FRANKLIN GOLD FUND, 485APOS, 1998-09-30

FRANKLIN GOLD FUND
485APOS, 1998-09-30

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As filed with the Securities and Exchange Commission on September 30, 1998.

File Nos. 2-30761
811-1700

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No._______

Post-Effective Amendment No. 48 (X)

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23 (X)

FRANKLIN GOLD FUND
(Exact Name of Registrant as Specified in Charter)

777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)Registrant's Telephone
Number, Including Area Code
(650) 312-2000

HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)

Approximate Date of Proposed Public offering:

It is proposed that this filing will become effective (check
appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on December 1, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

Title of Securities Being Registered:
Common Stock of:
Franklin Gold Fund - Class I
Franklin Gold Fund - Class II
Franklin Gold Fund - Advisor Class

FRANKLIN GOLD FUND
CROSS REFERENCE SHEET
FORM N-1A

PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Gold Fund - Class I & II

N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT

1. Front and Back Cover Pages Front and Back Cover Pages

2. Risk/Return Summary: Goals and Strategies; Main Risks;
Investments, Risks, and Performance
Performance

3. Risk/Return Summary: Fees and Expenses
Fee Table

4. Investment Objectives, Goals and Strategies; Main Risks
Principal Investment
Strategies, and Related Risks

5. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders

6. Management, Organization, and Management; Questions
Capital Structure

7. Shareholder Information Distributions and Taxes; Choosing
a Share Class; Buying Shares;
Investor Services; Selling
Shares; Account Policies

8. Distribution Arrangements Choosing a Share Class

9. Financial Highlights Financial Highlights
Information

FRANKLIN GOLD FUND
CROSS REFERENCE SHEET
FORM N-1A

PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Gold Fund - Advisor Class

N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT

1. Front and Back Cover Pages Front and Back Cover Pages

2. Risk/Return Summary: Goals and Strategies; Main Risks;
Investments, Risks, and Performance
Performance

3. Risk/Return Summary: Fees and Expenses
Fee Table

4. Investment Objectives, Goals and Strategies; Main Risks
Principal Investment
Strategies, and Related Risks

5. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders

6. Management, Organization, and Management; Questions
Capital Structure

7. Shareholder Information Distributions and Taxes;
Qualified Investors; Buying
Shares; Investor Services;
Selling Shares; Account Policies

8. Distribution Arrangements Not Applicable

9. Financial Highlights Financial Highlights
Information

FRANKLIN GOLD FUND
CROSS REFERENCE SHEET
FORM N-1A

PART B: INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
Franklin Gold Fund - Class I & II

N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT

10. Cover Page and Table of Contents Cover Page

11. Fund History Organization, Voting Rights and
Principal Holders

12. Description of the Fund and Its Goals and Strategies; The Fund's
Investments and Risks Risks; Organization, Voting Rights
and Principal Holders

13. Management of the Fund Officers and Directors; Buying
and Selling Shares

14. Control Persons and Principal Organization, Voting Rights and
Holders of Securities Principal Holders

15. Investment Advisory and Other Officers and Directors; Management
Services and Other Services; The Fund's
Underwriter; See "Account
Policies" in the Prospectus

16. Brokerage Allocation and Other Portfolio Transactions
Practices

17. Capital Stock and Other Organization, Voting Rights and
Securities Principal Holders

18. Purchase, Redemption and Buying and Selling Shares;
Pricing of Shares Pricing Shares

19. Taxation of the Fund Distributions and Taxes

20. Underwriters The Fund's Underwriter

21. Calculation of Performance Data Performance

22. Financial Statements Cover Page

FRANKLIN GOLD FUND
CROSS REFERENCE SHEET
FORM N-1A

PART B: INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
Franklin Gold Fund - Advisor Class

N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT

10. Cover Page and Table of Contents Cover Page

11. Fund History Organization, Voting Rights and
Principal Holders

12. Description of the Fund and Its Organization, Voting Rights and
Investments and Risks Principal Holders;
Goals and Strategies; The Fund's
Risks

13. Management of the Fund Officers and Directors; Buying
and Selling Shares

14. Control Persons and Principal Organization, Voting Rights and
Holders of Securities Principal Holders

15. Investment Advisory and Other Management and Other Services;
Services Officers and Directors; The
Fund's Underwriter

16. Brokerage Allocation and Other Portfolio Transactions
Practices

17. Capital Stock and Other Organization, Voting Rights and
Securities Principal Holders

18. Purchase, Redemption and Buying and Selling Shares;
Pricing of Shares Pricing Shares

19. Taxation of the Fund Distributions and Taxes

20. Underwriters The Fund's Underwriter

21. Calculation of Performance Data Performance

22. Financial Statements Cover Page

PROSPECTUS & APPLICATION

FRANKLIN
GOLD FUND

Class I & II

INVESTMENT STRATEGY GROWTH

DECEMBER 1, 1998

LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

CONTENTS
THE FUND
- -------------------------------------------------------------------------------
Information about 2 Goals and Strategies
the fund you
should know 3 Main Risks
before investing
5 Performance

6 Fees and Expenses

8 Management

9 Distributions and Taxes

10 Financial Highlights

YOUR ACCOUNT
- -------------------------------------------------------------------------------
Information about 11 Choosing a Share Class
sales charges,
account 15 Buying Shares
transactions and
services 17 Investor Services

19 Selling Shares

21 Account Policies

23 Questions

FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Where to learn Back Cover
more about the
fund

THE FUND

[CLIP ART - BLUE PRINT]

GOALS AND STRATEGIES

GOALS The fund's principal goal is capital appreciation. Its secondary goal is
to provide shareholders with current income through dividends or interest
received from its investments.

PRINCIPAL INVESTMENTS The fund will normally invest at least 65% of total assets
in equity securities of companies engaged in gold operations. The fund
concentrates (invests more than 25% of total assets) in companies which mine,
process, or deal in gold or other precious metals, such as silver, platinum, and
palladium. The fund may buy gold companies anywhere in the world and generally
invests more than 50% of total assets in companies outside the U.S.

[BEGIN - CALL OUT BOX]

The fund invests primarily in common stocks of companies engaged in gold
operations. This includes gold mining finance companies as well as operating
companies with long-, medium-, or short-life mines.

[END - CALL OUT BOX]

The fund's manager looks for companies with established records, as well as
companies having low-cost reserves to bring into production. The manager also
considers a company's potential for reserve growth and retention and production
growth.

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

THE VALUE OF FUND SHARES WILL GENERALLY MOVE IN THE SAME
DIRECTION AS THE PRICE OF GOLD

[CLIP ART - ARROWS]

MAIN RISKS

GOLD AND PRECIOUS METALS Gold operation companies involve special
considerations. Prices of their securities will be affected by the price of gold
and precious metals. They may also be affected by changing costs of production.
The price of gold may fluctuate substantially over short periods of time so the
fund's share price may be more volatile than other types of investments.

[BEGIN - CALL OUT BOX]

Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.

