------------------------------
Less distributions from:
Net investment income .................................................. (.51) (.56) (.05)
Net realized gains ..................................................... (.33) (.40) --
--------------------------------
Total distributions ..................................................... (.84) (.96) (.05)
--------------------------------
Net asset value, end of year ............................................ $19.26 $16.38 $15.19
================================
Total return* ........................................................... 23.40% 14.53% (.93%)

Ratios/supplemental data
Net assets, end of year (000's) ......................................... $45,277 $18,227 $386
Ratios to average net assets:
Expenses ............................................................... 1.72% 1.73% 1.99%**
Net investment income .................................................. 2.78% 3.33% 3.57%**
Portfolio turnover rate ................................................. 29.04% 24.15% 27.86%
Average commission rate paid*** ......................................... $.0488 $.0514 --

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997
<TABLE>
<CAPTION>

Franklin Equity Income Fund SHARES VALUE
<S> <C> <C>
Common Stocks 89.5%
Chemicals 5.3%
ARCO Chemical Co. .............................................................. 45,000 $ 2,199,375
Chemed Corp. ................................................................... 80,000 3,240,000
Dow Chemical Co. ............................................................... 65,000 5,898,750
Imperial Chemical Industries, Plc., Sponsored ADR (United Kingdom) ............. 94,000 5,628,250
Millennium Chemicals, Inc. ..................................................... 170,549 4,007,902
-------------
20,974,277
-------------
Consumer Products 1.1%
Amway Asia Pacific, Ltd . ...................................................... 50,000 1,187,500
Fortune Brands, Inc. ........................................................... 91,500 3,025,219
-------------
4,212,719
-------------
Financial Services 8.4%
Banc One Corp. ................................................................. 71,800 3,742,575
BankBoston Corp. ............................................................... 28,400 2,302,175
Beneficial Corp. ............................................................... 67,000 5,138,063
Mercantile Bancorp., Inc. ...................................................... 62,226 3,021,850
Morgan (J.P.) & Co., Inc. ...................................................... 30,500 3,347,375
National City Corp. ............................................................ 88,700 5,299,825
Nordbanken AB, Sponsored ADR, 144A (Sweden)...................................... 31,000 1,945,287
PNC Bank Corp. ................................................................. 98,300 4,669,250
dWestpac Banking Corp., Ltd. (Australia) ........................................ 686,015 3,994,602
-------------
33,461,002
-------------
Food & Beverage 2.1%
Cadbury Schweppes, Plc. (United Kingdom) ....................................... 400,000 4,009,798
Heinz (H.J.) Co. ............................................................... 92,000 4,272,250
-------------
8,282,048
-------------
Industrial Services .9%
Cooper Industries, Inc. ........................................................ 71,700 3,737,363
-------------
Insurance 5.1%
Gallagher (Arthur J.) & Co. .................................................... 120,000 4,200,000
IPC Holdings, Ltd. ............................................................. 65,000 2,002,813
Lincoln National Corp. ......................................................... 85,500 5,878,125
Mid Ocean, Ltd. ................................................................ 70,300 4,560,713
Scor, SA (France)............................................................... 80,500 3,738,734
-------------
20,380,385
-------------
Metals & Mining .9%
Freeport-McMoRan Copper & Gold, Inc., Class B .................................. 150,000 3,581,250
-------------
Oil 14.1%
Amoco Corp. .................................................................... 68,000 6,234,750
Atlantic Richfield Co. ......................................................... 138,000 11,359,125
Chevron Corp. .................................................................. 81,900 6,792,581
Exxon Corp. .................................................................... 99,400 6,106,888
Mobil Corp. .................................................................... 77,600 5,650,250
Occidental Petroleum Corp. ..................................................... 109,900 3,063,463
Oil (cont.)
Texaco, Inc. ................................................................... 127,000 $ 7,231,063
Ultramar Corp. ................................................................. 105,000 3,241,875
YPF, SA, Sponsored ADR (Argentina) ............................................. 205,200 6,566,400
-------------
56,246,395
-------------
Paper & Forest Products 3.8%
Portucel Industrial, SA, 144A (Portugal) ....................................... 245,000 1,843,258
Potlatch Corp. ................................................................. 88,000 4,389,000
Union Camp Corp. ............................................................... 86,000 4,660,125
Weyerhaeuser Co. ............................................................... 87,000 4,154,250
-------------
15,046,633
-------------
Pharmaceuticals 4.3%
Bristol-Myers Squibb Co. ....................................................... 71,600 6,282,900
Glaxo Wellcome, Plc., Sponsored ADR (United Kingdom)............................ 126,200 5,402,938
Pharmacia & Upjohn, Inc. ....................................................... 167,000 5,302,250
-------------
16,988,088
-------------
Publishing .7%
Dun & Bradstreet Corp. ......................................................... 93,900 2,682,019
-------------
Real Estate Investment Trusts 7.7%
Arden Realty Group, Inc. ....................................................... 175,200 5,343,600
Equity Office Properties Trust ................................................. 35,800 1,094,138
Equity Residential Properties Trust ............................................ 133,300 6,731,650
FelCor Suite Hotels, Inc. ...................................................... 189,000 6,922,125
Highwoods Properties, Inc . .................................................... 144,000 4,968,000
Simon DeBartolo Group, Inc. .................................................... 182,800 5,655,375
-------------
30,714,888
-------------
Retail 2.1%
Penney (J.C.) Co., Inc. ........................................................ 145,000 8,509,688
-------------
Steel 2.1%
British Steel, Plc., Sponsored ADR (United Kingdom) ............................ 119,500 3,241,438
Carpenter Technology Corp. ..................................................... 110,000 5,321,250
-------------
8,562,688
-------------
Telecommunications 9.3%
AT&T Corp. ..................................................................... 112,000 5,481,000
Bell Atlantic Corp. ............................................................ 106,060 8,471,543
France Telecom, SA (France) .................................................... 34,700 1,313,225
GTE Corp. ...................................................................... 146,500 6,217,094
Southern New England Telecommunications Corp. .................................. 196,800 8,437,800
US West Communications Group ................................................... 176,800 7,038,850
-------------
36,959,512
-------------
Tobacco 4.8%
Imperial Tobacco Group, Plc. (United Kingdom) .................................. 328,000 2,016,845
Imperial Tobacco Group, Plc., ADR (United Kingdom) ............................. 197,075 2,423,587
Tobacco (cont.)
Philip Morris Cos., Inc. ....................................................... 94,600 $ 3,748,525
RJR Nabisco Holdings Corp. ..................................................... 149,000 4,721,436
UST, Inc. ...................................................................... 202,000 6,047,375
-------------
18,957,768
-------------
Transportation 1.5%
Chrysler Corp. ................................................................. 168,000 5,922,000
-------------
Utilities - Electric 11.2%
Central & South West Corp. ..................................................... 40,800 879,750
CINergy Corp. .................................................................. 136,800 4,514,400
Dominion Resources, Inc. ....................................................... 155,000 5,764,062
Enova Corp. .................................................................... 163,000 3,962,938
Entergy Corp. .................................................................. 231,000 5,645,062
MidAmerican Energy Holdings Co. ................................................ 218,600 3,907,475
New Century Energies, Inc. ..................................................... 90,000 3,757,500
Northern States Power Co. ...................................................... 101,000 5,087,875
OGE Energy Corp. ............................................................... 109,000 5,279,687
PacifiCorp. .................................................................... 130,000 2,819,375
PG&E Corp. ..................................................................... 123,100 3,146,741
-------------
44,764,865
-------------
Utilities - Natural Gas 4.1%
Consolidated Natural Gas Co. ................................................... 81,300 4,395,281
National Fuel Gas Co. .......................................................... 129,600 5,718,600
Pacific Enterprises ............................................................ 115,200 3,765,600
Transportadora de Gas del Sur, SA, Sponsored ADR (Argentina) ................... 250,000 2,359,375
-------------
16,238,856
-------------
Total Common Stocks (Cost $291,719,099) ........................................ 356,222,444
-------------
Convertible Preferred Stocks 4.1%
Browning-Ferris Industries, Inc., 7.25% cvt. pfd., ACES (Argentina) ............ 111,100 3,555,200
eCMS Energy Trust 1, 7.75% cvt. pfd. ............................................ 80,000 4,294,152
National Australia Bank, 7.875% cvt. pfd. ...................................... 170,100 4,730,906
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina) ....................... 76,900 3,575,850
-------------
Total Convertible Preferred Stocks (Cost $14,787,226) 16,156,108
-------------

bRepurchase Agreements 6.1%
Joint Repurchase Agreement, 5.671%, 11/03/97 (Maturity Value $24,407,260)
(Cost $24,395,731) .............................................................. $24,395,731 $ 24,395,731
-------------
Aubrey G. Lanston & Co., Inc.
B.A. Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Fuji Securities, Inc.
Lehman Brothers, Inc.
Sanwa Securities (USA) Co., L.P.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $330,902,056) 99.7% .................................... 396,774,283
Other Assets, less Liabilities .3% ............................................. 1,057,368
-------------
Net Assets 100.0% .............................................................. $397,831,651
=============

</TABLE>
PORTFOLIO ABBREVIATIONS:
ACES - Adjustable Convertible Exempt Securities
MEDS - Mandatorially Exchangeable Debt Security

bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At 10/31/97, all repurchase agreements held by the
Fund had been entered into on that date.
dSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
eSee Note 7 regarding restricted securities.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights

Franklin Adjustable Rate Securities Fund

Class I
------------------------------------------------------
Year Ended October 31,
------------------------------------------------------
1997 1996 1995 1994 1993***
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $9.87 $9.82 $9.70 $10.04 $10.03
------------------------------------------------------
Income from investment operations:
Net investment income ............................ .56 .54 .58 .45 .37
Net realized and unrealized gain (loss) .......... .09 .06 .12 (.34) .01
------------------------------------------------------
Total from investment operations .................. .65 .60 .70 .11 .38
------------------------------------------------------
Less distributions from:
Net investment income ............................ (.56) (.55) (.58) (.45) (.37)
------------------------------------------------------
Total distributions ............................... (.56) (.55) (.58) (.45) (.37)
------------------------------------------------------
Net asset value, end of year ...................... $9.96 $9.87 $9.82 $9.70 $10.04
======================================================
Total return* ..................................... 6.75% 6.23% 7.57% 1.11% 3.83%

Ratios/supplemental data
Net assets, end of year (000's) ................... $21,137 $15,707 $17,014 $24,564 $37,809
Ratios to average net assets:
Expenses**** ..................................... .81% .90% .70% .45% .11%**
Expenses excluding waiver and payments by affiliate**** 1.00% 1.12% .99% .85% 1.01%**
Net investment income ............................ 5.64% 5.54% 5.82% 4.45% 4.69%**
Portfolio turnover rate ........................... 86.71% 41.67% 53.30% 84.67% 49.11%

FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1997

Franklin Adjustable Rate Securities Fund SHARES VALUE
<S> <C> <C>
Mutual Funds 100.3%
Adjustable Rate Securities Portfolio (Note 1) ..................................... 2,131,679 $21,210,207
-------------
Total Investments (Cost $21,083,576) 100.3% ....................................... 21,210,207
Other Assets, less Liabilities (.3)% .............................................. (72,868)
-------------
Net Assets 100.0% ................................................................. $21,137,339
=============

</TABLE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements

Statements of Assets and Liabilities
October 31, 1997

Franklin Franklin
Global Short-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities FundSecurities Fund
------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ....................................................... $124,273,516 $188,126,025 $227,366,851
=======================================================
Value ...................................................... 121,289,999 190,657,534 240,393,143
Cash ........................................................ 2,233 -- 1,199,335
Receivables:
Investment securities sold ................................. -- -- 5,110,665
Capital shares sold ........................................ 368,727 482,352 732,156
Dividends and interest ..................................... 3,432,188 3,255,931 1,935,948
Unrealized gain on forward currency contracts (Note 2) ...... 950,736 -- --
------------------------------------------------------
Total assets .......................................... 126,043,883 194,395,817 249,371,247
------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............................ 1,231,549 -- 840,588
Capital shares redeemed .................................... 277,790 1,246,241 110,923
Affiliates ................................................. 123,246 140,530 328,548
Shareholders ............................................... -- 183,882 178
Distributions to shareholders ............................... 337 372,091 152,377
Unrealized loss on forward exchange contracts (Note 2) ...... 634,295 -- --
Other liabilities ........................................... 213,722 17,898 25,137
------------------------------------------------------
Total liabilities ..................................... 2,480,939 1,960,642 1,457,751
------------------------------------------------------
Net assets, at value ................................. $123,562,944 $192,435,175 $247,913,496
=======================================================
Net assets consist of:
Undistributed net investment income ........................ $ -- $ 497,544 $ 1,287,973
Accumulated distributions in excess of net investment income (184,646) ----
Net unrealized appreciation (depreciation) ................. (2,650,048) 2,531,509 13,026,292
Accumulated net realized gain (loss) ....................... (2,971,285) (6,200,783) 18,108,020
Capital shares ............................................. 129,368,923 195,606,905 215,491,211
------------------------------------------------------
Net assets, at value .................................. $123,562,944 $192,435,175 $247,913,496
=======================================================

Franklin Franklin
Global Short-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities FundSecurities Fund
<S> <C> <C> <C>
Class I:
Net assets, at value ....................................... $118,348,186 $192,050,661 $212,631,347
=======================================================
Shares outstanding ......................................... 14,074,297 18,665,327 14,427,760
=======================================================
Net asset value per share* ................................. $8.41 $10.29 $14.74
=======================================================
Maximum offering price per share
(net asset value / 95.75%, 97.75%, 95.50%, respectively) ... $8.78 $10.53 $15.43
=======================================================
Class II:
Net assets, at value ....................................... $ 4,473,447 -- $ 35,282,149
=======================================================
Shares outstanding ......................................... 531,824 -- 2,402,672
=======================================================
Net asset value per share* ................................. $8.41 -- $14.68
=======================================================
Maximum offering price per share (net asset value / 99%) ... $8.49 -- $14.83
=======================================================
Advisor Class:
Net assets, at value ....................................... $ 741,311 $ 384,514 --
=======================================================
Shares outstanding ......................................... 88,115 37,349 --
=======================================================
Net asset value and maximum offering price per share ....... $8.41 $10.30 --
=======================================================

*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
<S> <C> <C> <C>
Assets:
Investments in securities:

Cost ....................................................... $356,924,519 $330,902,056 $21,083,576
=======================================================
Value ...................................................... 336,298,798 396,774,283 21,210,207
Cash ........................................................ 39,075 592,793 --
Receivables:
Investment securities sold ................................. -- 771,875 --
Capital shares sold ........................................ 78,248 418,183 18,736
Dividends and interest ..................................... -- 1,111,975 --
------------------------------------------------------
Total assets .......................................... 336,416,121 399,669,109 21,228,943
------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............................ -- 878,812 --
Capital shares redeemed .................................... 452,024 197,632 6,598
Affiliates ................................................. 265,000 523,000 15,163
Shareholders ............................................... 689,260 203,904 35,290
Distributions to shareholders ............................... 146 -- 5,752
Funds advanced by custodian ................................. -- -- 5,942
Other liabilities ........................................... 19,230 34,110 22,859
------------------------------------------------------
Total liabilities ..................................... 1,425,660 1,837,458 91,604
------------------------------------------------------
Net assets, at value ................................. $334,990,461 $397,831,651 $21,137,339
=======================================================
Net assets consist of:
Undistributed net investment income ........................ $ 955,056 $ 603,756 $--
Net unrealized appreciation (depreciation) ................ (20,625,721) 65,873,329 126,631
Accumulated net realized gain (loss) ....................... (82,967,418) 16,986,141 (930,245)
Capital shares ............................................. 437,628,544 314,368,425 21,940,953
------------------------------------------------------
Net assets, at value .................................. $334,990,461 $397,831,651 $21,137,339
=======================================================

Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
<S> <C> <C> <C>
Class I:
Net assets, at value ....................................... $334,990,461 $352,554,955 $21,137,339
=======================================================
Shares outstanding ......................................... 35,328,183 18,260,314 2,122,079
=======================================================
Net asset value per share* ................................. $9.48 $19.31 $ 9.96
=======================================================
Maximum offering price per share
(net asset value / 97.75%, 95.50%, 97.75%, respectively).. $9.70 $20.22 $10.19
=======================================================
Class II:
Net assets, at value ....................................... -- $ 45,276,696 --
=======================================================
Shares outstanding ......................................... -- 2,350,676 --
=======================================================
Net asset value per share* ................................. -- $19.26 --
=======================================================
Maximum offering price per share (net asset value / 99%) ... -- $19.45 --
=======================================================