[END - CALL OUT BOX]

The price of gold and other precious metals is affected by several factors
including (1) how much of the worldwide supply of gold is held among four major
producers. Economic, political, or other conditions affecting one of the major
sources could have a substantial effect on the world's gold supply in countries
throughout the world; (2) increased environmental, labor or other costs in
mining; (3) changes in laws relating to mining or gold production or sales; and
(4) unpredictable monetary policies and economic and political conditions in
countries throughout the world. For example, if Russia decides to sell some of
its gold reserves, the supply would go up, and the price would generally go
down.

In addition, changes in U.S. or foreign tax, currency or mining laws may make it
more expensive and/or more difficult to pursue the fund's investment strategies.

THE VALUE OF A COMPANY MAY BE AFFECTED BY FACTORS THAT AFFECT THE COMPANY ALONE,
THE INDUSTRY, OR THE ENTIRE COUNTRY IN WHICH IT IS LOCATED.

FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund.

COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.

The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes. The fund's investments in
developing or emerging markets are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
legal, business and social frameworks to support securities markets.

Because of current conditions in South Africa, the fund's investments in South
African companies, approximately 20% of the portfolio as of July 31, 1998, may
be subject to somewhat greater risk than investments in companies of countries
with more stable political profiles.

COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.

CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.

EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the Euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the Euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.

[BEGIN - CALL OUT BOX]

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

[END - CALL OUT BOX]

Because this change to a single currency is new and untested, the establishment
of the Euro may result in market volatility. For the same reason it is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the fund. To the extent the fund holds
non-U.S. dollar (Euro or other) denominated securities, it will still be exposed
to currency risk due to fluctuations in those currencies versus the U.S. dollar.

[CLIP ART - MARKET BEAR & MARKET BULL]

PERFORMANCE

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

CLASS I ANNUAL TOTAL RETURNS (1)

[The following information was represented by a bar graph in the printed
materials.]

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

-10.57% 41.89% -19.50% 5.90% -20.34% 73.72% -4.73% -1.28% 1.04% -35.70%
</TABLE>

Best quarter:
Q2 '93 27.28%

Worst quarter:
Q4 '97 -27.95%

AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997

1 YEAR 5 YEARS 10 YEARS
Franklin Gold Fund - Class I (2)- 38.62% 0.27% -1.34%
S&P 500(R) Index (3) 33.36% 20.27% 18.05%

1 YEAR SINCE INCEPTION (5/1/95)
Franklin Gold Fund - Class II (2) -37.54% -16.36%
S&P 500(R) Index (3) 33.36% 29.61%

(1) Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1998, the fund's year-to-date return was xx% for Class I.

(2) Figures reflect sales charges.

All fund performance assumes reinvestment of dividends and capital gains. May 1,
1994, the fund implemented a Rule 12b-1 plan, which affects subsequent
performance.

(3) The S&P 500(R) Index is an unmanaged group of widely held common stocks
covering a variety of industries. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.

[CLIP ART - ACCOUNTANT]
FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
July 31, 1998.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) As a percentage of
offering price

Maximum sales charge (load) 5.75% 1.99%
Paid at time of purchase 5.75% 1.00%
Paid at redemption None (1) 0.99% (2)
Exchange fee (3) None None

Please see "Choosing a Share Class" on page 11 for an explanation of how and
when these sales charges apply.

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

CLASS I CLASS II
Management fees 0.54% 0.54%
Distribution and service (12b-1) fees (4) 0.23% 1.00%
Other expenses 0.42% 0.42%
-------------------------
Total annual fund operating expenses 1.19% 1.96%
-------------------------

(1) Except for investments of $1 million or more (see page 11) and purchases by
certain retirement plans without an initial sales charge. (2) This is equivalent
to a charge of 1% based on net asset value. (3) There is a $5 fee for each
exchange by a market timer (see page 22). (4) Because of the 12b-1 fees, over
the long term you may indirectly pay more than the equivalent of the maximum
permitted initial sales charge.

EXAMPLE

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

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

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
CLASS I $689 (1) $931 $1,192 $1,935
CLASS II $395 $709 $1,147 $2,362

For the same Class II investment, your costs would be $297 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.

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

[CLIP ART - WRITERS]
MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager. Together,
Advisers and its affiliates manage over $236 billion in assets (as of June 30,
1998).

The team responsible for the fund's management is:

MANAGEMENT TEAM
- -------------------------------------------------------------------------------
R. Martin Wiskemann, Mr. Wiskemann has been a manager on the fund since
Senior Vice President of 1972 and has more than 30 years' experience in the
Advisers securities industry.
- -------------------------------------------------------------------------------

Suzanne Willoughby Ms. Killea has been a manager on the fund since
Killea, Vice President of 1994. She joined the Franklin Templeton Group in
Advisers 1991.
- ------------------------------------------------------------------------------

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

YEAR 2000 ISSUE Like other mutual funds, the fund could be adversely affected if
the computer systems used by the manager and other service providers do not
properly process date-related information on or after January 1, 2000 (Year 2000
Issue).

The Year 2000 Issue, and in particular foreign service providers' responsiveness
to the issue, could affect portfolio and operational areas including securities
trade processing, interest and dividend payments, securities pricing,
shareholder account services, reporting, custody functions, and others.

While the Year 2000 Issue could have a negative effect on the fund, the manager
and its affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking reasonable
assurances from the fund's other major service providers.

[CLIP ART - HANDGIVE]

DISTRIBUTIONS AND TAXES

INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund typically pays income dividends
on or about December 15th. Capital gains, if any, are also paid in December. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.

To receive an income dividend, you must be a shareholder on the record date. The
record date for the December dividend is typically the last business day in
November. You may not want to invest a large amount in the fund shortly before
the record date since you will receive some of your investment back as a taxable
distribution.

TAX CONSIDERATIONS In general, fund distributions are taxable as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.

[BEGIN - CALL OUT BOX]

BACKUP WITHHOLDING

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

[END - CALL OUT BOX]

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

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

Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax professional about federal, state, local or foreign tax
consequences.

For more information, please call 1-800/DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.

[CLIP ART - DOLLAR]
FINANCIAL HIGHLIGHTS

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

CLASS I
YEAR
ENDED JULY 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995(1) 1994
------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.44 14.65 15.07 14.88 15.63
------------------------------------------------------
Net investment income .10 .21 .19 .07 .18
Net realized and unrealized gains (3.96) .01 (.75) (2.37) .27
(losses)
------------------------------------------------------
Total from investment operations (3.86) .22 (.56) (2.30) .45
Dividends from net investment (.10) (.20) (.19) (.09) (.13)
income
In excess of net investment income -- -- -- (.06) --
Distributions from net realized -- -- -- (.82) (.51)
gains ------------------------------------------------------
Total distributions (.10) (.26) (.19) (.91) (.64)
------------------------------------------------------
Net asset value, end of year 7.48 11.44 14.65 15.07 14.88
======================================================

Total return (%)(2) (33.83) (16.45) 1.65 3.14 (3.52)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 189,591 291,544 364,032 391,966 418,698
($ x 1,000)
Ratios to average net assets: (%)
Expenses 1.19 1.05 .95 .95 .81
Net investment income 1.05 .99 1.20 1.30 .55
Portfolio turnover rate (%) 6.09 16.05 28.74 6.36 1.46
</TABLE>

CLASS II

PER SHARE DATA ($)
Net asset value, beginning of year 11.37 14.61 15.05 15.02
-------------------------------------------
Net investment income (loss) .03 (.02) .12 .12
Net realized and unrealized gains (3.93) (2.38) (.02) .09
(losses)
-------------------------------------------
Total from investment operations (3.90) (2.40) .10 .21
Dividends from net investment (.04) (.02) (.03) (.12)
income
In excess of net investment income -- -- -- (.06)
Distributions from net realized -- (.82) (.51) --
gains
-------------------------------------------
Total distributions (.04) (.84) (.54) (.18)
-------------------------------------------
Net asset value, end of year 7.43 11.37 14.61 15.05
===========================================

Total return (%)(2) (34.35) (17.18) .81 1.45

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 20,353 20,783 12,977 3,104
1,000)
Ratios to average net assets: (%)
Expenses 1.96 1.83 1.74 1.73(3)
Net investment income (loss) .25 (.16) .16 .33(3)
Portfolio turnover rate (%) 6.09 16.05 28.74 6.36

(1) For Class II, per share amounts were calculated using the daily average of
shares outstanding during the period. The 1995 numbers for Class II are for the
period May 1, 1995 (effective date) through July 31, 1995.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.

YOUR ACCOUNT

[CLIP ART - X BOX PENCIL]

CHOOSING A SHARE CLASS

Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.

CLASS I CLASS II
o Initial sales charge of 5.75% o Initial sales charge of 1%
or less

o Lower annual expenses than o Deferred sales charge of 1% on
Class II due to lower shares you sell within 18 months
distribution fees

SALES CHARGES

CLASS I
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
- -----------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04

INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 13), you can buy Class I shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for both Class I and Class II (please see the next page).

DISTRIBUTION AND SERVICE (12B-1) FEES Class I has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows Class I to pay distribution fees of up
to 0.25% per year to those who sell and distribute its shares and provide other
services to shareholders. Because these fees are paid out of Class I's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.

CLASS II
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
- ------------------------------------------------------------------------------
Under $1 million 1.00 1.01

WE AUTOMATICALLY INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS I SHARES,
SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS I ANNUAL EXPENSES ARE LOWER.

CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class II
shares you sell within 18 months of purchase.

[BEGIN - CALL OUT BOX]

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

For example, suppose you bought Class II shares on June 15th. On December 15th
of the following year, you could sell your Class II shares without a CDSC.

[END - CALL OUT BOX]

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

To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 18
for exchange information).

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

SALES CHARGE REDUCTIONS AND WAIVERS

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

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

[BEGIN - CALL OUT BOX]

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

[END - CALL OUT BOX]

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

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

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

REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
invest some or all of the proceeds in the same share class of the fund within
365 days without an initial sales charge. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a new
CDSC will apply.

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

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

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

o certain annuity payments received under an annuity contract that offers a
Franklin Templeton investment option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.

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

o certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton or
of certain dealers

CDSC WAIVERS The CDSC for either share class will generally be waived:

o to pay account fees
o to make payments through systematic withdrawal plans, up to certain amounts
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
o to return excess contributions from employee benefit plans
o for redemptions following the death of the shareholder or beneficial owner
o for redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans

IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER, CALL YOUR INVESTMENT
REPRESENTATIVE OR SHAREHOLDER SERVICES FOR MORE INFORMATION.

RETIREMENT PLANS Certain retirement plans may buy Class I shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:

o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period

A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the tax code must also qualify under our group
investment program to buy Class I shares without an initial sales charge.

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

FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.

[CLIP ART - CASHIER]

BUYING SHARES

Once you have chosen a share class, the next step is to determine the amount you
want to invest.

MINIMUM INVESTMENTS
INITIAL ADDITIONAL
Regular accounts $1,000 $50
- -------------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- -------------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs or
Roth IRAs)
- -------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
- -------------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs $250 $50
- -------------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and their
immediate family members $100 $50

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

BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
[CLIP ART - BUSINESS
DEAL]
Contact your investment Contact your investment
THROUGH YOUR INVESTMENT representative representative
REPRESENTATIVE
- --------------------------------------------------------------------------------

Make your check payable Make your check payable
[CLIP ART - ENVELOPES] to Franklin Gold Fund. to Franklin Gold Fund.
Include your account
BY MAIL Mail the check and your number on the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.

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

Call to receive a wire Call to receive a wire
[CLIP ART - SOUND WAVES] control number and wire control number and wire
instructions. instructions.

BY WIRE Mail your signed To make a same day wire
application to Investor investment, please call
1-800/632-2301 Services. Please include us by 1:00 p.m. pacific
(or 1-650/312-2000 the wire control number time and make sure your
collect) or your new account wire arrives by 3:00
number on the application. p.m.

To make a same day wire investment, please call us
by 1:00 p.m. pacific time and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------

[CLIP ART - ARROWS] Call Shareholder Services Call Shareholder
at the number below, or Services at the number
BY EXCHANGE send signed written below or our automated
instructions. The TeleFACTS system, or
TeleFACTS system cannot send signed written
TeleFACTS(R) 1-800/247-1753 be used to open a new instructions.
(around-the-clock access) account.

(Please see page 18 for (Please see page 18 for
information on exchanges.) information on
exchanges.)
- --------------------------------------------------------------------------------

FRANKLIN TEMPLETON INVESTOR SERVICES
777 MARINERS ISLAND BLVD., P.O. BOX 7777, SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)

[CLIP ART - HANDSHAKE]

INVESTOR SERVICES

AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA).

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

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

[BEGIN - CALL OUT BOX]

For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.

[END - CALL OUT BOX]

Please indicate on your application the distribution option you have chosen,
otherwise we will automatically reinvest your distributions in the same share
class of the fund.

*Class II shareholders may reinvest their distributions in Class I shares of the
fund or another Franklin Templeton Fund if they chose to do so before November
17, 1997, or in Class I shares of any Franklin Templeton money fund.

RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application 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 at 1-800/527-2020.

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

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

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

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

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.

[BEGIN - CALL OUT BOX]

An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges. Exchanges also have the same tax consequences as ordinary sales
and purchases.

[END - CALL OUT BOX]

Exchanges may only be made between identically registered accounts, unless you
send written instructions with a signature guarantee. Any CDSC will continue to
be calculated from the date of your initial investment and will not be charged
at the time of the exchange. If you exchange shares subject to a CDSC into a
Class I money fund, the time your shares are held there will not count towards
the CDSC holding period.

Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. To protect shareholders, there are limits on the number and amount
of exchanges you may make (please see Market timers on page 22 ).

*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class I without any sales charge.

SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed 1% a month of an account's net asset value. Certain
terms and minimums apply. To sign up, complete the appropriate section of your
application.