*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

Statements of Operations
for the year ended October 31, 1997

Franklin Franklin
Global Short-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities FundSecurities Fund
---------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends .................................................... $ 15,206 $-- $ 3,625,422
Interest ..................................................... 10,392,152 11,986,846 7,253,933
---------------------------------------------
Total investment income ................................. 10,407,358 11,986,846 10,879,355
---------------------------------------------
Expenses:
Management fees (Note 6) ..................................... 785,629 1,076,296 1,075,628
Distribution fees (Note 6)
Class I ..................................................... 127,737 161,539 428,603
Class II .................................................... 24,866 -- 210,683
Transfer agent fees (Note 6) ................................. 143,700 107,367 187,576
Custodian fees ............................................... 32,800 1,747 4,988
Reports to shareholders ...................................... 59,778 51,452 71,019
Registration and filing fees ................................. 23,800 37,953 25,613
Professional fees ............................................ 4,500 9,486 11,419
Trustees' fees and expenses .................................. 13,000 19,417 18,188
Other ........................................................ 135 15,978 6,052
---------------------------------------------
Total expenses .......................................... 1,215,945 1,481,235 2,039,769
---------------------------------------------
Net investment income .................................. 9,191,413 10,505,611 8,839,586
---------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. (3,072,458) 98,482 18,354,800
Foreign currency transactions ............................... 3,072,382 -- --
---------------------------------------------
Net realized gain (loss) ................................ (76) 98,482 18,354,800
Net unrealized appreciation (depreciation) on:
Investments ................................................. (3,990,314) 229,386 9,072,653
Translation of assets and liabilities
denominated in foreign currencies ............................ 660,415 -- --
---------------------------------------------
Net unrealized appreciation (depreciation) .............. (3,329,899) 229,386 9,072,653
---------------------------------------------
Net realized and unrealized gain (loss) ....................... (3,329,975) 327,868 27,427,453
---------------------------------------------
Net increase in net assets resulting from operations .......... $ 5,861,438 $10,833,479 $36,267,039
=============================================

Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities FundIncome Fund Securities Fund
---------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends .................................................... $22,969,711 $14,097,622 $1,239,654
Interest ..................................................... -- 1,172,968 --
---------------------------------------------
Total investment income ................................. 22,969,711 15,270,590 1,239,654
---------------------------------------------
Expenses:
Management fees (Note 6) ..................................... -- 1,783,336 --
Administrative fees (Note 6) ................................. 363,663 -- 19,960
Distribution fees (Note 6)
Class I ..................................................... 899,571 757,490 48,558
Class II .................................................... -- 310,656 --
Transfer agent fees (Note 6) ................................. 315,879 362,289 16,093
Custodian fees ............................................... -- 8,572 --
Reports to shareholders ...................................... 142,102 134,726 6,235
Registration and filing fees ................................. 29,961 41,141 13,005
Professional fees ............................................ 18,709 20,110 5,791
Trustees' fees and expenses .................................. 37,321 32,885 1,989
Other ........................................................ 18,624 7,748 863
---------------------------------------------
Total expenses .......................................... 1,825,830 3,458,953 112,494
---------------------------------------------
Net investment income .................................. 21,143,881 11,811,637 1,127,160
---------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. (4,382,996) 17,033,346 (144,543)
Foreign currency transactions ............................... -- (34,049) --
---------------------------------------------
Net realized gain (loss) ................................ (4,382,996) 16,999,297 (144,543)
Net unrealized appreciation on:
Investments ................................................. 8,545,202 41,582,753 369,436
Translation of assets and liabilities
denominated in foreign currencies ............................ -- 1,103 --
---------------------------------------------
Net unrealized appreciation ............................. 8,545,202 41,583,856 369,436
---------------------------------------------
Net realized and unrealized gain .............................. 4,162,206 58,583,153 224,893
---------------------------------------------
Net increase in net assets resulting from operations .......... $25,306,087 $70,394,790 $1,352,053
=============================================
*net of foreign taxes of $205,169 for the Equity Income Fund.

FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)

Statements of Changes in Net Assets
for the years ended October 31, 1997 and 1996

Franklin Global Franklin Short-Intermediate
Government Income Fund U.S. Government Securities Fund
----------------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 9,191,413 $ 11,369,376 $ 10,505,611 $ 11,482,507
Net realized gain (loss) from investments
and foreign currency transactions ........ (76) 962,741 98,482 (300,618)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies (3,329,899) 4,017,050 229,386 (1,357,852)
----------------------------------------------------------------
Net increase in net assets resulting from
operations ............................... 5,861,438 16,349,167 10,833,479 9,824,037
Distributions to shareholders from:
Net investment income:
Class I ................................ (9,275,930) (10,401,793) (10,697,486) (11,299,126)
Class II ............................... (254,743) (159,145) -- --
Advisor Class .......................... (40,774) -- (12,468) --
----------------------------------------------------------------
Total distributions to shareholders ...... (9,571,447) (10,560,938) (10,709,954) (11,299,126)
Capital share transactions (Note 3)
Class I ................................. (15,684,110) (33,016,472) (4,111,244) (10,540,555)
Class II ................................ 869,332 2,391,036 -- --
Advisor Class ........................... 762,031 -- 381,098 --
----------------------------------------------------------------
Total capital share transactions ......... (14,052,747) (30,625,436) (3,730,146) (10,540,555)
----------------------------------------------------------------
Net decrease in net assets .......... (17,762,756) (24,837,207) (3,606,621) (12,015,644)
Net assets:
Beginning of year ........................ 141,325,700 166,162,907 196,041,796 208,057,440
----------------------------------------------------------------
End of year .............................. $123,562,944 $141,325,700 $192,435,175 $196,041,796
================================================================
Undistributed net investment income (Accumulated
distributions in excess of net investment income)
included in net assets:
End of year ............................. $ (184,646) $ 259,884 $ 497,544 $ 701,887
================================================================

Franklin Convertible Franklin Adjustable
Securities Fund U.S. Government Securities Fund
----------------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 8,839,586 $ 5,369,753 $ 21,143,881 $ 27,128,106
Net realized gain (loss) from investments and
foreign currency transactions ............ 18,354,800 9,634,023 (4,382,996) (8,331,753)
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies .................... 9,072,653 1,567,232 8,545,202 10,070,322
----------------------------------------------------------------
Net increase in net assets resulting from
operations............................... 36,267,039 16,571,008 25,306,087 28,866,675
Distributions to shareholders from:
Net investment income:
Class I ................................ (7,148,153) (5,000,306) (20,946,338) (27,723,298)
Class II ............................... (764,202) (174,577) -- --
Net realized gains:
Class I ................................ (9,004,822) (4,634,096)
Class II ............................... (857,185) (30,571) -- --
----------------------------------------------------------------
Total distributions to shareholders ...... (17,774,362) (9,839,550) (20,946,338) (27,723,298)
Capital share transactions (Note 3)
Class I ................................. 65,369,154 41,026,026 (66,447,672) (113,435,575)
Class II ................................ 22,239,207 10,322,156 -- --
----------------------------------------------------------------
Total capital share transactions ......... 87,608,361 51,348,182 (66,447,672) (113,435,575)
----------------------------------------------------------------
Net increase (decrease) in net assets 106,101,038 58,079,640 (62,087,923) (112,292,198)
Net assets:
Beginning of year ........................ 141,812,458 83,732,818 397,078,384 509,370,582
----------------------------------------------------------------
End of year .............................. $247,913,496 $141,812,458 $334,990,461 $397,078,384
================================================================
Undistributed net investment income included
in net assets:
End of year ............................. $ 1,287,973 $ 360,742 $ 955,056 $ 757,513
================================================================

Franklin Equity Franklin Adjustable
Income Fund Rate Securities Fund
----------------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 11,811,637 $ 9,016,420 $ 1,127,160 $ 851,994
Net realized gain (loss) from investments and
foreign currency transactions ............ 16,999,297 5,500,551 (144,543) (67,763)
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies.................... 41,583,856 15,107,182 369,436 163,341
----------------------------------------------------------------
Net increase in net assets resulting
from operations.......................... 70,394,790 29,624,153 1,352,053 947,572
Distributions to shareholders from:
Net investment income:
Class I ................................ (10,821,047) (8,653,540) (1,127,160) (851,994)
Class II ............................... (874,988) (244,243) -- --
Net realized gains:
Class I ................................ (5,098,255) (4,623,214) -- --
Class II ............................... (396,739) (30,854) -- --
----------------------------------------------------------------
Total distributions to shareholders ...... (17,191,029) (13,551,851) (1,127,160) (851,994)
Capital share transactions (Note 3)
Class I ................................. 57,149,819 62,463,113 5,205,073 (1,401,961)
Class II ................................ 22,298,986 17,359,834 -- --
----------------------------------------------------------------
Total capital share transactions ......... 79,448,805 79,822,947 5,205,073 (1,401,961)
----------------------------------------------------------------
Net increase (decrease) in net assets 132,652,566 95,895,249 5,429,966 (1,306,383)
Net assets:
Beginning of year ........................ 265,179,085 169,283,836 15,707,373 17,013,756
----------------------------------------------------------------
End of year .............................. $397,831,651 $265,179,085 $21,137,339 $15,707,373
================================================================
Undistributed net investment income included
in net assets:
End of year ............................. $ 603,756 $ 522,203 $-- $--
================================================================

</TABLE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Franklin Investors Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end investment company, consisting of
six separate series (the Funds). All Funds are diversified except Franklin
Global Government Income Fund (the Global Fund). The Funds and their investment
policies are:

Global Income Growth and Income Income
- ------------------------------------------------------------------------
Global Fund Convertible Fund Short-Intermediate Fund
Equity Income Fund Adjustable U.S. Government Fund
Adjustable Rate Fund

The Adjustable U.S. Government Fund and the Adjustable Rate Fund invest
substantially all of their assets in the U.S. Government Adjustable Rate
Mortgage Portfolio and the Adjustable Rate Securities Portfolio, respectively.
The Trust is registered under the Investment Company Act of 1940 as a
diversified, open end investment company having the same investment objectives
as the Funds. The financial statements of the Trust, including the Statement of
Investments, are included elsewhere in this report and should be read in
conjunction with the Funds financial statements.

The following summarizes the Funds' significant accounting policies.

a. Security Valuation:

The values of the Adjustable U.S. Government Fund and the Adjustable Rate Fund
reflect their proportionate interest in the net assets of the U.S. Government
Adjustable Rate Mortgage Portfolio and the Adjustable Rate Securities Portfolio,
respectively. At October 31, 1997, the Adjustable U.S. Government Fund owns 98%
of the U.S. Government Adjustable Rate Mortgage Portfolio and the Adjustable
Rate Fund owns 94% of the Adjustable Rate Securities Portfolio. The Portfolios'
shares held by the Funds are valued at the net asset value of the Portfolios.

b. Income Taxes:

No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.

c. Security Transactions, Investment Income, Expenses and Distributions:

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)

c. Security Transactions, Investment Income, Expenses and Distributions: (cont.)

d. Accounting Estimates:

e. Foreign Currency Translation:

The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.

Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.

f. Forward Exchange Contract:

The Global Fund may enter into forward exchange contracts to hedge against
foreign exchange risks. These contracts are valued daily and the Fund's equity
therein is included in the Statement of Assets and Liabilities. Realized and
unrealized gains and losses are included in the Statement of Operations.

2. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Global Fund has been a party to financial instruments with off-balance-sheet
risk, primarily forward exchange contracts in order to minimize the impact of
the Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.

A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At 10/31/97,
the Fund has outstanding forward exchange contracts for the sale of currencies
as set out below. The contracts are reported in the financial statements at the
Fund's net equity, as measured by the difference between the forward exchange
rates at the reporting date and the forward exchange rates at the day of entry
into the contract.
<TABLE>
<CAPTION>

In Settlement Unrealized
Contracts to Sell Exchange for Date Gain/(Loss)
<S> <C> <C> <C>
300,000 Australian dollars U.S. $208,000 12/02/97U.S. $ (3,116)
210,000 New Zealand dollars 129,644 12/15/97 (749)
----------------------------------
U.S. $337,644 (3,865)
----------
Net unrealized loss on offsetting forward exchange contracts (630,430)
-------------
Unrealized loss on forward exchange contracts (634,295)
-------------
Net unrealized gain on offsetting forward exchange contracts 950,736
-------------
Net unrealized gain on forward exchange contracts U.S. $316,441
=============

</TABLE>

3. TRUST SHARES

Effective January 2, 1997, the Short-Intermediate Fund and the Global Fund
offered Advisor Class shares to qualified investors. The shares have the same
rights except for their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class. All
of the the Short-Intermediate Fund's outstanding shares before that date were
designated as Class I shares.

3. TRUST SHARES (cont.)

At October 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>

Global Government Short-Intermediate Convertible
Income Fund U.S. Government Securities Fund Securities Fund
Shares Amount Shares Amount Shares Amount
Class I Shares:
1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,472,734 $20,945,795 9,455,984 $ 96,723,865 7,074,889 $98,888,262
Shares issued in reinvestment
of distributions 576,140 4,904,638 610,793 6,250,094 916,933 12,136,488
Shares redeemed (4,879,312) (41,534,543) (10,469,896) (107,085,203) (3,302,613) (45,655,596)
------------------------------------------------------------------------------------
Net increase (decrease)(1,830,438)$(15,684,110) (403,119) $ (4,111,244) 4,689,209 $65,369,154
====================================================================================
1996
Shares sold 4,025,707 $33,831,552 7,187,123 $ 73,976,114 4,365,828 $56,759,465
Shares issued in reinvestment
of distributions 627,075 5,249,077 656,342 6,749,593 544,756 6,898,946
Shares redeemed (8,597,709) (72,097,101) (8,876,550) (91,266,262) (1,733,409) (22,632,385)
------------------------------------------------------------------------------------
Net increase (decrease)(3,944,927 $(33,016,472) (1,033,085) $(10,540,555) 3,177,175 $41,026,026
====================================================================================
Class II Shares:
1997
Shares sold 314,368 $ 2,666,891 1,693,202 $23,703,881
Shares issued in reinvestment
of distributions 18,565 157,895 96,754 1,282,945
Shares redeemed (228,727) (1,955,454) (197,081) (2,747,619)
------------------------------------------------------------------------------------
Net increase 104,206 $ 869,332 1,592,875 $22,239,207
====================================================================================
1996
Shares sold 346,306 $ 2,915,042 804,020 $10,462,164
Shares issued in reinvestment
of distributions 11,601 97,238 12,211 157,571
Shares redeemed (73,846) (621,244) (22,905) (297,579)
------------------------------------------------------------------------------------
Net increase 284,061 $ 2,391,036 793,326 $ 10,322,156
====================================================================================
Advisor Class Shares:
1997+
Shares sold 102,752 $885,499 37,960 $ 387,372
Shares issued in reinvestment
of distributions 4,741 40,043 393 4,015
Shares redeemed (19,378) (163,511) (1,004) (10,289)
---------------------------------------------------------
Net increase 88,115 $ 762,031 37,349 $ 381,098
=========================================================

</TABLE>
+For the period January 2, 1997 (effective date) to October 31, 1997 for the
Advisor Class of shares.
<TABLE>
<CAPTION>

3. TRUST SHARES (cont.)

Adjustable U.S. Government Adjustable Rate
Securities Fund Equity Income Fund Securities Fund
------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------
Class I Shares:
1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 19,504,396 $183,679,079 6,936,844 $125,149,684 2,515,583 $24,890,014
Shares issued in reinvestment
of distributions 1,309,703 12,299,705 762,734 13,249,367 91,780 910,284
Shares redeemed (27,867,699) (262,426,456) (4,489,818) (81,249,232) (2,076,570) (20,595,225)
------------------------------------------------------------------------------------
Net increase
(decrease) (7,053,600)$ (66,447,672) 3,209,760 $ 57,149,819 530,793 $ 5,205,073
====================================================================================
1996
Shares sold 14,565,477 $136,048,405 6,911,802 $110,237,707 686,370 $ 6,733,448
Shares issued in reinvestment
of distributions 1,655,133 15,418,849 674,366 10,650,968 65,447 642,723
Shares redeemed (28,356,704) (264,902,829) (3,657,228) (58,425,562) (892,821) (8,778,132)
------------------------------------------------------------------------------------
Net increase
(decrease) (12,136,094)$(113,435,575) 3,928,940 $ 62,463,113 (141,004)$ (1,401,961)
====================================================================================
Class II Shares:

1997
Shares sold 1,537,907 $ 27,820,253
Shares issued in reinvestment
of distributions 64,902 1,133,280
Shares redeemed (364,896) (6,654,547)
-----------------------
Net increase 1,237,913 $ 22,298,986
=======================
1996
Shares sold 1,133,269 $ 18,099,689
Shares issued in reinvestment
of distributions 15,808 251,793
Shares redeemed (61,758) (991,648)
-----------------------
Net increase 1,087,319 $ 17,359,834
=======================

</TABLE>
4. INCOME TAXES

At October 31, 1997, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>

Global Short-Intermediate Adjustable
Government U.S. Government U.S. Government Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund
----------------------------------------------------------------
Capital loss carryovers expiring in:
<S> <C> <C> <C> <C>
2000 ........................................... $-- $-- $ 1,925,614 $ --
2001 ........................................... -- -- 7,701,615 --
2002 ........................................... -- 2,335,397 41,867,757 414,821
2003 ........................................... 2,971,284 3,564,637 18,176,270 286,740
2004 ........................................... -- 300,618 8,741,194 66,100
2005 ........................................... -- -- 4,484,844 95,706
----------------------------------------------------------------
$2,971,284 $6,200,652 $82,897,294 $863,367
================================================================

</TABLE>
At October 31, 1997, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes were as follows:
<TABLE>
<CAPTION>

Global Short-Intermediate Adjustable
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund Income Fund Securities Fund
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment at cost $124,273,516 $188,126,025 $227,475,851 $356,994,643 $330,902,056 $21,083,576
==========================================================================================
Unrealized appreciation 1,335,596 2,531,509 17,269,741 -- 69,217,601 58,899
Unrealized depreciation (3,985,644) -- (4,352,449) (20,695,845) (3,345,374) --
------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) $ (2,650,048) $ 2,531,509 $ 12,917,292 $ (20,695,845) $ 65,872,227 $ 58,899
==========================================================================================

</TABLE>
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.

5. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1997 were as follows:
<TABLE>
<CAPTION>

</TABLE>
6. TRANSACTIONS WITH AFFILIATES

Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), Templeton
Investment Counsel, Inc. (TICI), Franklin/Templeton Investor Services, Inc.
(Investor Services), and of the Securities Portfolio and the Mortgage Portfolio,
the Trust's investment manager, principal underwriter, administrative managers,
transfer agent, and the Funds in which the Adjustable US Government Fund and the
Adjustable Rate Fund invest, respectively.

Under an agreement with Advisers, FT Services provides administrative services
to the Global Fund, the Short-Intermediate Fund, the Convertible Fund and the
Equity Income Fund. The fee is paid by Advisers based on average daily net
assets, and is not an additional expense of the funds.

Under a subadvisory agreement, Templeton Investment Counsel, Inc. (Investment
Counsel) provides subadvisory services to the Global Fund and receives from
Advisers fees based on the month end net assets of the Fund.

The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds, except Adjustable U.S. Government Fund and the Adjustable
Rate Fund, as follows:

Annualized
Fee Rate Month End Net Assets
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million

The Adjustable U.S. Government Fund and the Adjustable Rate Fund pay an
administrative fee to Advisers based on the average net assets of the Funds, as
follows:

Annualized
Fee Rate Average Daily Net Assets
0.10% First $5 billion
0.09% Over $5 billion, up to and including $10 billion
0.08% Over $10 billion

The Adjustable U.S. Government Fund and the Adjustable Rate Fund reimburse
Distributors up to 0.25% per year of its average daily net assets, the
Short-Intermediate Fund reimburses Distributors up to 0.10% per year of its
average daily net assets, the Global Fund reimburses Distributors up to 0.15%
and 0.65% per year of the average daily net assets of Class I and Class II,
respectively, and the Convertible Fund and Equity Income Fund reimburse
Distributors up to 0.25% and 1.00% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares.

6. TRANSACTIONS WITH AFFILIATES (cont.)

Distributors received (paid) net commissions on sales of the Funds shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>

</TABLE>
The Trust paid shareholder servicing fees of $1,132,904, of which $1,072,924 was
paid to Investor Services.

7. RESTRICTED SECURITIES

The Funds may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at October 31, 1997 are as follows:

Shares/
Warrants Issuer Acquisition Date Cost Value
------------------------------------------------------------------------------------------
Convertible Fund
<S> <C> <C> <C>
73,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.58% of Net Assets) 6/18/97 $3,650,000 $3,918,414
Equity Income Fund
80,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.08% of Net Assets) 6/18/97 4,000,000 4,294,152
</TABLE>

8. CREDIT RISK

The Convertible Fund has 66.7% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.

The Convertible Fund has investments in excess of 10% of its total net assets in
the Electronics industry. Such concentration may subject the Fund more
significantly to economic changes occurring within that industry.

FRANKLIN INVESTORS SECURITIES TRUST
Report of Independent Accountants

To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:

We have audited the accompanying statements of assets and liabilities of the six
Funds comprising the Franklin Investors Securities Trust, including each Fund's
statement of investments, as of October 31, 1997, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
six Funds comprising the Franklin Investor Securities Trust, as of October 31,
1997, the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California

December 5, 1997

FRANKLIN INVESTORS SECURITIES TRUST
Tax Information

Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the ordinary income dividends as income qualifying the dividends received
deduction for the fiscal year ended October 31, 1997 as follows:

Convertible Fund 17.50% Equity Fund 91.92%

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
<TABLE>
<CAPTION>

U.S. Government Adjustable Rate Mortgage Portfolio

Year ended October 31,
----------------------------------------------------------
1997 1996 1995 1994 19931
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $9.37 $9.33 $9.19 $9.82 $9.91
----------------------------------------------------------
Income from investment operations:
Net investment income ........................ .593 .589 .572 .415 .313
Net realized and unrealized gain (loss) ...... .110 .040 .140 (.630) (.090)
----------------------------------------------------------
Total from investment operations .............. .703 .629 .712 (.215) .223
Less distributions from net investment income . (.593) (.589) (.572) (.415) (.313)
----------------------------------------------------------
Net asset value, end of year .................. $9.48 $9.37 $9.33 $9.19 $9.82
==========================================================
Total return* ................................. 7.74% 6.95% 7.99% (2.22)% 2.28%

Ratios/supplemental data
Net assets, end of year (000's) ............... $342,541 $406,431 $522,802 $747,471 $2,130,229
Ratio of average net assets:
Expenses ..................................... .25% .25% .18% .02% .27%**
Expenses excluding waiver and payments by affiliate .43% .42% .43% .42% .41%**
Net investment income ....................... 6.31% 6.31% 6.17% 4.01% 4.15%**
Portfolio turnover rate ....................... 20.84% 24.63% 20.16% 56.43% 76.55%

1For the nine months ended October 31, 1993
*Total return is not annualized
**Annualized

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1997
PRINCIPAL
U.S. Government Adjustable Rate Mortgage Portfolio AMOUNT VALUE
<S> <C> <C>
Adjustable Rate Mortgage Securities 97.2%
Federal Home Loan Mortgage Corp. (FHLMC) 19.8%
FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.625%, 11/01/16 ..... $ 4,718,503 $ 4,969,670
FHLMC, Cap 12.723%, Margin 2.189% + CMT, Resets Annually, 7.853%, 4/01/19 ..... 2,117,740 2,225,491
FHLMC, Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 7.685%, 7/01/18 ...... 4,267,699 4,428,848
FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.847%, 4/01/18 ...... 6,712,722 7,098,301
FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.654%, 9/01/19 ...... 5,388,451 5,675,171
FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.644%, 12/01/16 .... 2,637,333 2,776,901
FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.831%, 10/01/18 .... 2,528,652 2,664,694
FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.762%, 3/01/19 ..... 2,164,913 2,281,234
FHLMC, Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.62%, 3/01/18 ...... 4,072,207 4,288,319
FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.665%, 4/01/19 ....... 8,453,614 8,881,030
FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.994%, 7/01/20 ...... 6,081,007 6,401,842
FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.944%, 11/01/19 .... 2,733,821 2,875,488
FHLMC, Cap 13.879%, Margin 2.089% + CMT, Resets Annually, 7.746%, 4/01/18 ..... 7,879,212 8,285,070
FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 8.751%, 12/01/21 1,847,307 1,940,153
FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.096%, 2/01/19 ...... 2,959,606 3,174,947
-------------
Total Federal Home Loan Mortgage Corp. (Cost $66,725,193) ..................... 67,967,159
-------------
Federal National Mortgage Association (FNMA) 68.0%
FNMA, Cap 12.00%, Margin 1.25% + COFI, Resets Monthly, 6.112%, 11/01/35 ....... 9,394,906 9,401,953
FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR,
Resets Semi-Annually, 7.673%, 11/01/18 ................................... 2,264,248 2,363,898
FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.913%, 11/01/17 ...... 15,260,761 15,507,986
FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.686%, 3/01/19 ........ 3,993,972 4,179,732
FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR,
Resets Semi-Annually, 6.929%, 1/01/19 ......................................... 10,589,417 10,916,418
FNMA, Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.888%, 1/01/19 ....... 2,967,682 2,985,132
FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.103%, 9/01/18 ....... 11,214,476 11,133,284
FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.477%, 1/01/19 ....... 2,903,508 2,992,297
FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 7.821%, 11/01/20 ...... 3,739,582 3,952,066
FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.426%, 5/01/19 ....... 4,860,978 5,107,430
FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually,
7.85%, 6/01/17................................................................ 3,007,607 3,163,462
FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.257%, 10/01/17 4,798,997 4,983,183
FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR,
Resets Semi-Annually, 7.280%, 7/01/17........................................ 6,765,613 7,063,369
FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.103%, 2/01/19 ....... 7,059,067 7,005,771
FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 7.745%, 12/01/19 ..... 3,268,174 3,456,454
FNMA, Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 8.167%, 11/01/17 4,936,608 5,146,167
FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.733%, 6/01/19 ........ 4,872,351 5,152,804
FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.917%, 2/01/20 ........ 8,468,598 8,518,393
FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually,
7.158%, 12/01/20 .............................................................. 5,205,039 5,372,278
FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.749%, 4/01/19 ...... 5,414,705 5,729,138
FNMA, Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.635%, 6/01/19 ...... 4,708,480 4,977,241
FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 7.584%, 4/01/19 ...... 4,364,388 4,612,504
FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR,
Resets Semi-Annually, 7.683%, 11/01/26 ........................................ 2,536,223 2,672,418
FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 7.636%, 6/01/19 2,893,430 3,025,284
FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.637%, 10/01/19 ...... 7,435,748 7,860,181
FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.434%, 4/01/03 ........ 6,372,700 6,460,007
FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 7.84%, 9/01/22 ....... 11,322,763 11,927,173
FNMA, Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 7.601%, 6/01/18 ...... 5,587,954 5,905,686
FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 7.86%, 3/01/21 ....... 4,946,037 5,233,996
FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 7.916%, 12/01/20 $ 7,701,866 $ 8,153,889
FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.747%, 3/01/19 ....... 2,392,531 2,517,278
FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.794%, 7/01/245,287,705 5,287,441
FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.775%, 2/01/19 ....... 3,659,439 3,855,915
FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.989%, 12/01/18 2,866,026 3,034,148
FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.755%, 1/01/19 ...... 6,096,910 6,448,397
FNMA, Cap 14.142%, Margin 2.118% + CMT, Resets Annually, 7.77%, 3/01/21 ....... 1,906,283 2,005,067
FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.168%, 5/01/21 . 9,771,483 10,140,454
FNMA, Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 7.799%, 3/01/20 ....... 3,044,716 3,221,492
FNMA, Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.421%, 1/01/16 ....... 7,983,277 8,267,243
FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.356%, 5/01/19 ...... 2,885,536 3,098,172
-------------
Total Federal National Mortgage Association (Cost $231,376,068) ............... 232,835,201
-------------
Government National Mortgage Association (GNMA) 9.4%
GNMA, Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 7.00%, 1/20/24 6,821,605 7,014,589
dGNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 5.50%, 12/01/27 ........ 9,000,000 8,980,313
dGNMA, Cap 11.00%, Margin 1.50% + CMT, Resets Annually, 6.00%, 12/01/27 ........ 10,000,000 10,078,125
GNMA, Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 7.00%, 7/20/25 ......... 5,959,124 6,249,333
-------------
Total Government National Mortgage Association (Cost $31,957,224) ............. 32,322,360
-------------
bRepurchase Agreements 8.0%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $27,393,124)
(Cost $27,380,185) ............................................................. 27,380,185 27,380,185
-------------
Aubrey G. Lanston & Co., Inc.
B.A. Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Fuji Securities, Inc.
Lehman Brothers, Inc.
Sanwa Securities (USA) Co., L.P.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $357,438,670) 105.2% .................................. 360,504,905
Other Assets, less Liabilities (5.2%) ......................................... (17,963,815)
-------------
Net Assets 100.0% ............................................................. $342,541,090
=============

PORTFOLIO ABBREVIATIONS:
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate

</TABLE>
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At October 31, 1997, all repurchase agreements held
by the Portfolio had been entered into on that date.
dSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
<TABLE>
<CAPTION>
Adjustable Rate Securities Portfolio
Year ended October 31,
----------------------------------------------------
1997 1996 1995 1994 19931
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $9.86 $9.81 $9.69 $10.03 $10.02
----------------------------------------------------
Income from investment operations:
Net investment income ........................ .616 .607 .625 .469 .368
Net realized and unrealized gain (loss) ...... .090 .050 .120 (.340) .010
----------------------------------------------------
Total from investment operations .............. .706 .657 .745 .129 .378
Less distributions from net investment income . (.616) (.607) (.625) (.469) (.368)
----------------------------------------------------
Net asset value, end of year .................. $9.95 $9.86 $9.81 $9.69 $10.03
====================================================
Total return* ................................. 7.38% 6.91% 7.94% 1.32% 3.83%

Ratios/supplemental data
Net assets, end of period (000's) ............. $22,540 $20,534 $27,079 $41,619 $124,309
Ratio of average net assets:
Expenses ..................................... .25% .25% .25% .25% .11%**
Expenses excluding waiver and payments by affiliate .44% .47% .47% .43% .47%**
Net investment income ........................ 6.20% 6.19% 6.36% 4.55% 4.76%**
Portfolio turnover rate ....................... 138.32% 46.78% 50.29% 192.06% 158.70%

</TABLE>
1For the nine months ended October 31, 1993.
*Total return is not annualized
**Annualized

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1997

PRINCIPAL
Adjustable Rate Securities Portfolio AMOUNT VALUE
Adjustable Rate Mortgage Securities 80.1%
<S> <C> <C>
FNMA, Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%, 10/01/28 .......... $ 837,463 $ 842,388
FNMA, Cap 13.86%, Margin 1.84% + CMT, Resets Annually, 7.490%, 8/01/16 .......... 375,448 394,318
FNMA, Cap 14.68%, Margin 2.125% + 3CMT, Resets Every 3 Years, 8.627%, 8/01/22 ... 1,844,163 1,959,885
dGNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 5.50%, 12/01/27 .......... 1,000,000 997,813
Homeowners Federal Savings, Cap 13.00%, Margin 1.75% + CMT,
Resets Annually, 7.407%, 1/25/18 ................................................ 887,457 902,710
PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 8.359%, 7/25/22 .......... 1,152,236 1,177,442
PHMS, Cap 12.02%, Margin 2.55% + CMT, Resets Annually, 8.144%, 4/25/22 .......... 598,746 602,676
RFC, Cap 10.00%, Margin 0.85% + COFI, Resets Monthly, 5.713%, 2/25/22 ........... 846,607 844,169
RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.705%, 11/25/22 .......... 1,184,262 1,225,982
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 6.868%, 1/25/25 1,166,767 1,166,767
RTC, Cap 13.82%, Margin 0.92% + 3CMT, Resets Every 3 Years, 7.099%, 4/25/22 ..... 1,235,919 1,239,009
RTC, Cap 14.69%, Margin 1.55% + 3CMT, Resets Every 3 Years, 7.582%, 6/25/22 ..... 1,483,767 1,438,790
RTC, Cap 16.48%, Margin NACR - 0.15%, Resets Annually, 7.549%, 7/25/20 .......... 1,059,548 1,064,846
Salomon Brothers Mortgage Securities, Cap 14.00%, Margin 0.96% + NACR,
Resets Annually, 8.121%, 10/25/16 ............................................... 1,408,400 1,407,961
Saxon Mortgage Securities Corp., Cap 10.78%, Margin 2.78% + 6 Month LIBOR,
Resets Semi-Annually, 8.683%, 5/25/24 .......................................... 517,538 536,725
Saxon Mortgage Securities Corp., Cap 11.68%, Margin 2.13% + 6 Month LIBOR,
Resets Semi-Annually, 8.128%, 2/25/23 .......................................... 1,138,876 1,141,723
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25% + CMT,
Resets Annually, 7.902%, 12/25/18 ............................................... 757,017 758,674
Western Federal Savings and Loan Association, Cap 13.00%,
Margin 1.80% + COFI, Resets Monthly, 6.664%, 3/25/19 ........................... 335,058 342,938
-------------
Total Adjustable Rate Mortgage Securities (Cost $18,203,747) .................... 18,044,816
-------------
Fixed Rate Mortgage Securities 4.1%
Countrywide Mortgage-Backed Securities, Inc., Series 1994-I,
Class A8, 6.25%, 7/25/09 (Cost $917,871) ........................................ 943,825 931,160
-------------
Other Adjustable Rate Securities 4.3%
SBA, Cap 12.625%, Margin -0.125% + Prime, Resets Quarterly,
8.375%, 8/25/20 (Cost $975,901) ................................................. 905,183 971,941
-------------
U.S. Government Securities 8.9%
U.S. Treasury Notes, 5.75%, 9/30/99 (Cost $1,998,945) ........................... 2,000,000 2,005,002
-------------
bRepurchase Agreements 6.9%
Joint Repurchase Agreement, 5.671%, 11/03/97, (Maturity Value $1,547,322)
(Cost $1,546,591) ................................................................ 1,546,591 1,546,591
-------------
Aubrey G. Lanston & Co., Inc.
B.A. Securities, Inc.
Barclays de Zoete Wedd Securities, Inc.
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Fuji Securities, Inc.
Lehman Brothers, Inc.
Sanwa Securities (USA) Co., L.P.
SBC Warburg, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $23,643,055) 104.3% ..................................... 23,499,510
Other Assets, less Liabilities (4.3%) ........................................... (959,648)
-------------
Net Assets 100.0% ............................................................... $22,539,862
=============

</TABLE>
PORTFOLIO ABBREVIATIONS
3CMT - 3 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
LIBOR - London Interbank Offered Rate
NACR - National Average Contract Rate
NCI - National Median Cost of Funds Index
PHMS - Prudential Home Mortgage Securities
RFC - Residential Finance Corp.
RTC - Resolution Trust Corp.
SBA - Small Business Administration

bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At October 31, 1997, all repurchase agreements held
by the Portfolio had been entered into on that date.
dSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements
<TABLE>
<CAPTION>

Statements of Assets and Liabilities
October 31, 1997

U.S. Government
Adjustable Rate Adjustable Rate
Mortgage PortfolioSecurities Portfolio
---------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost ................................................................... $357,438,670 $23,643,055
======================================
Value .................................................................. 360,504,905 23,499,510
Cash .................................................................... -- 7,274
Receivables:
Investment securities sold ............................................. 821,558 1,105
Interest ............................................................... 2,373,126 135,508
---------------------------------------
Total assets ...................................................... 363,699,589 23,643,397
---------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................................ 19,129,729 999,924
Capital shares redeemed ................................................ 1,946,394 93,797
Affiliates ............................................................. 68,239 4,009
Other liabilities ....................................................... 14,137 5,805
---------------------------------------
Total liabilities ................................................. 21,158,499 1,103,535
---------------------------------------
Net assets, at value ............................................. $342,541,090 $22,539,862
======================================
Net assets consist of:
Net unrealized appreciation (depreciation) ............................. $ 3,066,235 $ (143,545)
Accumulated net realized loss .......................................... (137,126,881) (2,729,247)
Capital shares ......................................................... 476,601,736 25,412,654
---------------------------------------
Net assets, at value .................................................... $342,541,090 $22,539,862
======================================
Shares outstanding ...................................................... 36,140,971 2,265,903
======================================
Net asset value and maximum offering price per share .................... $9.48 $9.95
======================================

</TABLE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)

Statements of Operations
for the year ended October 31, 1997

U.S. Government
Adjustable Rate Adjustable Rate
Mortgage PortfolioSecurities Portfolio
---------------------------------------
<S> <C> <C>
Investment income:
Interest ............................................................... $24,396,969 $1,562,033
---------------------------------------
Expenses:
Management fees (Note 5) ............................................... 1,487,256 96,727
Custodian fees ......................................................... 3,641 205
Reports to shareholders ................................................ 906 689
Professional fees ...................................................... 53,470 4,455
Trustees' fees and expenses ............................................ 6,531 387
Other .................................................................. 37,399 4,233
---------------------------------------
Total expenses .................................................... 1,589,203 106,696
Expenses waived/paid by affiliate (Note 5) ........................ (656,658) (45,274)
---------------------------------------
Net expenses ..................................................... 932,545 61,422
---------------------------------------
Net investment income ........................................... 23,464,424 1,500,611
---------------------------------------
Realized and unrealized gain:
Net realized gain from investments ..................................... 693,708 14,469
Net unrealized appreciation on investments ............................. 3,675,679 260,606
---------------------------------------
Net realized and unrealized gain ........................................ 4,369,387 275,075
---------------------------------------
Net increase in net assets resulting from operations .................... $27,833,811 $1,775,686
======================================

</TABLE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)
<TABLE>
<CAPTION>

Statements of Changes in Net Assets
for the years ended October 31, 1997 and 1996

U.S. Government Adjustable Rate
Adjustable Rate Mortgage Portfolio Securities Portfolio
--------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 23,464,424 $ 29,813,817 $ 1,500,611 $ 1,391,109
Net realized gain (loss) from investments 693,708 (419,303) 14,469 (37,828)
Net unrealized appreciation on investments 3,675,679 2,011,283 260,606 139,862
--------------------------------------------------------------
Net increase in net assets resulting
from operations 27,833,811 31,405,797 1,775,686 1,493,143
Distributions to shareholders from:
Net investment income (23,464,424) (29,813,817) (1,500,611) (1,391,109)
Capital share transactions (Note 2) (68,259,294) (117,962,940) 1,730,540 (6,646,687)
--------------------------------------------------------------
Net increase (decrease) in net assets (63,889,907) (116,370,960) 2,005,615 (6,544,653)
Net assets (there is no undistributed net investment
income at beginning or end of year):
Beginning of year 406,430,997 522,801,957 20,534,247 27,078,900
--------------------------------------------------------------
End of year $342,541,090 $406,430,997 $22,539,862 $20,534,247
==============================================================

</TABLE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

The following summarizes the Portfolios' significant accounting policies.

a. Security Valuation:

Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.

b. Income Taxes:

No provision has been made for income taxes because each Portfolio's policy is
to qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.

c. Security Transactions, Investment Income, Expenses and Distributions:

Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividends from net
investment income are normally declared daily and distributed monthly to
shareholders.

d. Accounting Estimates:

2. TRUST SHARES:

At October 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in each of the Portfolios' shares were as follow:
<TABLE>
<CAPTION>

U.S. Government Adjustable Adjustable Rate
Rate Mortgage Portfolio Securities Portfolio
------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Shares sold ....................................... 14,468,647 $136,195,699 2,195,631 $21,698,569
Shares issued in reinvestment of distributions .... 2,492,654 23,464,406 151,507 1,500,610
Shares redeemed ...................................(24,217,403) (227,919,399) (2,164,571) (21,468,639)
------------------------------------------------------
Net Increase (decrease) ...................... (7,256,102)$ (68,259,294) 182,567 $ 1,730,540
======================================================
1996
Shares sold ....................................... 8,516,434 $ 79,504,622 741,450 $ 7,267,077
Shares issued in reinvestment of distributions .... 3,196,067 29,832,645 141,790 1,391,107
Shares redeemed ...................................(24,351,072) (227,300,207) (1,560,875) (15,304,871)
------------------------------------------------------
Net Decrease .................................(12,638,571)$(117,962,940) (677,635)$ (6,646,687)
======================================================

</TABLE>
3. INCOME TAXES

At October 31, 1997, the Portfolios had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:

U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
Capital loss carryovers
Expiring in:
2000 $ 44,745,908 $ 42,138
2001 17,182,002 50,908
2002 67,102,060 1,987,888
2003 7,677,608 609,391
2004 419,303 37,828
----------------------------
$137,126,881 $2,728,153
----------------------------

3. INCOME TAXES (cont.)

The cost of securities for income tax purposes is the same as that shown in the
investment portfolio.

At October 31, 1997, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes were as follows:

U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
---------------------------------------
Investments
at cost $357,438,670 $23,643,055
---------------------------------------
Unrealized
appreciation $ 4,622,271 98,232
Unrealized
depreciation (1,556,036) (241,777)
---------------------------------------
Net unrealized
appreciation
(depreciation) $ 3,066,235 $ (143,545)
---------------------------------------

4. INVESTMENT TRANSACTIONS

Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1997 were as follows:

U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
---------------------------------------
Purchases $ 74,103,904 $35,649,657
Sales $124,530,053 $32,484,549

5. TRANSACTIONS WITH AFFILIATES

Certain officers and directors of the Trust are also officers and/or directors
of Franklin Advisers, Inc. (Advisers), the Portfolios' investment manager (a
wholly-owned subsidiary of Franklin Resources, Inc.) and of Franklin Investors
Securities Trust and Institutional Fiduciary Trust.

The Portfolios pay an investment management fee to Advisers based on the average
net assets of the Portfolios as follows:

Annualized
Fee Rate Month End Net Assets
0.400% First $5 billion
0.350% Over $5 billion, up to and including $10 billion
0.330% Over $10 billion, up to and including $15 billion

Fees are further reduced on net assets over $15 billion.

Advisers agreed in advance to waive management fees as noted in the Statement of
Operations.

5. TRANSACTIONS WITH AFFILIATES (cont.)
<TABLE>
<CAPTION>

At October 31, 1997, 36,140,971 shares of the Mortgage Portfolio were owned by
the following:

Shares Percentage of
Name Owned Outstanding Shares
<S> <C> <C>
Franklin Adjustable U.S. Government Securities Fund ......................... 35,474,557 98%
Franklin Institutional Adjustable U.S. Government Securities Fund ........... 666,414 2%

At October 31, 1997, 2,265,903 shares of the Securities Portfolio were owned by the following:

Shares Percentage of
Name Owned Outstanding Shares
<S> <C> <C>
Franklin Adjustable Rate Securities Fund .................................... 2,131,679 94%
Franklin Institutional Adjustable Rate Securities Fund ...................... 132,707 6%
Franklin Resources, Inc. .................................................... 1,517 --

</TABLE>

ADJUSTABLE RATE SECURITIES PORTFOLIOS
Report of Independent Accountants

To the Shareholders and Board of Trustees
of Adjustable Rate Securities Portfolios:

We have audited the accompanying statements of assets and liabilities of the two
Portfolios comprising the Adjustable Rate Securities Portfolios (the Trust),
including each Portfolio's statement of investments, as of October 31, 1997, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
two Portfolios comprising the Adjustable Rate Securities Portfolios as of
October 31, 1997, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California

December 5, 1997

Franklin Investors Securities Trust Annual Report October 31, 1997

APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATION S-T)

GRAPHIC MATERIAL (1)

The following line graph hypothetically compares the performance of the
Franklin Global Government Income Fund - Class I Shares to that of the JP
Morgan Global Government Bond Index, based on a $10,000 investment from
3/15/88 to 10/31/97.

Period Ending Fund Index

3/15/1988 $9,579 $10,000
3/31/1988 $9,607 $10,041
4/30/1988 $9,626 $9,995
5/31/1988 $9,799 $9,888
6/30/1988 $9,866 $9,800
7/31/1988 $9,933 $9,724
8/31/1988 $9,868 $9,654
9/30/1988 $9,949 $9,895
10/31/1988 $10,245 $10,284
11/30/1988 $10,425 $10,374
12/31/1988 $10,351 $10,312
1/31/1989 $10,513 $10,210
2/28/1989 $10,364 $10,193
3/31/1989 $10,366 $10,107
4/30/1989 $10,421 $10,274
5/31/1989 $10,268 $10,162
6/30/1989 $10,608 $10,394
7/31/1989 $10,823 $10,808
8/31/1989 $10,880 $10,489
9/30/1989 $10,764 $10,654
10/31/1989 $10,658 $10,791
11/30/1989 $10,761 $10,887
12/31/1989 $10,931 $11,013
1/31/1990 $10,844 $10,849
2/28/1990 $10,689 $10,732
3/31/1990 $10,819 $10,667
4/30/1990 $10,752 $10,625
5/31/1990 $10,978 $10,965
6/30/1990 $11,312 $11,163
7/31/1990 $11,602 $11,492
8/31/1990 $11,449 $11,402
9/30/1990 $11,415 $11,508
10/31/1990 $11,468 $11,963
11/30/1990 $11,670 $12,174
12/31/1990 $11,761 $12,310
1/31/1991 $11,905 $12,589
2/28/1991 $12,241 $12,600
3/31/1991 $12,013 $12,206
4/30/1991 $12,199 $12,354
5/31/1991 $12,347 $12,365
6/30/1991 $12,246 $12,200
7/31/1991 $12,491 $12,459
8/31/1991 $12,564 $12,717
9/30/1991 $12,898 $13,181
10/31/1991 $13,076 $13,310
11/30/1991 $13,058 $13,527
12/31/1991 $13,435 $14,210
1/31/1992 $13,403 $13,932
2/29/1992 $13,415 $13,891
3/31/1992 $13,399 $13,763
4/30/1992 $13,527 $13,878
5/31/1992 $13,817 $14,272
6/30/1992 $13,799 $14,661
7/31/1992 $13,916 $14,984
8/31/1992 $13,819 $15,383
9/30/1992 $13,193 $15,367
10/31/1992 $13,434 $14,983
11/30/1992 $13,162 $14,718
12/31/1992 $13,402 $14,858
1/31/1993 $13,597 $15,109
2/28/1993 $13,856 $15,352
3/31/1993 $14,357 $15,588
4/30/1993 $14,780 $15,872
5/31/1993 $15,013 $15,974
6/30/1993 $14,954 $15,986
7/31/1993 $14,910 $15,993
8/31/1993 $15,280 $16,466
9/30/1993 $15,254 $16,641
10/31/1993 $15,695 $16,633
11/30/1993 $15,331 $16,511
12/31/1993 $15,899 $16,679
1/31/1994 $16,213 $16,836
2/28/1994 $15,720 $16,651
3/31/1994 $15,067 $16,574
4/30/1994 $15,058 $16,561
5/31/1994 $15,169 $16,425
6/30/1994 $14,414 $16,619
7/31/1994 $14,618 $16,775
8/31/1994 $14,770 $16,732
9/30/1994 $14,742 $16,816
10/31/1994 $14,814 $17,068
11/30/1994 $14,797 $16,853
12/31/1994 $14,665 $16,891
1/31/1995 $14,573 $17,233
2/28/1995 $14,781 $17,677
3/31/1995 $15,085 $18,577
4/30/1995 $15,449 $18,874
5/31/1995 $15,855 $19,401
6/30/1995 $15,913 $19,521
7/31/1995 $16,049 $19,613
8/31/1995 $16,090 $19,068
9/30/1995 $16,448 $19,499
10/31/1995 $16,688 $19,690
11/30/1995 $16,950 $19,908
12/31/1995 $17,316 $20,155
1/31/1996 $17,356 $19,950
2/29/1996 $17,068 $19,832
3/31/1996 $17,131 $19,802
4/30/1996 $17,318 $19,729
5/31/1996 $17,443 $19,749
6/30/1996 $17,696 $19,922
7/31/1996 $17,717 $20,289
8/31/1996 $17,993 $20,374
9/30/1996 $18,314 $20,486
10/31/1996 $18,658 $20,892
11/30/1996 $19,133 $21,191
12/31/1996 $19,178 $21,042
1/31/1997 $18,937 $20,516
2/28/1997 $18,847 $20,375
3/31/1997 $18,759 $20,220
4/30/1997 $18,804 $20,106
5/31/1997 $18,960 $20,581
6/30/1997 $19,186 $20,816
7/31/1997 $19,277 $20,739
8/31/1997 $19,232 $20,714
9/30/1997 $19,623 $21,174
10/31/1997 $19,506 $21,622

GRAPHIC MATERIAL (2)

The following line graph hypothetically compares the performance of the
Franklin Global Government Income Fund - Class II Shares to that of the JP
Morgan Global Government Bond Index, based on a $10,000 investment from
5/1/95 to 10/31/97.