[CLIP ART - CASHIER]
SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell less than $50,000 can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:

[BEGIN - CALL OUT BOX]

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

A notary public CANNOT provide a signature guarantee.

[END - CALL OUT BOX]

o you are selling more than $50,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days

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

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

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

RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you need to complete additional forms required by the
Internal Revenue Service. For participants under age 591/2 , tax penalties may
apply. Call Retirement Plan Services at 1-800/527-2020 to request the necessary
forms.

SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
[CLIP ART - BUSINESS
DEAL]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------

[CLIP ART - ENVELOPES] Send written instructions and endorsed share
certificates (if you hold share certificates) to
BY MAIL Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.

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

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

[CLIP ART - TELEPHONE] As long as your transaction is for $50,000 or less,
you do not hold share certificates and you have not
BY PHONE changed your address by phone within the last
15 days, you can sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address
on the account. Written instructions, with a
signature guarantee, are required to send the check
to another address or to make it payable to another
person.
- --------------------------------------------------------------------------------

[CLIP ART - SOUND WAVES] You can call or write to have redemption proceeds
of $1,000 or more wired to a bank or escrow account.
See the policies above for selling shares by mail or
phone.
BY WIRE
Before requesting a wire, please make sure we have
your bank account information on file. If we do not
have this information, you will need to send written
instructions with your bank's name and address, your
bank account number, the ABA routing number, and a
signature guarantee.

Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business day.
- --------------------------------------------------------------------------------

[CLIP ART - ARROWS] Obtain a current prospectus for the fund you are
considering.
BY EXCHANGE
Call Shareholder Services at the number below or
TeleFACTS 1-800/247-1753 our automated TeleFACTS(R) system, or send signed
(around-the-clock access) written instructions. See the policies above for
selling shares by mail or phone.

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

FRANKLIN TEMPLETON INVESTOR SERVICES
777 MARINERS ISLAND BLVD., P.O. BOX 7777, SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)

[CLIP ART - CERTIFICATE]

ACCOUNT POLICIES

CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.

[BEGIN - CALL OUT BOX]

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

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

[END - CALL OUT BOX]

The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.

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

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

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

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

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

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

MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5.00. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets. Shares under
common ownership or control are combined for these limits.

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

o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.

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

CLASS I CLASS II
- -------------------------------------------------------------------------------
COMMISSION (%) --- 2.00
Investment under $50,000 5.00 ---
$50,000 but under $100,000 3.75 ---
$100,000 but under $250,000 2.80 ---
$250,000 but under $500,000 2.00 ---
$500,000 but under $1 million 1.60 ---
$1 million or more up to 1.00(1) ---
12B-1 FEE TO DEALER 0.25 1.00(2)

A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans(1) and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.

(1) During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee. (2) Dealers may be eligible to receive up to 0.25% during the
first year after purchase and may be eligible to receive the full 12b-1 fee in
the 13th month.

[CLIP ART - QUESTION]

QUESTIONS

More detailed information about the fund and its policies can be found in the
fund's Statement of Additional Information (SAI). If you have any questions
about the fund or your account, you can write to us at 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.

HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- ------------------------- -------------------- --------------------------------
Shareholder Services 1-800/ 632-2301 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.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.

FOR MORE INFORMATION

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

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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

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

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

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

Investment Company Act file #
Lit. Code #

Prospectus & Application

FRANKLIN
GOLD FUND

Advisor Class

Investment Strategy GROWTH

December 1, 1998

LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

CONTENTS

THE FUND
- ------------------------------------------------------------------------------

Information about the fund you should know before investing

2 Goals and Strategies

3 Main Risks

5 Performance

6 Fees and Expenses

7 Management

8 Distributions and Taxes

9 Financial Highlights

YOUR ACCOUNT
- ------------------------------------------------------------------------------

Information about qualified investors, account transactions and services

10 Qualified Investors

12 Buying Shares

13 Investor Services

15 Selling Shares

17 Account Policies

19 Questions

FOR MORE INFORMATION
- ------------------------------------------------------------------------------

Where to learn more about the fund
Back Cover

The Fund

[CLIP ART-BLUE PRINTS]
GOALS AND STRATEGIES

GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to provide shareholders with current income through dividends or interest
received from its investments.

PRINCIPAL INVESTMENTS The fund will normally invest at least 65% of total
assets in equity securities of companies engaged in gold operations. The fund
concentrates (invests more than 25% of total assets) in companies which mine,
process, or deal in gold or other precious metals, such as silver, platinum,
and palladium. The fund may buy gold companies anywhere in the world and
generally invests more than 50% of total assets in companies outside the U.S.

[BEGIN - CALL OUT BOX]
The fund invests primarily in common stocks of companies engaged in gold
operations. This includes gold mining finance companies as well as operating
companies with long-, medium-, or short-life mines.
[END - CALL OUT BOX]

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

The value of fund shares will generally move in the same
direction as the price of gold.

[CLIP ART - ARROWS]
MAIN RISKS

GOLD AND PRECIOUS METALS Gold operation companies involve special
considerations. Prices of their securities will be affected by the price of
gold and precious metals. They may also be affected by changing costs of
production. The price of gold may fluctuate substantially over short periods
of time so the fund's share price may be more volatile than other types of
investments.

[BEGIN - CALL OUT BOX]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[END - CALL OUT BOX]

The price of gold and other precious metals is affected by several factors
including (1) how much of the worldwide supply of gold is held among four
major producers. Economic, political, or other conditions affecting one of
the major sources could have a substantial effect on the world's gold supply
in countries throughout the world; (2) increased environmental, labor or
other costs in mining; (3) changes in laws relating to mining or gold
production or sales; and (4) unpredictable monetary policies and economic and
political conditions in countries throughout the world. For example, if
Russia decides to sell some of its gold reserves, the supply would go up, and
the price would generally go down.

In addition, changes in U.S. or foreign tax, currency or mining laws may make
it more expensive and/or more difficult to pursue the fund's investment
strategies.

The value of a company may be affected by factors that affect the company
alone, the industry, or the entire country in which it is located.

FOREIGN SECURITIES Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund.

Country risk. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.

The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets and punitive taxes. The
fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.

Because of current conditions in South Africa, the fund's investments in
South African companies, approximately 20% of the portfolio as of July 31,
1998, may be subject to somewhat greater risk than investments in companies
of countries with more stable political profiles.

Company risk. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to U.S. companies in U.S. courts.

CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.

Euro. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.

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

Because this change to a single currency is new and untested, the
establishment of the Euro may result in market volatility. For the same
reason it is not possible to predict the impact of the Euro on the business
or financial condition of European issuers or on the fund. To the extent the
fund holds non-U.S. dollar (Euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.

[CLIP ART - MARKET BEAR & MARKET BULL]
PERFORMANCE

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

ADVISOR CLASS ANNUAL TOTAL RETURNS(1) (2)
[The following information was represented by a bar graph in the printed
materials.]