Period Ending Fund Index

5/1/1995 $9,901 $10,000
5/31/1995 $10,171 $10,279
6/30/1995 $10,204 $10,343
7/31/1995 $10,273 $10,391
8/31/1995 $10,294 $10,102
9/30/1995 $10,518 $10,331
10/31/1995 $10,670 $10,432
11/30/1995 $10,834 $10,548
12/31/1995 $11,063 $10,679
1/31/1996 $11,084 $10,570
2/29/1996 $10,895 $10,507
3/31/1996 $10,929 $10,492
4/30/1996 $11,029 $10,453
5/31/1996 $11,117 $10,463
6/30/1996 $11,272 $10,555
7/31/1996 $11,280 $10,749
8/31/1996 $11,451 $10,795
9/30/1996 $11,650 $10,854
10/31/1996 $11,864 $11,069
11/30/1996 $12,163 $11,227
12/31/1996 $12,187 $11,149
1/31/1997 $12,027 $10,870
2/28/1997 $11,979 $10,795
3/31/1997 $11,903 $10,713
4/30/1997 $11,925 $10,653
5/31/1997 $12,033 $10,904
6/30/1997 $12,170 $11,029
7/31/1997 $12,222 $10,988
8/31/1997 $12,188 $10,975
9/30/1997 $12,415 $11,218
10/31/1997 $12,336 $11,456

GRAPHIC MATERIAL (3)

The following line graph hypothetically compares the performance of the
Franklin Global Government Income Fund - Advisor Class Shares to that of the
JP Morgan Global Government Bond Index, based on a $10,000 investment from
3/15/88 to 10/31/97.

Period Ending Fund Index

3/15/1988 $10,000 $10,000
3/31/1988 $10,030 $10,041
4/30/1988 $10,050 $9,995
5/31/1988 $10,230 $9,888
6/30/1988 $10,300 $9,800
7/31/1988 $10,370 $9,724
8/31/1988 $10,303 $9,654
9/30/1988 $10,387 $9,895
10/31/1988 $10,696 $10,284
11/30/1988 $10,884 $10,374
12/31/1988 $10,807 $10,312
1/31/1989 $10,976 $10,210
2/28/1989 $10,820 $10,193
3/31/1989 $10,823 $10,107
4/30/1989 $10,880 $10,274
5/31/1989 $10,720 $10,162
6/30/1989 $11,074 $10,394
7/31/1989 $11,300 $10,808
8/31/1989 $11,359 $10,489
9/30/1989 $11,238 $10,654
10/31/1989 $11,127 $10,791
11/30/1989 $11,234 $10,887
12/31/1989 $11,412 $11,013
1/31/1990 $11,321 $10,849
2/28/1990 $11,159 $10,732
3/31/1990 $11,295 $10,667
4/30/1990 $11,225 $10,625
5/31/1990 $11,461 $10,965
6/30/1990 $11,810 $11,163
7/31/1990 $12,113 $11,492
8/31/1990 $11,952 $11,402
9/30/1990 $11,917 $11,508
10/31/1990 $11,973 $11,963
11/30/1990 $12,183 $12,174
12/31/1990 $12,279 $12,310
1/31/1991 $12,429 $12,589
2/28/1991 $12,780 $12,600
3/31/1991 $12,541 $12,206
4/30/1991 $12,736 $12,354
5/31/1991 $12,891 $12,365
6/30/1991 $12,785 $12,200
7/31/1991 $13,041 $12,459
8/31/1991 $13,117 $12,717
9/30/1991 $13,466 $13,181
10/31/1991 $13,651 $13,310
11/30/1991 $13,632 $13,527
12/31/1991 $14,026 $14,210
1/31/1992 $13,993 $13,932
2/29/1992 $14,005 $13,891
3/31/1992 $13,988 $13,763
4/30/1992 $14,122 $13,878
5/31/1992 $14,425 $14,272
6/30/1992 $14,406 $14,661
7/31/1992 $14,528 $14,984
8/31/1992 $14,427 $15,383
9/30/1992 $13,773 $15,367
10/31/1992 $14,025 $14,983
11/30/1992 $13,741 $14,718
12/31/1992 $13,992 $14,858
1/31/1993 $14,195 $15,109
2/28/1993 $14,466 $15,352
3/31/1993 $14,989 $15,588
4/30/1993 $15,431 $15,872
5/31/1993 $15,674 $15,974
6/30/1993 $15,612 $15,986
7/31/1993 $15,567 $15,993
8/31/1993 $15,952 $16,466
9/30/1993 $15,925 $16,641
10/31/1993 $16,386 $16,633
11/30/1993 $16,006 $16,511
12/31/1993 $16,599 $16,679
1/31/1994 $16,927 $16,836
2/28/1994 $16,412 $16,651
3/31/1994 $15,730 $16,574
4/30/1994 $15,720 $16,561
5/31/1994 $15,837 $16,425
6/30/1994 $15,049 $16,619
7/31/1994 $15,261 $16,775
8/31/1994 $15,420 $16,732
9/30/1994 $15,390 $16,816
10/31/1994 $15,466 $17,068
11/30/1994 $15,448 $16,853
12/31/1994 $15,310 $16,891
1/31/1995 $15,214 $17,233
2/28/1995 $15,431 $17,677
3/31/1995 $15,749 $18,577
4/30/1995 $16,129 $18,874
5/31/1995 $16,552 $19,401
6/30/1995 $16,613 $19,521
7/31/1995 $16,755 $19,613
8/31/1995 $16,798 $19,068
9/30/1995 $17,171 $19,499
10/31/1995 $17,422 $19,690
11/30/1995 $17,696 $19,908
12/31/1995 $18,077 $20,155
1/31/1996 $18,119 $19,950
2/29/1996 $17,819 $19,832
3/31/1996 $17,885 $19,802
4/30/1996 $18,080 $19,729
5/31/1996 $18,210 $19,749
6/30/1996 $18,474 $19,922
7/31/1996 $18,496 $20,289
8/31/1996 $18,784 $20,374
9/30/1996 $19,119 $20,486
10/31/1996 $19,478 $20,892
11/30/1996 $19,975 $21,191
12/31/1996 $20,022 $21,042
1/31/1997 $19,772 $20,516
2/28/1997 $19,703 $20,375
3/31/1997 $19,589 $20,220
4/30/1997 $19,661 $20,106
5/31/1997 $19,826 $20,581
6/30/1997 $20,063 $20,816
7/31/1997 $20,160 $20,739
8/31/1997 $20,115 $20,714
9/30/1997 $20,501 $21,174
10/31/1997 $20,381 $21,622

GRAPHIC MATERIAL (4)

The following line graph hypothetically compares the performance of the
Franklin Short-Intermediate U.S. Government Securities Fund - Class I Shares
to that of the Lehman Brothers Short U.S. Treasury 1-5 Year Index and the
CPI, based on a $10,000 investment from 11/1/87 to 10/31/97.

Period Ending Fund Index Index

11/1/1987 9,772 $10,000 $10,000
Nov-87 9,820 $10,065 $10,009
Dec-87 9,888 $10,143 $10,009
Jan-88 10,053 $10,331 $10,035
Feb-88 10,132 $10,426 $10,061
Mar-88 10,143 $10,422 $10,104
Apr-88 10,144 $10,424 $10,157
May-88 10,135 $10,399 $10,191
Jun-88 10,235 $10,525 $10,235
Jul-88 10,236 $10,517 $10,278
Aug-88 10,247 $10,528 $10,321
Sep-88 10,370 $10,672 $10,391
Oct-88 10,474 $10,795 $10,425
Nov-88 10,437 $10,739 $10,433
Dec-88 10,461 $10,752 $10,451
Jan-89 10,536 $10,841 $10,503
Feb-89 10,539 $10,823 $10,546
Mar-89 10,584 $10,869 $10,607
Apr-89 10,746 $11,070 $10,676
May-89 10,876 $11,243 $10,737
Jun-89 11,049 $11,488 $10,763
Jul-89 11,192 $11,690 $10,789
Aug-89 11,097 $11,576 $10,806
Sep-89 11,153 $11,636 $10,841
Oct-89 11,343 $11,846 $10,893
Nov-89 11,433 $11,955 $10,919
Dec-89 11,469 $11,998 $10,936
Jan-90 11,482 $11,973 $11,049
Feb-90 11,553 $12,027 $11,101
Mar-90 11,578 $12,051 $11,162
Apr-90 11,580 $12,052 $11,180
May-90 11,767 $12,268 $11,206
Jun-90 11,898 $12,412 $11,266
Jul-90 12,030 $12,578 $11,309
Aug-90 12,056 $12,592 $11,413
Sep-90 12,165 $12,699 $11,509
Oct-90 12,300 $12,858 $11,578
Nov-90 12,423 $13,005 $11,603
Dec-90 12,576 $13,173 $11,603
Jan-91 12,676 $13,302 $11,673
Feb-91 12,753 $13,382 $11,690
Mar-91 12,830 $13,465 $11,708
Apr-91 12,945 $13,602 $11,726
May-91 13,011 $13,683 $11,761
Jun-91 13,042 $13,716 $11,795
Jul-91 13,151 $13,853 $11,812
Aug-91 13,337 $14,081 $11,847
Sep-91 13,486 $14,273 $11,899
Oct-91 13,635 $14,440 $11,917
Nov-91 13,760 $14,603 $11,951
Dec-91 14,092 $14,885 $11,960
Jan-92 13,897 $14,809 $11,978
Feb-92 13,930 $14,847 $12,021
Mar-92 13,863 $14,812 $12,082
Apr-92 13,984 $14,955 $12,099
May-92 14,188 $15,138 $12,116
Jun-92 14,407 $15,335 $12,159
Jul-92 14,711 $15,574 $12,185
Aug-92 14,863 $15,731 $12,219
Sep-92 15,123 $15,922 $12,253
Oct-92 14,879 $15,762 $12,296
Nov-92 14,789 $15,709 $12,313
Dec-92 15,027 $15,885 $12,305
Jan-93 15,307 $16,136 $12,365
Feb-93 15,574 $16,324 $12,408
Mar-93 15,638 $16,380 $12,452
Apr-93 15,731 $16,504 $12,487
May-93 15,678 $16,448 $12,504
Jun-93 15,883 $16,626 $12,522
Jul-93 15,903 $16,656 $12,522
Aug-93 16,147 $16,856 $12,557
Sep-93 16,197 $16,911 $12,583
Oct-93 16,224 $16,952 $12,635
Nov-93 16,131 $16,915 $12,644
Dec-93 16,192 $16,982 $12,644
Jan-94 16,357 $17,123 $12,678
Feb-94 16,109 $16,949 $12,721
Mar-94 15,890 $16,783 $12,764
Apr-94 15,764 $16,685 $12,782
May-94 15,776 $16,704 $12,791
Jun-94 15,773 $16,729 $12,834
Jul-94 15,960 $16,911 $12,869
Aug-94 15,995 $16,963 $12,920
Sep-94 15,888 $16,872 $12,955
Oct-94 15,910 $16,894 $12,964
Nov-94 15,821 $16,809 $12,981
Dec-94 15,844 $16,848 $12,981
Jan-95 16,074 $17,104 $13,033
Feb-95 16,322 $17,393 $13,085
Mar-95 16,409 $17,490 $13,129
Apr-95 16,550 $17,671 $13,172
May-95 16,871 $18,077 $13,198
Jun-95 16,964 $18,185 $13,225
Jul-95 17,008 $18,225 $13,225
Aug-95 17,102 $18,349 $13,259
Sep-95 17,180 $18,452 $13,285
Oct-95 17,325 $18,631 $13,329
Nov-95 17,471 $18,825 $13,320
Dec-95 17,601 $18,989 $13,311
Jan-96 17,714 $19,161 $13,389
Feb-96 17,641 $19,029 $13,432
Mar-96 17,602 $18,968 $13,502
Apr-96 17,596 $18,951 $13,555
May-96 17,610 $18,965 $13,580
Jun-96 17,745 $19,126 $13,588
Jul-96 17,794 $19,193 $13,614
Aug-96 17,842 $19,243 $13,640
Sep-96 17,997 $19,450 $13,684
Oct-96 18,187 $19,717 $13,728
Nov-96 18,343 $19,900 $13,754
Dec-96 18,303 $19,850 $13,754
Jan-97 18,371 $19,938 $13,798
Feb-97 18,404 $19,974 $13,840
Mar-97 18,364 $19,912 $13,875
Apr-97 18,505 $20,103 $13,892
May-97 18,629 $20,248 $13,883
Jun-97 18,753 $20,404 $13,900
Jul-97 18,970 $20,704 $13,917
Aug-97 18,966 $20,677 $13,943
Sep-97 19,111 $20,865 $13,978
Oct-97 19,256 $21,063 $14,013
TOTAL RETURN 92.56% 110.63% 40.13%

GRAPHIC MATERIAL (5)

The following line graph hypothetically compares the performance of the
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Shares to that of the Lehman Brothers Short U.S. Treasury 1-5 Year Index and
the CPI, based on a $10,000 investment from 11/1/87 to 10/31/97.

Period Ending Fund Index Index

11/1/1987 10,000 $10,000 $10,000
Nov-87 10,050 $10,065 $10,009
Dec-87 10,119 $10,143 $10,009
Jan-88 10,288 $10,331 $10,035
Feb-88 10,369 $10,426 $10,061
Mar-88 10,380 $10,422 $10,104
Apr-88 10,381 $10,424 $10,157
May-88 10,372 $10,399 $10,191
Jun-88 10,474 $10,525 $10,235
Jul-88 10,475 $10,517 $10,278
Aug-88 10,487 $10,528 $10,321
Sep-88 10,612 $10,672 $10,391
Oct-88 10,719 $10,795 $10,425
Nov-88 10,681 $10,739 $10,433
Dec-88 10,705 $10,752 $10,451
Jan-89 10,782 $10,841 $10,503
Feb-89 10,786 $10,823 $10,546
Mar-89 10,832 $10,869 $10,607
Apr-89 10,997 $11,070 $10,676
May-89 11,130 $11,243 $10,737
Jun-89 11,308 $11,488 $10,763
Jul-89 11,453 $11,690 $10,789
Aug-89 11,356 $11,576 $10,806
Sep-89 11,414 $11,636 $10,841
Oct-89 11,608 $11,846 $10,893
Nov-89 11,701 $11,955 $10,919
Dec-89 11,737 $11,998 $10,936
Jan-90 11,751 $11,973 $11,049
Feb-90 11,823 $12,027 $11,101
Mar-90 11,849 $12,051 $11,162
Apr-90 11,851 $12,052 $11,180
May-90 12,042 $12,268 $11,206
Jun-90 12,176 $12,412 $11,266
Jul-90 12,311 $12,578 $11,309
Aug-90 12,338 $12,592 $11,413
Sep-90 12,450 $12,699 $11,509
Oct-90 12,587 $12,858 $11,578
Nov-90 12,713 $13,005 $11,603
Dec-90 12,870 $13,173 $11,603
Jan-91 12,973 $13,302 $11,673
Feb-91 13,051 $13,382 $11,690
Mar-91 13,130 $13,465 $11,708
Apr-91 13,248 $13,602 $11,726
May-91 13,315 $13,683 $11,761
Jun-91 13,347 $13,716 $11,795
Jul-91 13,458 $13,853 $11,812
Aug-91 13,649 $14,081 $11,847
Sep-91 13,801 $14,273 $11,899
Oct-91 13,954 $14,440 $11,917
Nov-91 14,081 $14,603 $11,951
Dec-91 14,421 $14,885 $11,960
Jan-92 14,222 $14,809 $11,978
Feb-92 14,255 $14,847 $12,021
Mar-92 14,187 $14,812 $12,082
Apr-92 14,311 $14,955 $12,099
May-92 14,520 $15,138 $12,116
Jun-92 14,744 $15,335 $12,159
Jul-92 15,055 $15,574 $12,185
Aug-92 15,211 $15,731 $12,219
Sep-92 15,476 $15,922 $12,253
Oct-92 15,227 $15,762 $12,296
Nov-92 15,135 $15,709 $12,313
Dec-92 15,379 $15,885 $12,305
Jan-93 15,665 $16,136 $12,365
Feb-93 15,938 $16,324 $12,408
Mar-93 16,003 $16,380 $12,452
Apr-93 16,099 $16,504 $12,487
May-93 16,045 $16,448 $12,504
Jun-93 16,254 $16,626 $12,522
Jul-93 16,275 $16,656 $12,522
Aug-93 16,524 $16,856 $12,557
Sep-93 16,576 $16,911 $12,583
Oct-93 16,604 $16,952 $12,635
Nov-93 16,508 $16,915 $12,644
Dec-93 16,570 $16,982 $12,644
Jan-94 16,739 $17,123 $12,678
Feb-94 16,485 $16,949 $12,721
Mar-94 16,262 $16,783 $12,764
Apr-94 16,132 $16,685 $12,782
May-94 16,145 $16,704 $12,791
Jun-94 16,142 $16,729 $12,834
Jul-94 16,333 $16,911 $12,869
Aug-94 16,369 $16,963 $12,920
Sep-94 16,259 $16,872 $12,955
Oct-94 16,282 $16,894 $12,964
Nov-94 16,191 $16,809 $12,981
Dec-94 16,214 $16,848 $12,981
Jan-95 16,450 $17,104 $13,033
Feb-95 16,703 $17,393 $13,085
Mar-95 16,792 $17,490 $13,129
Apr-95 16,937 $17,671 $13,172
May-95 17,265 $18,077 $13,198
Jun-95 17,360 $18,185 $13,225
Jul-95 17,406 $18,225 $13,225
Aug-95 17,502 $18,349 $13,259
Sep-95 17,582 $18,452 $13,285
Oct-95 17,730 $18,631 $13,329
Nov-95 17,879 $18,825 $13,320
Dec-95 18,012 $18,989 $13,311
Jan-96 18,128 $19,161 $13,389
Feb-96 18,053 $19,029 $13,432
Mar-96 18,013 $18,968 $13,502
Apr-96 18,008 $18,951 $13,555
May-96 18,022 $18,965 $13,580
Jun-96 18,160 $19,126 $13,588
Jul-96 18,209 $19,193 $13,614
Aug-96 18,259 $19,243 $13,640
Sep-96 18,417 $19,450 $13,684
Oct-96 18,612 $19,717 $13,728
Nov-96 18,771 $19,900 $13,754
Dec-96 18,731 $19,850 $13,754
Jan-97 18,796 $19,938 $13,798
Feb-97 18,830 $19,974 $13,840
Mar-97 18,791 $19,912 $13,875
Apr-97 18,936 $20,103 $13,892
May-97 19,064 $20,248 $13,883
Jun-97 19,191 $20,404 $13,900
Jul-97 19,414 $20,704 $13,917
Aug-97 19,412 $20,677 $13,943
Sep-97 19,561 $20,865 $13,978
Oct-97 19,712 $21,063 $14,013
TOTAL RETURN 97.12% 110.63% 40.13%

GRAPHIC MATERIAL (6)

The following line graph hypothetically compares the performance of the
Franklin Convertible Securities Fund - Class I Shares to that of the Goldman
Sachs Convertible 100 Bond Index, based on a $10,000 investment from 11/1/87
to 10/31/97.

Period Ending Fund Index

11/1/1987 $9,547 $10,000
11/30/1987 $9,418 $9,761
12/31/1987 $9,738 $10,187
1/31/1988 $9,997 $10,705
2/29/1988 $10,412 $11,143
3/31/1988 $10,530 $11,243
4/30/1988 $10,660 $11,370
5/31/1988 $10,590 $11,291
6/30/1988 $11,003 $11,731
7/31/1988 $10,852 $11,553
8/31/1988 $10,701 $11,309
9/30/1988 $10,778 $11,406
10/31/1988 $10,958 $11,591
11/30/1988 $10,862 $11,358
12/31/1988 $10,836 $11,549
1/31/1989 $11,338 $12,117
2/28/1989 $11,370 $12,157
3/31/1989 $11,307 $12,240
4/30/1989 $11,710 $12,569
5/31/1989 $11,959 $12,722
6/30/1989 $11,918 $12,591
7/31/1989 $12,183 $12,760
8/31/1989 $12,461 $13,034
9/30/1989 $12,359 $12,791
10/31/1989 $11,908 $12,270
11/30/1989 $12,043 $12,429
12/31/1989 $12,154 $12,408
1/31/1990 $11,808 $11,768
2/28/1990 $11,881 $11,853
3/31/1990 $12,158 $12,036
4/30/1990 $11,883 $11,614
5/31/1990 $12,422 $12,339
6/30/1990 $12,614 $12,308
7/31/1990 $12,439 $12,172
8/31/1990 $11,658 $11,496
9/30/1990 $11,029 $10,855
10/31/1990 $10,478 $10,269
11/30/1990 $10,959 $10,844
12/31/1990 $11,454 $11,133
1/31/1991 $11,897 $11,739
2/28/1991 $12,632 $12,445
3/31/1991 $13,107 $12,723
4/30/1991 $13,413 $12,846
5/31/1991 $13,923 $13,316
6/30/1991 $13,460 $12,901
7/31/1991 $14,031 $13,252
8/31/1991 $14,534 $13,680
9/30/1991 $14,559 $13,643
10/31/1991 $14,702 $13,913
11/30/1991 $14,521 $13,548
12/31/1991 $15,305 $14,216
1/31/1992 $15,688 $14,903
2/29/1992 $15,938 $15,246
3/31/1992 $15,721 $15,069
4/30/1992 $15,778 $15,079
5/31/1992 $16,078 $15,406
6/30/1992 $15,814 $15,251
7/31/1992 $16,380 $15,785
8/31/1992 $16,174 $15,777
9/30/1992 $16,418 $16,099
10/31/1992 $16,617 $16,129
11/30/1992 $17,320 $16,502
12/31/1992 $17,791 $16,726
1/31/1993 $18,264 $17,106
2/28/1993 $18,196 $17,304
3/31/1993 $18,914 $17,887
4/30/1993 $18,877 $17,855
5/31/1993 $19,391 $18,302
6/30/1993 $19,599 $18,578
7/31/1993 $19,824 $18,532
8/31/1993 $20,543 $19,047
9/30/1993 $20,870 $19,070
10/31/1993 $21,313 $19,361
11/30/1993 $20,918 $19,292
12/31/1993 $21,445 $19,591
1/31/1994 $22,027 $20,073
2/28/1994 $21,947 $19,982
3/31/1994 $21,145 $19,385
4/30/1994 $20,824 $19,036
5/31/1994 $20,904 $19,093
6/30/1994 $20,879 $18,906
7/31/1994 $21,341 $19,299
8/31/1994 $21,860 $19,843
9/30/1994 $21,765 $19,552
10/31/1994 $21,776 $19,460
11/30/1994 $21,150 $18,777
12/31/1994 $21,094 $18,640
1/31/1995 $20,962 $19,009
2/28/1995 $21,399 $19,638
3/31/1995 $22,011 $20,217
4/30/1995 $22,606 $20,705
5/31/1995 $23,280 $21,299
6/30/1995 $23,957 $22,012
7/31/1995 $24,928 $22,688
8/31/1995 $25,163 $22,972
9/30/1995 $25,631 $23,240
10/31/1995 $25,080 $22,734
11/30/1995 $25,732 $23,641
12/31/1995 $26,197 $23,771
1/31/1996 $26,682 $24,448
2/29/1996 $27,102 $24,866
3/31/1996 $27,378 $25,210
4/30/1996 $28,037 $25,444
5/31/1996 $28,612 $25,899
6/30/1996 $28,162 $25,721
7/31/1996 $27,134 $24,864
8/31/1996 $28,104 $25,657
9/30/1996 $29,208 $26,494
10/31/1996 $29,272 $26,348
11/30/1996 $30,340 $27,236
12/31/1996 $30,476 $27,029
1/31/1997 $31,839 $27,513
2/28/1997 $31,508 $27,606
3/31/1997 $30,820 $27,394
4/30/1997 $30,893 $27,780
5/31/1997 $32,443 $29,080
6/30/1997 $33,496 $29,941
7/31/1997 $35,251 $31,719
8/31/1997 $35,517 $31,482
9/30/1997 $37,018 $33,062
10/31/1997 $35,850 $32,295

GRAPHIC MATERIAL (7)

The following line graph hypothetically compares the performance of the
Franklin Convertible Securities Fund - Class II Shares to that of the Goldman
Sachs Convertible 100 Bond Index, based on a $10,000 investment from 10/2/95
to 10/31/97.

Period Ending Fund Index

10/2/1995 $9,901 $10,000
10/31/1995 $9,708 $9,782
11/30/1995 $9,964 $10,172
12/31/1995 $10,125 $10,228
1/31/1996 $10,317 $10,520
2/29/1996 $10,468 $10,700
3/31/1996 $10,571 $10,847
4/30/1996 $10,822 $10,948
5/31/1996 $11,032 $11,144
6/30/1996 $10,854 $11,067
7/31/1996 $10,451 $10,699
8/31/1996 $10,812 $11,040
9/30/1996 $11,232 $11,400
10/31/1996 $11,245 $11,337
11/30/1996 $11,659 $11,719
12/31/1996 $11,697 $11,630
1/31/1997 $12,214 $11,838
2/28/1997 $12,079 $11,879
3/31/1997 $11,807 $11,787
4/30/1997 $11,827 $11,953
5/31/1997 $12,416 $12,513
6/30/1997 $12,803 $12,883
7/31/1997 $13,469 $13,648
8/31/1997 $13,564 $13,546
9/30/1997 $14,123 $14,226
10/31/1997 $13,667 $13,896

GRAPHIC MATERIAL (8)

The following line graph compares the Franklin Adjustable U.S. Governemnt
Income Fund's distribution rate to the one-year constant maturity t-bill
annualized yield from 11/1/96 to 10/31/97.

Period Ending Fund Index

11/1/1996 5.51% 5.46%
11/30/1996 5.51% 5.38%
12/31/1996 5.51% 5.51%
1/31/1997 5.49% 5.58%
2/28/1997 5.49% 5.67%
3/31/1997 5.63% 6.02%
4/30/1997 5.73% 5.90%
5/31/1997 5.73% 5.78%
6/30/1997 5.71% 5.67%
7/31/1997 5.68% 5.45%
8/31/1997 5.71% 5.59%
9/30/1997 5.70% 5.47%
10/31/1997 5.69% 5.36%

GRAPHIC MATERIAL (9)

The following line graph hypothetically compares the performance of the
Franklin Adjustable U.S. Government Securities Fund to that of the Lehman
Brothers Short U.S. Government 1-2 Year Index and the Payden & Rygel 6-month
CD Index, based on a $10,000 investment from 11/1/87 to 10/31/97.

Period Ending Fund Index Index

11/1/1987 $ 9,775 $10,000 $10,000
Nov-87 $ 9,775 $10,061 $10,051
Dec-87 $ 9,834 $10,123 $10,135
Jan-88 $ 9,941 $10,264 $10,214
Feb-88 $ 10,020 $10,345 $10,272
Mar-88 $ 10,078 $10,375 $10,320
Apr-88 $ 10,097 $10,396 $10,360
May-88 $ 10,076 $10,395 $10,404
Jun-88 $ 10,164 $10,491 $10,469
Jul-88 $ 10,183 $10,508 $10,510
Aug-88 $ 10,203 $10,534 $10,569
Sep-88 $ 10,283 $10,646 $10,652
Oct-88 $ 10,384 $10,747 $10,732
Nov-88 $ 10,424 $10,732 $10,773
Dec-88 $ 10,464 $10,762 $10,853
Jan-89 $ 10,537 $10,844 $10,933
Feb-89 $ 10,558 $10,850 $10,966
Mar-89 $ 10,605 $10,901 $11,051
Apr-89 $ 10,726 $11,032 $11,174
May-89 $ 10,816 $11,179 $11,284
Jun-89 $ 10,925 $11,364 $11,391
Jul-89 $ 11,004 $11,518 $11,505
Aug-89 $ 11,085 $11,470 $11,560
Sep-89 $ 11,187 $11,540 $11,634
Oct-89 $ 11,325 $11,692 $11,748
Nov-89 $ 11,429 $11,796 $11,834
Dec-89 $ 11,546 $11,841 $11,913
Jan-90 $ 11,607 $11,869 $11,987
Feb-90 $ 11,692 $11,933 $12,061
Mar-90 $ 11,786 $11,976 $12,132
Apr-90 $ 11,866 $12,015 $12,204
May-90 $ 11,972 $12,186 $12,313
Jun-90 $ 12,063 $12,305 $12,399
Jul-90 $ 12,175 $12,440 $12,504
Aug-90 $ 12,261 $12,493 $12,579
Sep-90 $ 12,359 $12,585 $12,652
Oct-90 $ 12,446 $12,717 $12,751
Nov-90 $ 12,534 $12,831 $12,822
Dec-90 $ 12,647 $12,974 $12,947
Jan-91 $ 12,758 $13,093 $13,055
Feb-91 $ 12,866 $13,180 $13,134
Mar-91 $ 12,973 $13,270 $13,226
Apr-91 $ 13,055 $13,385 $13,313
May-91 $ 13,134 $13,460 $13,377
Jun-91 $ 13,184 $13,520 $13,425
Jul-91 $ 13,323 $13,625 $13,507
Aug-91 $ 13,422 $13,795 $13,604
Sep-91 $ 13,544 $13,920 $13,678
Oct-91 $ 13,626 $14,056 $13,760
Nov-91 $ 13,665 $14,196 $13,839
Dec-91 $ 13,743 $14,381 $13,924
Jan-92 $ 13,773 $14,382 $13,981
Feb-92 $ 13,844 $14,424 $14,022
Mar-92 $ 13,900 $14,439 $14,062
Apr-92 $ 13,939 $14,563 $14,131
May-92 $ 14,030 $14,685 $14,183
Jun-92 $ 14,122 $14,811 $14,233
Jul-92 $ 14,133 $14,964 $14,311
Aug-92 $ 14,193 $15,070 $14,354
Sep-92 $ 14,251 $15,195 $14,413
Oct-92 $ 14,210 $15,125 $14,438
Nov-92 $ 14,239 $15,111 $14,452
Dec-92 $ 14,294 $15,240 $14,520
Jan-93 $ 14,346 $15,379 $14,575
Feb-93 $ 14,411 $15,487 $14,614
Mar-93 $ 14,430 $15,529 $14,654
Apr-93 $ 14,505 $15,614 $14,698
May-93 $ 14,507 $15,581 $14,723
Jun-93 $ 14,585 $15,678 $14,763
Jul-93 $ 14,634 $15,715 $14,805
Aug-93 $ 14,681 $15,825 $14,853
Sep-93 $ 14,664 $15,874 $14,894
Oct-93 $ 14,631 $15,908 $14,932
Nov-93 $ 14,523 $15,922 $14,967
Dec-93 $ 14,487 $15,978 $15,012
Jan-94 $ 14,538 $16,069 $15,062
Feb-94 $ 14,452 $15,998 $15,060
Mar-94 $ 14,348 $15,956 $15,095
Apr-94 $ 14,255 $15,913 $15,118
May-94 $ 14,321 $15,940 $15,157
Jun-94 $ 14,360 $15,984 $15,204
Jul-94 $ 14,420 $16,112 $15,271
Aug-94 $ 14,420 $16,167 $15,330
Sep-94 $ 14,405 $16,154 $15,369
Oct-94 $ 14,240 $16,199 $15,429
Nov-94 $ 14,233 $16,147 $15,463
Dec-94 $ 14,202 $16,186 $15,523
Jan-95 $ 14,316 $16,384 $15,632
Feb-95 $ 14,480 $16,579 $15,727
Mar-95 $ 14,565 $16,673 $15,804
Apr-95 $ 14,700 $16,808 $15,896
May-95 $ 15,011 $17,042 $16,001
Jun-95 $ 14,958 $17,132 $16,081
Jul-95 $ 15,051 $17,213 $16,169
Aug-95 $ 15,177 $17,307 $16,247
Sep-95 $ 15,255 $17,385 $16,320
Oct-95 $ 15,317 $17,514 $16,406
Nov-95 $ 15,462 $17,644 $16,493
Dec-95 $ 15,505 $17,767 $16,586
Jan-96 $ 15,615 $17,907 $16,675
Feb-96 $ 15,624 $17,868 $16,740
Mar-96 $ 15,718 $17,879 $16,799
Apr-96 $ 15,732 $17,913 $16,871
May-96 $ 15,796 $17,966 $16,942
Jun-96 $ 15,946 $18,087 $17,008
Jul-96 $ 15,994 $18,159 $17,081
Aug-96 $ 16,042 $18,234 $17,172
Sep-96 $ 16,156 $18,379 $17,256
Oct-96 $ 16,320 $18,563 $17,345
Nov-96 $ 16,396 $18,682 $17,429
Dec-96 $ 16,474 $18,712 $17,507
Jan-97 $ 16,587 $18,800 $17,584
Feb-97 $ 16,682 $18,854 $17,655
Mar-97 $ 16,727 $18,862 $17,715
Apr-97 $ 16,862 $19,003 $17,798
May-97 $ 16,963 $19,131 $17,890
Jun-97 $ 17,082 $19,251 $17,980
Jul-97 $ 17,256 $19,426 $18,077
Aug-97 $ 17,267 $19,465 $18,158
Sep-97 $ 17,388 $19,598 $18,242
Oct-97 $ 17,492 $19,727 $18,331
Total Return 74.92% 97.27% 83.31%

GRAPHIC MATERIAL (10)

The following line graph hypothetically compares the performance of the
Franklin Equity Income Fund - Class I Shares to that of the S&P 500 Stock
Index and the CPI, based on a $10,000 investment from 3/15/88 to 10/31/97.