[BEGIN-CALL OUT BOX]
Best quarter:
Q2 '93 27.28%

Worst quarter:
Q4 '97 -27.93%
[END-CALL OUT BOX]

YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

-10.57 41.89 -19.5 5.9 -20.34 73.72 -4.73 -1.28 1.04 -35.54

Average Annual Total Returns
For the periods ended December 31, 1997

1 5 10
Year Years Years
- ----------------------------------------------------
Franklin Gold Fund - -35.54% 1.25% -0.86%
Advisor Class (2)
S&P 500(R) Index (3) 33.36% 20.27% 18.05%

(1) As of September 30, 1998, the fund's year-to-date return was xx%.
(2) Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class I performance, excluding the effect
of Class I's maximum initial sales charge and including the effect of the
Class I distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
(3) The S&P 500(R) Index is an unmanaged group of widely held common stocks
covering a variety of industries. One cannot invest directly in an index, nor
is an index representative of the fund's portfolio.

[CLIP ART - ACCOUNTANT]
FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended July 31, 1998.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

Advisor Class
Maximum sales charge (load) imposed None
on purchases
Exchange fee (1) None

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

Advisor Class
Management fees 0.54%
Distribution and service (12b-1) None
fees
Other expenses 0.42%
---------------
Total annual fund operating expenses 0.96%
===============

(1) There is a $5 fee for each exchange by a market timer (see page 18).

EXAMPLE

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

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

1 Year 3 Years 5 Years 10 years
- ---------------------------------------------
$98 $306 $531 $1,178

[CLIP ART - WRITERS]
MANAGEMENT

Franklin Advisers, Inc. (Advisers) is the fund's investment manager.
Together, Advisers and its affiliates manage over $236 billion in assets (as
of June 30, 1998).

The team responsible for the fund's management is:

MANAGEMENT TEAM

R. Martin Mr. Wiskemann has been a manager on
Wiskemann, Senior the fund since 1972 and has more
Vice President of than 30 years' experience in the
Advisers securities industry.
- --------------------------------------------------------

Suzanne Ms. Killea has been a manager on
Willoughby the fund since 1994. She joined the
Killea, Vice Franklin Templeton Group in 1991.
President of
Advisers
- --------------------------------------------------------

YEAR 2000 ISSUE Like other mutual funds, the fund could be adversely
affected if the computer systems used by the manager and other service
providers do not properly process date-related information on or after
January 1, 2000 (Year 2000 Issue).

The Year 2000 Issue, and in particular foreign service providers'
responsiveness to the issue, could affect portfolio and operational areas
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions, and others.

While the Year 2000 Issue could have a negative effect on the fund, the
manager and its affiliated service providers are taking steps that they
believe are reasonably designed to address the Year 2000 Issue, including
seeking reasonable assurances from the fund's other major service providers.

[CLIP ART - HANDGIVE]
DISTRIBUTIONS AND TAXES

INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund typically pays income
dividends on or about December 15th. Capital gains, if any, are also paid in
December. The amount of these distributions will vary and there is no
guarantee the fund will pay dividends.

To receive an income dividend, you must be a shareholder on the record date.
The record date for the December dividend is typically the last business day
in November. You may not want to invest a large amount in the fund shortly
before the record date since you will receive some of your investment back as
a taxable distribution.

TAX CONSIDERATIONS In general, fund distributions are taxable as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.

[BEGIN - CALL OUT BOX]
BACKUP WITHHOLDING

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

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

Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax professional about federal, state, local or
foreign tax consequences.

For more information, please call 1-800/DIAL BEN to request a free copy of
the Franklin Templeton Tax Information Handbook.

[CLIP ART - DOLLAR]
FINANCIAL HIGHLIGHTS

This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.

ADVISOR CLASS YEAR ENDED JULY 31,
1998 1997(1)
------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.43 13.12
year
------------------------
Net investment income .14 .07
Net realized and unrealized (3.84) (1.67)
losses
------------------------
Total from investment (3.70) (1.60)
operations
------------------------
Less distributions from net (.12) (.09)
investment income
------------------------
Net asset value, end of year 7.61 11.43
========================

Total return (%)(2) (32.46) (12.24)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 2,207 3,211
1,000)
Ratios to average net assets:
(%)
Expenses .96 .83(3)
Net investment income 1.30 .80(3)
Portfolio turnover rate (%) 6.09 16.05

(1) For the period January 2, 1997 (effective date) to July 31, 1997.
(2) Total return is not annualized.
(3) Annualized.

YOUR ACCOUNT
- --------------------------------------------------------------------------------

[CLIP ART - X BOX PENCIL]
QUALIFIED INVESTORS

The following investors may qualify to buy Advisor Class shares of the fund.

o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc. (Distributors).
Minimum investments: $1,000 initial and $50 additional.

o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $25 additional.

o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial and
$25 additional.

o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.

[BEGIN - CALL OUT BOX]
The Franklin Templeton Funds include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund
[END - CALL OUT BOX]

o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the tax code. Minimum
investments: $1 million initial investment in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds and $25 additional.

o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $25 additional.

o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial minimum and $25 additional.

o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the tax code, including salary reduction plans qualified under
section 401(k) of the tax code, and that are sponsored by an employer (i)
with at least 10,000 employees, or (ii) with retirement plan assets of $100
million or more. Minimum investments: No initial minimum and $25
additional.

o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds 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. Minimum investments: No initial minimum and $25
additional.

o Individual investors. Minimum investments: $5 million initial and $25
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.

o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $25 additional. For
minimum investment purposes, the group's investments are added together.
The group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must
have a purpose other than buying fund shares without a sales charge.

Please note that Advisor Class shares of the fund are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however,
may continue to invest in the fund's Advisor Class shares.

[CLIP ART - CASHIER]
BUYING SHARES

ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).

BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN
ACCOUNT
[CLIP ART -
BUSINESS DEAL]
THROUGH YOUR Contact your Contact your
INVESTMENT investment investment
REPRESENTATIVE representative representative
- --------------------------------------------------------

Make your check Make your check
[CLIP ART - payable to payable to
ENVELOPES] Franklin Gold Franklin Gold
BY MAIL Fund. Fund. Include
your account
Mail the check number on the
and your signed check.
application to
Investor Services. Fill out the
deposit slip
from your
account
statement. If
you do not have
a slip, include
a note with your
name, the fund
name, and your
account number.

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

[CLIP ART - SOUND Call to receive Call to receive
WAVES] a wire control a wire control
number and wire number and wire
instructions. instructions.

BY WIRE Mail your signed To make a same
application to day wire
1-800/632-2301 Investor investment,
(or Services. Please please call us
1-650/312-2000 include the wire by 1:00 p.m.
collect) control number or pacific time and
your new account make sure your
number on the wire arrives by
application. 3:00 p.m.