Period Ending Fund Index Index

3/15/1988 $9,551 $10,000 $10,000
3/31/1988 $9,561 $9,841 $10,022
4/30/1988 $9,532 $9,950 $10,074
5/31/1988 $9,694 $10,036 $10,108
6/30/1988 $10,029 $10,496 $10,152
7/31/1988 $10,057 $10,457 $10,194
8/31/1988 $9,943 $10,101 $10,237
9/30/1988 $10,251 $10,531 $10,306
10/31/1988 $10,445 $10,824 $10,340
11/30/1988 $10,313 $10,669 $10,348
12/31/1988 $10,384 $10,856 $10,366
1/31/1989 $10,962 $11,651 $10,418
2/28/1989 $10,824 $11,361 $10,460
3/31/1989 $11,057 $11,625 $10,521
4/30/1989 $11,472 $12,229 $10,589
5/31/1989 $11,817 $12,724 $10,650
6/30/1989 $11,860 $12,651 $10,675
7/31/1989 $12,660 $13,794 $10,701
8/31/1989 $12,819 $14,064 $10,718
9/30/1989 $12,813 $14,007 $10,752
10/31/1989 $12,455 $13,682 $10,804
11/30/1989 $12,637 $13,961 $10,830
12/31/1989 $12,872 $14,296 $10,847
1/31/1990 $12,242 $13,336 $10,959
2/28/1990 $12,438 $13,509 $11,010
3/31/1990 $12,516 $13,866 $11,071
4/30/1990 $12,091 $13,521 $11,089
5/31/1990 $12,882 $14,840 $11,114
6/30/1990 $12,747 $14,740 $11,174
7/31/1990 $12,479 $14,693 $11,217
8/31/1990 $11,528 $13,365 $11,320
9/30/1990 $11,002 $12,714 $11,415
10/31/1990 $10,907 $12,659 $11,483
11/30/1990 $11,605 $13,477 $11,509
12/31/1990 $11,734 $13,853 $11,509
1/31/1991 $12,162 $14,457 $11,578
2/28/1991 $12,911 $15,491 $11,595
3/31/1991 $13,079 $15,865 $11,613
4/30/1991 $13,176 $15,904 $11,630
5/31/1991 $13,718 $16,589 $11,665
6/30/1991 $13,152 $15,829 $11,699
7/31/1991 $13,686 $16,567 $11,716
8/31/1991 $14,092 $16,960 $11,750
9/30/1991 $14,122 $16,676 $11,802
10/31/1991 $14,354 $16,900 $11,820
11/30/1991 $14,050 $16,219 $11,854
12/31/1991 $15,044 $18,074 $11,862
1/31/1992 $14,965 $17,738 $11,880
2/29/1992 $15,178 $17,967 $11,923
3/31/1992 $14,988 $17,616 $11,984
4/30/1992 $15,706 $18,134 $12,000
5/31/1992 $15,861 $18,223 $12,017
6/30/1992 $15,979 $17,952 $12,060
7/31/1992 $16,732 $18,686 $12,086
8/31/1992 $16,464 $18,303 $12,120
9/30/1992 $16,370 $18,517 $12,153
10/31/1992 $16,213 $18,580 $12,196
11/30/1992 $16,663 $19,212 $12,213
12/31/1992 $17,037 $19,448 $12,205
1/31/1993 $17,431 $19,611 $12,264
2/28/1993 $17,944 $19,878 $12,307
3/31/1993 $18,419 $20,297 $12,350
4/30/1993 $18,385 $19,806 $12,385
5/31/1993 $18,655 $20,335 $12,402
6/30/1993 $18,809 $20,394 $12,420
7/31/1993 $19,002 $20,312 $12,420
8/31/1993 $19,690 $21,082 $12,454
9/30/1993 $19,818 $20,920 $12,481
10/31/1993 $20,121 $21,353 $12,532
11/30/1993 $19,912 $21,150 $12,540
12/31/1993 $20,074 $21,406 $12,540
1/31/1994 $20,543 $22,134 $12,574
2/28/1994 $19,975 $21,534 $12,617
3/31/1994 $19,133 $20,595 $12,660
4/30/1994 $19,282 $20,859 $12,678
5/31/1994 $19,524 $21,201 $12,687
6/30/1994 $19,480 $20,681 $12,730
7/31/1994 $19,996 $21,360 $12,764
8/31/1994 $20,787 $22,236 $12,815
9/30/1994 $20,383 $21,693 $12,850
10/31/1994 $20,514 $22,181 $12,859
11/30/1994 $19,934 $21,374 $12,875
12/31/1994 $20,009 $21,690 $12,875
1/31/1995 $20,576 $22,252 $12,927
2/28/1995 $20,980 $23,120 $12,979
3/31/1995 $21,281 $23,802 $13,021
4/30/1995 $21,748 $24,501 $13,064
5/31/1995 $22,201 $25,481 $13,091
6/30/1995 $22,322 $26,073 $13,117
7/31/1995 $22,612 $26,938 $13,117
8/31/1995 $22,826 $27,006 $13,151
9/30/1995 $23,622 $28,145 $13,177
10/31/1995 $23,422 $28,044 $13,221
11/30/1995 $24,212 $29,275 $13,211
12/31/1995 $25,157 $29,840 $13,202
1/31/1996 $25,752 $30,855 $13,280
2/29/1996 $25,514 $31,142 $13,323
3/31/1996 $25,711 $31,441 $13,392
4/30/1996 $25,779 $31,903 $13,444
5/31/1996 $25,976 $32,726 $13,470
6/30/1996 $26,385 $32,850 $13,478
7/31/1996 $25,429 $31,398 $13,503
8/31/1996 $25,840 $32,061 $13,529
9/30/1996 $26,464 $33,866 $13,572
10/31/1996 $27,009 $34,800 $13,616
11/30/1996 $28,248 $37,431 $13,642
12/31/1996 $28,361 $36,690 $13,642
1/31/1997 $29,108 $38,980 $13,685
2/28/1997 $29,688 $39,288 $13,728
3/31/1997 $29,178 $37,677 $13,762
4/30/1997 $29,372 $39,922 $13,778
5/31/1997 $30,917 $42,350 $13,770
6/30/1997 $31,829 $44,247 $13,787
7/31/1997 $33,350 $47,764 $13,803
8/31/1997 $32,836 $45,090 $13,829
9/30/1997 $34,520 $47,556 $13,864
10/31/1997 $33,601 $45,968 $13,899

GRAPHIC MATERIAL (11)

The following line graph hypothetically compares the performance of the
Franklin Equity Income Fund - Class II Shares to that of the S&P 500 Stock
Index and the CPI, based on a $10,000 investment from 10/2/95 to 10/31/97.

Period Ending Fund Index Index

10/2/1995 $9,903 $10,000 $10,000
10/31/1995 $9,843 $9,964 $10,033
11/30/1995 $10,184 $10,401 $10,026
12/31/1995 $10,548 $10,602 $10,019
1/31/1996 $10,800 $10,963 $10,078
2/29/1996 $10,697 $11,065 $10,110
3/31/1996 $10,775 $11,171 $10,163
4/30/1996 $10,800 $11,335 $10,203
5/31/1996 $10,872 $11,627 $10,222
6/30/1996 $11,040 $11,672 $10,228
7/31/1996 $10,634 $11,156 $10,247
8/31/1996 $10,794 $11,391 $10,267
9/30/1996 $11,049 $12,032 $10,300
10/31/1996 $11,266 $12,365 $10,333
11/30/1996 $11,771 $13,299 $10,352
12/31/1996 $11,815 $13,036 $10,352
1/31/1997 $12,119 $13,849 $10,386
2/28/1997 $12,352 $13,959 $10,418
3/31/1997 $12,140 $13,387 $10,444
4/30/1997 $12,208 $14,184 $10,456
5/31/1997 $12,839 $15,047 $10,450
6/30/1997 $13,206 $15,721 $10,463
7/31/1997 $13,830 $16,971 $10,475
8/31/1997 $13,602 $16,020 $10,495
9/30/1997 $14,301 $16,897 $10,521
10/31/1997 $13,903 $16,332 $10,548

GRAPHIC MATERIAL (12)

The following line graph compares the Franklin Adjustable Rate Securities
Fund's distribution rate to the one-year constant maturity t-bill annualized
yield from 11/1/96 to 10/31/97.

Period Ending Fund Index

11/1/1996 5.58% 5.46%
11/30/1996 5.80% 5.38%
12/31/1996 5.64% 5.51%
1/31/1997 5.24% 5.58%
2/28/1997 5.73% 5.67%
3/31/1997 5.40% 6.02%
4/30/1997 5.37% 5.90%
5/31/1997 4.78% 5.78%
6/30/1997 5.37% 5.67%
7/31/1997 5.65% 5.45%
8/31/1997 5.61% 5.59%
9/30/1997 5.75% 5.47%
10/31/1997 5.68% 5.36%

GRAPHIC MATERIAL (13)

The following line graph hypothetically compares the performance of the
Franklin Adjustable Rate Securities Fund to that of the Lehman Brothers Short
U.S. Government 1-2 Year Index and the Payden & Rygel 6-month CD Index, based
on a $10,000 investment from 12/26/91 to 10/31/97.

Period Ending Fund Index Index

12/26/1991 9775 $10,000 $10,000
12/31/1991 9,775 $10,021 $10,010
1/31/1992 9,775 $10,022 $10,051
2/29/1992 9,804 $10,051 $10,080
3/31/1992 9,847 $10,062 $10,109
4/30/1992 9,933 $10,148 $10,159
5/31/1992 9,981 $10,233 $10,196
6/30/1992 10,065 $10,321 $10,232
7/31/1992 10,097 $10,427 $10,288
8/31/1992 10,165 $10,501 $10,319
9/30/1992 10,232 $10,588 $10,362
10/31/1992 10,249 $10,540 $10,379
11/30/1992 10,284 $10,529 $10,390
12/31/1992 10,362 $10,620 $10,438
1/31/1993 10,409 $10,716 $10,478
2/28/1993 10,486 $10,792 $10,506
3/31/1993 10,547 $10,821 $10,535
4/30/1993 10,602 $10,880 $10,566
5/31/1993 10,622 $10,857 $10,584
6/30/1993 10,661 $10,924 $10,613
7/31/1993 10,713 $10,951 $10,644
8/31/1993 10,754 $11,027 $10,678
9/30/1993 10,785 $11,061 $10,708
10/31/1993 10,807 $11,085 $10,734
11/30/1993 10,826 $11,095 $10,760
12/31/1993 10,868 $11,134 $10,792
1/31/1994 10,891 $11,197 $10,828
2/28/1994 10,865 $11,147 $10,827
3/31/1994 10,768 $11,119 $10,852
4/30/1994 10,763 $11,089 $10,868
5/31/1994 10,802 $11,107 $10,896
6/30/1994 10,821 $11,138 $10,930
7/31/1994 10,864 $11,227 $10,978
8/31/1994 10,926 $11,265 $11,021
9/30/1994 10,897 $11,256 $11,049
10/31/1994 10,927 $11,288 $11,092
11/30/1994 10,934 $11,252 $11,116
12/31/1994 10,981 $11,279 $11,159
1/31/1995 11,034 $11,416 $11,238
2/28/1995 11,131 $11,552 $11,306
3/31/1995 11,183 $11,618 $11,361
4/30/1995 11,272 $11,712 $11,427
5/31/1995 11,403 $11,875 $11,503
6/30/1995 11,477 $11,938 $11,560
7/31/1995 11,497 $11,994 $11,624
8/31/1995 11,602 $12,060 $11,680
9/30/1995 11,657 $12,114 $11,732
10/31/1995 11,740 $12,204 $11,794
11/30/1995 11,809 $12,294 $11,857
12/31/1995 11,910 $12,380 $11,923
1/31/1996 11,961 $12,478 $11,988
2/29/1996 11,958 $12,451 $12,034
3/31/1996 12,001 $12,458 $12,077
4/30/1996 12,046 $12,482 $12,129
5/31/1996 12,061 $12,519 $12,179
6/30/1996 12,148 $12,603 $12,227
7/31/1996 12,195 $12,654 $12,280
8/31/1996 12,238 $12,705 $12,345
9/30/1996 12,324 $12,807 $12,405
10/31/1996 12,472 $12,935 $12,470
11/30/1996 12,543 $13,018 $12,529
12/31/1996 12,568 $13,039 $12,586
1/31/1997 12,626 $13,100 $12,641
2/28/1997 12,671 $13,138 $12,692
3/31/1997 12,769 $13,143 $12,735
4/30/1997 12,853 $13,242 $12,795
5/31/1997 12,931 $13,331 $12,861
6/30/1997 13,031 $13,415 $12,926
7/31/1997 13,160 $13,537 $12,995
8/31/1997 13,180 $13,564 $13,054
9/30/1997 13,274 $13,656 $13,114
10/31/1997 13,313 $13,746 $13,178
Total Return 33.13% 37.46% 31.78%

FORM N-14

PART C. OTHER INFORMATION

Item 15. INDEMNIFICATION

Please see the Agreement and Declaration of Trust, By-Laws, Management,
and Distribution Agreements, previously filed as exhibits and incorporated
herein by reference. Notwithstanding the provisions contained in the
Registrant's By-Laws, in the absence of authorization by the appropriate
court on the merits pursuant to said By-Laws, any indemnification under said
By-Laws shall be made by Registrant only if authorized in the manner provided
by such By-Laws.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.

Item 16. EXHIBITS (Incorporated by reference to the filings as noted).

The following exhibits are incorporated herein by reference, except
exhibits 11, 12, and 14(a), 16 and 17 which are attached.

(1) Copies of the charter as now in effect;

(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 13, 1990
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iv) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1989
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 27, 1998

(2) Copies of the existing By-Laws or instruments corresponding thereto;

(i) By-Laws
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(ii) Amendment to By-Laws dated January 18, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(3) Copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;

Not Applicable

(4) The Agreement and Plan of Reorganization is included in this
Registration Statement as Exhibit A to the Prospectus/Proxy
Statement.