To make a same
day wire
investment,
please call us by
1:00 p.m. pacific
time and make
sure your wire
arrives by 3:00
p.m.
- --------------------------------------------------------

[CLIP ART - Call Shareholder Call Shareholder
ARROWS] Services at the Services at the
number below, or number below, or
BY EXCHANGE send signed send signed
written written
instructions. instructions.
(Please see page (Please see page
14 for 14 for
information on information on
exchanges.) exchanges.)
- --------------------------------------------------------

Franklin Templeton Investor Services 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, CA 94403-7777
Call toll-free: 1-800/632-2301 (Monday through Friday 5:30 a.m. to 5:00 p.m.,
pacific time)

[CLIP ART - HANDSHAKE]
INVESTOR SERVICES

AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares.

DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in the same share class of the fund or in Advisor Class or Class I
shares of another Franklin Templeton Fund. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.

[BEGIN - CALL OUT BOX]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call
1-800/527-2020 for information.
[END - CALL OUT BOX]

Please indicate on your application the distribution option you have chosen,
otherwise we will automatically reinvest your distributions in the same share
class of the fund.

RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application 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 at 1-800/527-2020.

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

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

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

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

EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You may also exchange your Advisor Class shares
for Class I shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.

If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you may also
exchange your shares for Class I shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.

[BEGIN - CALL OUT BOX]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges. Exchanges also have the same tax consequences as ordinary
sales and purchases.
[END - CALL OUT BOX]

Exchanges may only be made between identically registered accounts, unless
you send written instructions with a signature guarantee.

Frequent exchanges can interfere with fund management and drive up costs for
all shareholders. To protect shareholders, there are limits on the number and
amount of exchanges you may make (please see Market timers on page 18 ).

* If you exchange into Class I shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class I shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class.

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

[CLIP ART - BROKER]
SELLING SHARES

You can sell your shares at any time.

SELLING SHARES IN WRITING Requests to sell less than $50,000 can generally
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:

[BEGIN - CALL OUT BOX]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.

A notary public CANNOT provide a signature guarantee.
[END - CALL OUT BOX]

o you are selling more than $50,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days

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

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

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

RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you need to complete additional forms required by
the Internal Revenue Service. For participants under age 591/2 , tax
penalties may apply. Call Retirement Plan Services at 1-800/527-2020 to
request the necessary forms.

SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
[CLIP ART -
BUSINESS DEAL]
Contact your investment
THROUGH YOUR representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------

[CLIP ART - Send written instructions and
ENVELOPES] endorsed share certificates (if you
hold share certificates) to
BY MAIL Investor Services. Corporate,
partnership or trust accounts may
need to send additional documents.

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

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

[CLIP ART - As long as your transaction is for
TELEPHONE] $50,000 or less, you do not hold
share certificates and you have not
BY PHONE changed your address by phone
within the last 15 days, you can
1-800/632-2301 sell your shares by phone.

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

[CLIP ART - SOUND You can call or write to have
WAVES] redemption proceeds of $1,000 or
more wired to a bank or escrow
account. See the policies above for
selling shares by mail or phone.

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

Requests received in proper form by
1:00 p.m. pacific time will be
wired the next business day.
- --------------------------------------------------------

[CLIP ART - Obtain a current prospectus for the
ARROWS] fund you are considering.

BY EXCHANGE Call Shareholder Services at the
number below, or send signed
written instructions. See the
policies above for selling shares
by mail or phone.

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

Franklin Templeton Investor Services 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, CA 94403-7777
Call toll-free: 1-800/632-2301 (Monday through Friday 5:30 a.m. to 5:00 p.m.,
pacific time)

[CLIP ART - CERTIFICATE]
ACCOUNT POLICIES

CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.

The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.

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

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

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

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

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

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

MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5.00. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets. Shares under common ownership or control are combined for these
limits.

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

o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment
minimums or waive or lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state
or jurisdiction.
o In unusual circumstances, we may temporarily suspend
redemptions, or postpone the payment of proceeds, as allowed by federal
securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in
the case of an emergency or if the payment by check would be harmful to
existing shareholders.
o To permit investors to obtain the current price,
dealers are responsible for transmitting all orders to the fund promptly.

DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.

[CLIP ART - QUESTION]
QUESTIONS

More detailed information about the fund and its policies can be found in the
fund's Statement of Additional Information (SAI). If you have any questions
about the fund or your account, you can write to us at 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.

Hours (pacific time,
Department Name Telephone Monday through Friday)
Number
- --------------------------------------------------------
Shareholder 1-800/ 5:30 a.m. to 5:00 p.m.
Services 632-2301
Fund Information 1-800/ DIAL 5:30 a.m. to 8:00 p.m.
BEN 6:30 a.m. to 2:30
(1-800/ p.m. (Saturday)
342-5236)
Retirement Plan 1-800/ 5:30 a.m. to 5:00 p.m.
Services 527-2020
Dealer Services 1-800/ 5:30 a.m. to 5:00 p.m.
524-4040
Institutional 1-800/ 6:00 a.m. to 5:00 p.m.
Services 321-8563
TDD (hearing 1-800/ 5:30 a.m. to 5:00 p.m.
impaired) 851-0637

F O R M O R E I N F O R M A T I O N

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

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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

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

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

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

Investment Company Act file #
Lit. Code #

FRANKLIN
GOLD
FUND

CLASS I & CLASS II

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777

DECEMBER 1, 1998 SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)

This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated December 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.

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

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

CONTENTS

Goals and Strategies
The Fund's Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Fund's Underwriter
Performance
Miscellaneous Information
Description of Ratings for Debt Securities

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

The fund's principal investment goal is capital appreciation. The fund's
secondary goal is to provide current income through the receipt of dividends or
interest from its investments. These goals are fundamental, which means they may
not be changed without shareholder approval.

The fund tries to achieve its goal of capital appreciation by investing in
securities with the potential to increase in value, so that its own shares will
in turn increase in value. The fund may also consider the payment of dividends
in trying to achieve its secondary goal of current income.

The fund concentrates its investments in securities of issuers engaged in
mining, processing, or dealing in gold or other precious metals, such as silver,
platinum, and palladium. This means that the fund invests at least 25% of its
total assets in these securities, except for temporary periods when unusual and
adverse economic conditions exist in those industries. This policy is
fundamental, which means that it may not be changed without shareholder
approval.

The fund will normally invest in common stocks and securities convertible into
common stocks, such as convertible preferred stock, convertible debentures, and
convertible rights and warrants, all of which may be traded on a securities
exchange or over the counter. The fund may also buy preferred stocks and debt
securities, such as notes, bonds, debentures, or commercial paper (short-term
debt securities of large corporations), and may place some of its cash reserves
in securities of the U.S. government and its agencies, various bank debt
instruments, or repurchase agreements collateralized by U.S. government
securities.

Independent rating organizations rate debt and convertible securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. The fund may invest in fixed-income and
convertible securities rated below investment grade by Moody's Investors
Service, Inc. (Moody's) or Standard & Poor's Corporation(R) (S&P), or that are
unrated but considered by the manager to be of comparable quality. Below
investment grade securities are generally those rated Ba or lower by Moody's or
BB or lower by S&P. Please see the Appendix for a description of ratings.

EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting rights.
The owner of an equity security may participate in a company's success through
the receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's success
or lack of success through increases or decreases in the value of the company's
shares as traded in the public trading market for such shares. Equity securities
generally take the form of common stock or preferred stock, as well as
securities convertible into common stocks. Preferred stockholders typically
receive greater dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well. Equity securities may
also include convertible securities, warrants, or rights. Warrants or rights
give the holder the right to buy a common stock at a given time for a specified
price.

DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.

The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.

CASH MANAGEMENT TECHNIQUES The fund may place some of its cash reserves in
securities of the U.S. government and its agencies, various bank debt
instruments, or repurchase agreements collateralized by U.S. government
securities.

REPURCHASE AGREEMENTS In a repurchase agreement, the fund 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. A
custodian bank approved by the fund's Board of Directors holds the securities
subject to resale on behalf of the fund. 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 fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The fund, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
(I.E., banks or broker-dealers that have been determined by the fund's manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction).

FOREIGN SECURITIES Because the fund concentrates its investments in gold and
precious metal-related issuers, the fund invests a substantial portion of its
assets in foreign securities. Foreign securities are securities issued by
companies domiciled and operating outside the U.S. or securities issued by
foreign governments. Although the fund is not obligated to do so, the fund
presently expects that under normal conditions, it will invest more than 50% of
the value of its assets in foreign securities. At any particular time a
substantial portion of the fund's assets may be invested in companies domiciled
or operating in one or a very few foreign countries. The fund may, however,
invest some or all of its assets in U.S. securities when the fund's manager
concludes that investments in U.S. companies are more likely to accomplish the
fund's goals. On July 31, 1998, approximately 65.1% of the fund's assets were
invested in securities of foreign issuers in the following countries: 29.3% in
Canada; 19.5% in South Africa; 8.7% in Australia; and 7.6% in other foreign
countries.

Any investments by the fund in foreign securities where delivery takes place
outside the U.S. will be made in compliance with applicable U.S. and foreign
currency restrictions and other tax laws and laws limiting the amount and types
of foreign investments. Although current regulations do not, in the opinion of
the fund's manager, limit seriously the fund's investment activities, if they
were changed in the future they might restrict the ability of the fund to make
its investments or tend to impair the liquidity of the fund's investments.
Changes in governmental administrations, economic or monetary policies in the
U.S. or abroad, or circumstances in dealings between nations could result in
investment losses for the fund and could adversely affect the fund's operations.
The fund's investments in securities in foreign countries will involve
currencies of the U.S. and of foreign countries. Therefore, changes in exchange
rates, currency convertibility, and repatriation may favorably or adversely
affect the fund.

The fund ordinarily buys foreign securities that are traded in the U.S., as well
as American, European, and Global Depositary Receipts. The fund may buy foreign
securities for which there is an established public trading market directly in
foreign markets. This means that there is a sufficient number of shares traded
regularly relative to the number of shares the fund would buy.

Notwithstanding the fact that the fund intends to acquire the securities of
foreign issuers only where there are public trading markets, investments by the
fund in the securities of foreign issuers may tend to increase the risks with
respect to the liquidity of the fund's portfolio and the fund's ability to meet
a large number of shareholder redemption requests should there be economic or
political turmoil in a country in which the fund has a substantial portion of
its assets invested or should relations between the U.S. and the foreign country
deteriorate markedly. The fund does not consider securities that it acquires
outside the U.S. and that are publicly traded in the U.S. or on a foreign
securities exchange or in a foreign securities market to be illiquid
investments, if (a) the fund reasonably believes it can readily dispose of the
securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. Foreign securities are often traded with less
frequency and volume, and therefore may have greater price volatility, than many
U.S. securities.

DEPOSITARY RECEIPTS American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.

Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.

Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the fund's investment policies,
the fund will consider its investments in depositary receipts to be investments
in the underlying securities.

CONVERTIBLE SECURITIES The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because both interest rate and market movements can
influence its value, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.

A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.

The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.

While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.

GOLD BULLION As a means of seeking its principal goal of capital appreciation
and when the fund considers it to be appropriate as a possible hedge against
inflation, the fund may invest a portion of its assets in gold bullion and may
hold a portion of its cash in foreign currency in the form of gold coins. The
fund has not used these techniques recently but may use them if it determines
that they could help the fund achieve its goals. There is, of course, no
assurance that these investments will provide capital appreciation or a hedge
against inflation. The fund's ability to invest in gold bullion is restricted by
the diversification requirements that the fund must meet in order to qualify as
a regulated investment company under the tax code, as well as diversification
requirements of the federal securities laws.

The fund will invest in gold bullion when the prospects of these investments
are, in the opinion of the manager, attractive in relation to other possible
investments. The basic trading unit for gold bullion is a gold bar weighing
approximately 100 troy ounces with a purity of at least 995/1000, although gold
bullion is also sold in much smaller units. Gold bars and wafers are usually
numbered and bear an indication of purity and the stamp or assay mark of the
refinery or assay office that certifies the bar's purity. Bars of gold bullion
historically have traded primarily in the New York, London, and Zurich gold
markets. In terms of volume, these gold markets have been the major markets for
trading in gold bullion. Prices in the Zurich gold market generally correspond
to prices in the London gold market. Since the ownership of gold bullion became
legal in the U.S. on December 31, 1974, U.S. markets for trading gold bullion
have developed. It is anticipated that transactions in gold will generally be
made in U.S. markets, although these transactions may be made in foreign markets
when it is deemed to be in the best interest of the fund. Transactions in gold
bullion by the fund are negotiated with principal bullion dealers unless, in the
opinion of the fund's manager, more favorable prices (including the costs and
expenses described below) are otherwise obtainable. Prices at which gold bullion
is purchased or sold include dealer mark-ups or mark-downs, insurance expenses,
assay charges and shipping costs for delivery to a custodian bank. These costs
and expenses may be a greater or lesser percentage of the price from time to
time, depending on whether the price of gold bullion decreases or increases.
Since gold bullion does not generate any investment income, the only source of
return to the fund on such an investment will be from any gains realized upon
its sale, and negative return will be realized, of course, to the extent the
fund sells its gold bullion at a loss.

LOANS OF PORTFOLIO SECURITIES The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% of its total
assets. The fund has not used this technique recently but may do so if it
determines that it could help the fund achieve its goals. Such loans must be
secured by collateral (consisting of any combination of cash, U.S. government
securities or irrevocable letters of credit) in an amount equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. The fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower fail.

TRANSACTIONS IN OPTIONS, FUTURES, OPTIONS ON FUTURES, AND FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS The fund may enter into options (including writing
covered call options), futures, options on financial futures, and forward
foreign currency exchange contracts. The fund's investments in these securities
will be for portfolio hedging purposes in an effort to stabilize principal
fluctuations to achieve the fund's primary investment goal, and not for
speculation. The fund does not currently intend to write put options, although
the fund reserves the right to do so. The fund will commit no more than 5% of
its assets to premiums when buying put options.