(5) Specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;

Not Applicable

(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;

(i) Management Agreement between Registrant and
Franklin Advisers, Inc. dated April 15, 1987
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(ii) Administration Agreement between Franklin Adjustable U.S.
Government Securities Fund and Franklin Advisers, Inc.
dated June 3, 1991
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iii) Administration Agreement between Franklin Adjustable Rate
Securities Fund and Franklin Advisers, Inc. dated December
26, 1991
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iv) Subadvisory Agreement between Franklin Advisers, Inc., and
Templeton Investment Counsel, Inc., providing for service
to Franklin Investors Securities Trust on behalf of
Franklin Global Government Income Fund dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(v) Amendment dated August 1, 1995 to the Administration
Agreement between Registrant on behalf of Franklin
Adjustable Rate Securities Fund and Franklin Advisers, Inc.
dated June 3, 1991
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(vi) Amendment dated August 1, 1995 to the Administration
Agreement between Registrant on behalf of Franklin
Adjustable U.S. Government Securities Fund and Franklin
Advisers, Inc. dated December 26, 1991
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(7) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;

(i) Amended and Restated Distribution Agreement
between Registrant and Franklin/Templeton
Distributors, Inc. dated March 29, 1995
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996

(ii) Forms of Dealer Agreement between
Franklin/Templeton Distributors, Inc. and securities dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996

(8) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof;

Not Applicable

(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;

(i) Global Custody Agreement between The Chase Manhattan Bank,
N.A. and Franklin Investors Securities Trust on behalf of
Franklin Global Government Income Fund dated July 28, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(ii) Master Custody Agreement between Registrant and Bank of New
York
dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996

(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated
February 16, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 27, 1998

(iv) Amendment dated October 15, 1997 to Exhibit A in the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 27, 1998

(v) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996

(10) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.

(i) Distribution Plan between Franklin Global Government Income
Fund and Franklin/Templeton Distributors, Inc. dated May 1,
1994
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(ii) Distribution Plan between Franklin Short-Intermediate U.S.
Government Securities Fund and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iii) Distribution Plan between Franklin Convertible Securities
Fund and Franklin/Templeton Distributors, Inc., dated May
1, 1994
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iv) Amended and restated Distribution Plan between Franklin
Adjustable U.S. Government Securities Fund and
Franklin/Templeton Distributors, Inc. dated July 1, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(v) Distribution Plan between Franklin Equity Income Fund and
Franklin/Templeton Distributors, Inc., dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(vi) Amended and restated Distribution Plan between Franklin
Adjustable Rate Securities Fund and Franklin/Templeton
Distributors, Inc. dated July 1, 1993
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(vii) Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Global Government Income Fund dated March 30,
1995
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(viii)Class II Distribution Plan pursuant to Rule 12b-1 on
behalf of Franklin Convertible Securities Fund dated
September 29, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(ix) Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Equity Income Fund dated March 30, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(11) An opinion and consent of counsel as to the legality of the
securities being registered

Legal opinion of Stradley, Ronon, Stevens & Young LLP, counsel to
the Registrant, as to the legality of the securities being
registered, is incorporated herein by reference to Post-Effective
Amendment No. 26 to Registrant's Registration Statement on Form
N-1A (File Nos. 33-11444, 811-4986) as filed electronically with
the Commission on December 30, 1998.

(12) An opinion, and consent to its use, of counsel, supporting the
tax matters and consequences to shareholders discussed in the
prospectus.

(13) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement:

Not Applicable

(14) Copies of any other opinions, appraisals or rulings, and consents
to their use relied on in preparing the registration statement
and required by Section 7 of the 1933 Act.

(a) Consent of PricewaterhouseCoopers LLP, independent auditors
of Franklin Investors Securities Trust.

(15) All financial statements omitted from Item 14(a)(1):

Not Applicable

(16) (i) Power of Attorney for Franklin Investors Securities Trust
dated February 16, 1995
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(ii) Certificate of Secretary for Franklin Investors Securities
Trust dated February 16, 1995
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995

(iii) Power of Attorney for Adjustable Rate Securities Portfolios
dated February 16, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(iv) Certificate of Secretary for Adjustable Rate Securities
Portfolios dated February 16, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995

(v) Power of Attorney for Franklin Investors Securities Trust.

(vi) Certificate of Secretary for Franklin Investors Securities
Trust.

(vii) Power of Attorney for Adjustable Rate Securities Portfolios.

(viii)Certificate of Secretary for Adjustable Rate
Securities Portfolios.

(27) Any additional exhibits which the Registrant may wish to file:

(1) Financial Data Schedule - Franklin Adjustable USG Fund.

Item 17. UNDERTAKINGS

(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may
be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a part
of an amendment to the registration statement and will not be
used until the amendment is effective, and that, in determining
any liability under the 1933 Act, each Post-Effective Amendment
shall be deemed to be a new Registration Statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering
for them.

SIGNATURES

As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of San Mateo, and
the State of California, on the 12th day of January, 1999.

Franklin Investors Securities Trust
(Registrant)

By: EDWARD B. JAMIESON
Edward B. Jamieson,
President

As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.

EDWARD B. JAMIESON* Trustee and Principal
Edward B. Jamieson Executive Officer
Dated: January 12, 199

MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 12, 1999

DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: January 12, 1999

FRANK H. ABBOTT* Trustee
Frank H. Abbott III Dated: January 12, 1999

HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: January 12, 1999

S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: January 12, 1999

Trustee
Edith E. Holiday Dated: January 12, 1999

CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: January 12, 1999

RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: January 12, 1999

FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: January 12, 1999

GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: January 12, 1999

*By: /S/ LARRY L. GREENE
Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933,the undersigned
has duly consented to the filing of this Registration Statement of Franklin
Investors Securities Trust and has caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 12th day of January,
1999.

ADJUSTABLE RATE SECURITIES PORTFOLIOS
(Registrant)

By: CHARLES E. JOHNSON*
Charles E. Johnson,
President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following Trustees and Officers of
Adjustable Rate Securities Portfolios in the capacities and on the dates
indicated:

CHARLES E. JOHNSON* Trustee and Principal
Charles E. Johnson Executive Officer
Dated: January 12, 1999

MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 12, 1999

DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: January 12, 1999

FRANK H. ABBOTT, III Trustee
Frank H. Abbott III Dated: January 12, 1999

HARRIS J. ASHTON Trustee
Harris J. Ashton Dated: January 12, 1999

S. JOSEPH FORTUNATO Trustee
S. Joseph Fortunato Dated: January 12, 1999

CHARLES B. JOHNSON Trustee
Charles B. Johnson Dated: January 12, 1999

RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: January 12, 1999

FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: January 12, 1999

WILLIAM J. LIPPMAN* Trustee
William J. Lippman Dated: January 12, 1999

GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: January 12, 1999

*By: /S/ LARRY L. GREENE
Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)

EXHIBIT INDEX

EXHIBIT NO. DOCUMENT

EX-12 Opinion and Consent of Counsel Supporting
Tax Matters and Consequences to Shareholders

EX-14 Consent of Auditors, PricewaterhouseCoopers LLP

EX-16 (v) Power of Attorney for Franklin Investors
Securities Trust

(vi) Certificate of Secretary for Franklin
Investors Securities Trust

(vii) Power of Attorney for Adjustable Rate
Securities Portfolios

(viii) Certificate of Secretary for Adjustable
Rate Securities Portfolios

EX-27 Financial Data Schedule

Exhibit 12

, 1999

Board of Trustees
Franklin Investors Securities Trust
777 Mariners Island Blvd.
San Mateo, CA 94404

Re: PLAN OF REORGANIZATION, DATED AS OF THE TH DAY OF
, 1999 (THE "PLAN"), BY FRANKLIN INVESTORS SECURITIES TRUST,
A MASSACHUSETTS BUSINESS TRUST, ON BEHALF OF FRANKLIN ADJUSTABLE
RATE SECURITIES FUND ("ACQUIRED FUND") AND FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND ("ACQUIRING FUND")

Ladies and Gentlemen:

You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
beneficial interest, with par value of $0.01 per share, of the Acquiring Fund
("Acquiring Fund Shares"), (ii) the distribution of Acquiring Fund Shares to
the shareholders of the Acquired Fund, and (iii) the subsequent dissolution
of the Acquired Fund as soon as practicable after the closing (the
"Reorganization"), all upon and subject to the terms and conditions of the
Plan.

In rendering our opinion, we have reviewed and relied upon (a)
the Plan of Reorganization, dated as of the th day of , 1998, by
the Trust on behalf of the Acquiring Fund and the Acquired Fund, (b) the
proxy materials provided to stockholders of the Acquired Fund in connection
with the Special Meeting of Stockholders of the Acquired Fund held
on , 1999, (c) certain representations concerning the
Reorganization made to us by the Trust on behalf of the Acquiring Fund and
the Acquired Fund in a letter dated , 1999 (the
"Representation Letter"), (d) all other documents, financial and other
reports and corporate minutes which we deemed relevant or appropriate, and
(e) such statutes, regulations, rulings and decisions as we deemed material
to the rendition of this opinion. All terms used herein, unless otherwise
defined, are used as defined in the Plan.

For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.

Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.

Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the State of Massachusetts, the
Plan and the Representation Letter, it is our opinion that:

1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.

2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Shares pursuant to Section 361(a) and Section 357(a) of the
Code. We express no opinion as to whether any accrued market discount will
be required to be recognized as ordinary income pursuant to Section 1276 of
the Code.

3. No gain or loss will be recognized by Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Shares pursuant to Section 1032(a) of the Code.

4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.

5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.

6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Shares (including fractional shares to which they may be entitled),
pursuant to Section 354(a) of the Code.

7. The basis of the Acquiring Fund Shares received by the
stockholders of Acquired Fund (including fractional shares to which they may
be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.

8. The holding period of the Acquiring Fund Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will include the holding period of the Acquired Fund Shares
surrendered in exchange therefor, provided that the Acquired Fund Shares were
held as a capital asset on the effective date of the Reorganization, pursuant
to Section 1223(1) of the Code.

9. Acquiring Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.

Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.

Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Plan and the Representation
Letter.

This opinion is being rendered to Acquiring Fund and Acquired
Fund and may be relied upon only by such funds and the stockholders of each.

Very truly yours,

STRADLEY, RONON, STEVENS & YOUNG, LLP

By:___________________________________
William P. Zimmerman, a Partner

Exhibit 14

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement of
Franklin Investors Securities Trust on Form N-14 of our reports dated
December 5, 1997 and December 9, 1998, on our audits of the financial
statements and financial highlights of Franklin Investors Securities Trust,
and Adjustable Rate Securities Portfolios for the years ended October 31,
1997 and October 31, 1998, respectively, which are included in the
Registration Statement.

/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 11, 1999

Exhibit 16(v)
POWER OF ATTORNEY

The undersigned officers and trustees of FRANKLIN INVESTORS SECURITIES
TRUST hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R. GATZEK,
LARRY L. GREENE and KAREN L. SKIDMORE (with full power to each of them to act
alone) his attorney-in-fact and agent, in all capacities, to execute, file or
withdraw any of the documents referred to below relating to the Company's
Registration Statement on Form N-14 under the Securities Act of 1933, or any
amendment to such Registration Statement, covering the sale of shares by the
Company under a propectus becoming effective after this date, with all
exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.

The undersigned officers and trustees hereby execute this Power of Attorney
as of this 15th day of December 1998.

/s/ Edward B. Jamieson /s/ Rupert H. Johnson, Jr.
Edward B. Jamieson Rupert H. Johnson, Jr.,
Principal Executive Officer Trustee
and Trustee

/s/ Charles B. Johnson /s/ Frank H. Abbott, III
Charles B. Johnson, Trustee Frank H. Abbott, III, Trustee

/s/ Harris J. Ashton /s/ S. Joseph Fortunato
Harris J. Ashton, Trustee S. Joseph Fortunato, Trustee

/s/ Edith E. Holiday /s/ Frank W.T. LaHaye
Edith E. Holiday, Trustee Frank W.T. LaHaye, Trustee

/s/ Gordon S. Macklin /s/ Martin L. Flanagan
Gordon S. Macklin, Trustee Martin L. Flanagan
Principal Financial Officer

/s/ Diomedes Loo-Tam
Diomedes Loo-Tam,
Principal Accounting Officer

Exhibit 16(vi)
R:\LEGAL\WPDOC1\N1A\FIST CERT.DOC

CERTIFICATE OF SECRETARY

I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN INVESTORS
SECURITIES TRUST (the "Trust")

As Secretary of the Fund, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held
at 777 Mariners Island Boulevard, San Mateo, California, on December 15, 1998.

RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L. Skidmore,
and Larry L. Greene as attorneys-in-fact for the purpose of
filing a registration statement on Form N-14, including all
attachments and exhibits, and any amendments thereto, with the
SEC to register the shares of Adjustable USG Fund to be
transferred to Adjustable Rate Fund in connection with the
reorganization, be executed by each Trustee and designated
officer.

I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.

Dated: 12/29/98 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary

Exhibit 16(vii)
POWER OF ATTORNEY

The undersigned officers and trustees of ADJUSTABLE RATE SECURITIES
PORTFOLIOS hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, LARRY L. GREENE and KAREN L. SKIDMORE (with full power to each of
them to act alone) his attorney-in-fact and agent, in all capacities, to
execute, file or withdraw any of the documents referred to below relating to
the Franklin Investors Securities Trust Registration Statement on Form N-14
under the Securities Act of 1933, or any amendment to such Registration
Statement, covering the sale of shares by the Franklin Adjustable U.S.
Government Securities Fund, a series of Franklin Investors Securities Trust,
under a prospectus becoming effective after this date, with all exhibits and
any and all documents required to be filed with respect thereto with any
regulatory authority. Each of the undersigned grants to each of said
attorneys full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.

The undersigned officers and trustees hereby execute this Power of Attorney
as of this 15th day of December 1998.

/s/ Charles E. Johnson /s/ Rupert H. Johnson, Jr.
Charles E. Johnson, Rupert H. Johnson, Jr.,
Principal Executive Officer Trustee
and Trustee

/s/ Charles B. Johnson /s/ Frank H. Abbott, III
Charles B. Johnson, Trustee Frank H. Abbott, III, Trustee

/s/ Harris J. Ashton /s/ S. Joseph Fortunato
Harris J. Ashton, Trustee S. Joseph Fortunato, Trustee

/s/ Frank W.T. LaHaye /s/ William J. Lippman
Frank W.T. LaHaye, Trustee William J. Lippman, Trustee

/s/ Gordon S. Macklin /s/ Diomedes Loo-Tam
Gordon S. Macklin, Trustee Diomedes Loo-Tam,
Principal Accounting Officer

/s/ Martin L. Flanagan
Martin L. Flanagan,
Principal Financial Officer

Exhibit 16(viii)

CERTIFICATE OF SECRETARY

I, Deborah R. Gatzek, certify that I am Secretary of ADJUSTABLE RATE
SECURITIES PORTFOLIOS (the "Fund")

As Secretary of the Fund, I further certify that the following resolution was
adopted by a majority of the Directors of the Fund present at a meeting held
at 777 Mariners Island Boulevard, San Mateo, California, on December 15, 1998.

RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L. Skidmore,
and Larry L. Greene as attorneys-in-fact for the purpose of
filing a registration statement on Form N-14, including all
attachments and exhibits, and any amendments thereto, with the
SEC to register the shares of Franklin Adjustable U.S. Government
Securities Fund to be transferred to Franklin Adjustable Rate
Securities Fund in connection with the reorganization, be
executed by each Trustee and designated officer.

I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.

Dated: 12/29/98 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 321,282,773
<INVESTMENTS-AT-VALUE> 299,455,245
<RECEIVABLES> 1,116,138
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 300,571,383
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,273,792
<TOTAL-LIABILITIES> 2,273,792
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 404,916,455
<SHARES-COMMON-STOCK> 31,854,776
<SHARES-COMMON-PRIOR> 35,328,183
<ACCUMULATED-NII-CURRENT> 687,275
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (85,478,611)
<ACCUM-APPREC-OR-DEPREC> (21,827,528)
<NET-ASSETS> 298,297,591
<DIVIDEND-INCOME> 18,453,876
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1,578,556)
<NET-INVESTMENT-INCOME> 16,875,320
<REALIZED-GAINS-CURRENT> (2,511,193)
<APPREC-INCREASE-CURRENT> (1,201,807)
<NET-CHANGE-FROM-OPS> 13,162,320
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,143,101)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,728,448
<NUMBER-OF-SHARES-REDEEMED> (22,292,627)
<SHARES-REINVESTED> 1,090,772
<NET-CHANGE-IN-ASSETS> (36,692,870)
<ACCUMULATED-NII-PRIOR> 955,056
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (82,967,418)
<GROSS-ADVISORY-FEES> (313,856)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,578,556)
<AVERAGE-NET-ASSETS> 313,597,557
<PER-SHARE-NAV-BEGIN> 9.480
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> (.120)
<PER-SHARE-DIVIDEND> (.510)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.360
<EXPENSE-RATIO> .760<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1> INCLUDES THE FUND'S SHARE OF THE PORTFOLIO'S ALLOCATED
EXPENSES. EXPENSE RATIO EXCLUDING WAIVER .93%.
</FN>

</TABLE>