Options, futures, options on futures, and forward foreign currency exchange
contracts are generally considered "derivative securities."

The fund may buy or write (sell) put and call options that trade on securities
exchanges or in the over-the-counter market. The fund may also buy or write put
and call options on currencies. An option allows its holder to buy a specified
security or currency (a call option) or to sell a specified security or currency
(a put option) from or to the writer of the option at a set price during the
term of the option. All options written by the fund will be covered.

WRITING CALL OPTIONS. A call option written by the fund is "covered" if the fund
owns the underlying security or currency that is subject to the call or has an
absolute and immediate right to acquire that security or currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian bank) upon conversion or exchange of other
securities or currencies held in its portfolio. A call option is also covered if
the fund holds a call on the same security or currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the fund in cash and high-grade debt securities in a segregated account with its
custodian bank. The premium paid by the buyer will reflect, among other things,
the relationship of the exercise price to the market price and volatility of the
underlying security or currency, the remaining term of the option, supply and
demand, and interest rates.

The fund may have no control over when the underlying securities or currencies
must be sold since, with regard to certain options, the fund may be assigned an
exercise notice at any time before the termination of the obligation. Whether or
not an option expires unexercised, the fund retains the amount of the premium.
This amount may be offset by a decline in the market value of the underlying
security or currency during the option period. If a call option is exercised,
the fund experiences a profit or loss from the sale of the underlying security
or currency.

If the fund wishes to terminate its obligation, it may effect a "closing
purchase transaction." This is done by buying an option of the same series as
the option previously written. The effect of the purchase is that the clearing
corporation will cancel the fund's position. The fund may not, however, effect a
closing purchase transaction after being notified of the exercise of an option.
Likewise, the holder of an option may liquidate its position by effecting a
"closing sale transaction." This is done by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.

Effecting a closing transaction in the case of a written call option will allow
the fund to write another call option on the underlying security or currency
with a different exercise price, expiration date, or both. Also, effecting a
closing transaction will allow the proceeds from the sale of any securities or
currencies subject to the option to be used for other fund investments. If the
fund desires to sell a particular security or currency from its portfolio on
which it has written a call option, it will effect a closing transaction before
or at the same time as the sale of the security or currency.

The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option. The fund
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option. Because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security or currency, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the fund.

BUYING CALL OPTIONS. The fund may buy call options on securities or currencies
that it intends to buy in order to limit the risk of a substantial increase in
the market price of the security or currency. The fund may also buy call options
on securities or currencies held in its portfolio and on which it has written
call options. Before its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the call option plus the
related transaction costs.

WRITING PUT OPTIONS. The operation of put options, including their related risks
and rewards, is substantially identical to that of call options.

The fund may write put options only on a covered basis. This means that the fund
must maintain in a segregated account cash, U.S. government securities, or other
liquid, high-grade debt securities in an amount not less than the exercise price
at all times while the put option is outstanding. The rules of the clearing
corporation currently require that these assets be deposited in escrow to secure
payment of the exercise price. The fund may generally write covered put options
in circumstances where the fund's manager wants to buy the underlying security
or currency for the fund's portfolio at a price lower than the current market
price of the security or currency. In this event, the fund would write a put
option at an exercise price that, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the fund would also receive
interest on debt securities maintained to cover the exercise price of the
option, this technique could be used to enhance current return during periods of
market uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received.

BUYING PUT OPTIONS. The fund may buy put options. The fund may enter into
closing sale transactions with respect to these options, exercise them, or allow
them to expire.

The fund may buy a put option on an underlying security or currency owned by the
fund (a "protective put") as a hedging technique in order to protect against an
anticipated decline in the value of the security or currency. This hedge
protection is provided only during the life of the put option when the fund, as
the holder of the put option, is able to sell the underlying security or
currency at the put exercise price, regardless of any decline in the underlying
security's market price or currency's exchange value. For example, a put option
may be purchased in order to protect unrealized appreciation of a security or
currency when the manager deems it desirable to continue to hold the security or
currency because of tax considerations. The premium paid for the put option and
any transaction costs would reduce any short-term capital gain otherwise
available for distribution when the security or currency is eventually sold.

The fund may also buy put options at a time when the fund does not own the
underlying security or currency. By buying put options on a security or currency
it does not own, the fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not sold when it has
remaining value, and if the market price of the underlying security or currency
remains equal to or greater than the exercise price during the life of the put
option, the fund will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.

OVER-THE-COUNTER OPTIONS (OTC OPTIONS). The fund may write covered put and call
options and buy put and call options that trade in the over-the-counter market
to the same extent that it may engage in exchange-traded options. OTC options
differ from exchange-traded options in certain material respects.

OTC options are available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange-traded options. OTC
options, however, are arranged directly with dealers and not, as is the case
with exchange-traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. The writer of an
OTC option is paid the premium in advance by the dealer.

OPTIONS ON STOCK INDICES. The fund may buy call and put options on stock indices
in order to hedge against the risk of market or industry-wide stock price
fluctuations. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.

When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high-quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open,
or it will otherwise cover the transaction.

FUTURES CONTRACTS. The fund may enter into futures contracts based upon
financial indices (financial futures). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of a
specified quantity of a financial instrument, such as a security or the cash
value of a securities index, during a specified future period at a specified
price. The purpose of the acquisition or sale of a futures contract is to
attempt to protect the fund from fluctuations in the price of portfolio
securities without actually buying or selling the underlying security. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the cash value called for by the contract on a specified date. A
"purchase" of a futures contract means the acquisition of a contractual
obligation to take delivery of the cash value called for by the contract at a
specified date. Futures contracts have been designed by exchanges designated
"contracts markets" by the Commodity Futures Trading Commission (CFTC) and must
be executed through a futures commission merchant or brokerage firm that is a
member of the relevant contract market.

To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the fund's position, the
fund will be required to pay to the futures commission merchant an amount equal
to the change in value.

Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, or the cash value of an index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The offsetting of the
contractual obligation is done by buying (or selling, as the case may be) on a
commodities exchange an identical financial futures contract calling for
delivery in the same month. This transaction, which is effected through a member
of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset, or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the fund will incur brokerage fees when it buys
or sells financial futures contracts.

The fund will not enter into futures contracts or related options for
speculation, but only as a hedge against changes in the value of its securities,
or securities that it intends to buy, resulting from market conditions and, to
the extent consistent with this policy, to accommodate cash flows. The fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on its existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of the market value of the fund's total assets.

The fund expects that in the normal course it will buy securities upon
termination of long futures contracts and long call options on futures
contracts, but under unusual market conditions it may terminate any of these
positions without a corresponding purchase of securities.

To the extent the fund enters into a futures contract, it will maintain assets
in a segregated account with its custodian bank, to the extent required by the
Securities and Exchange Commission (SEC), to cover its obligations with respect
to the contract. The assets will consist of cash, cash equivalents, or
high-quality debt securities from the fund's portfolio in an amount equal to the
difference between the fluctuating market value of the futures contract and the
aggregate value of the initial and variation margin payments made by the fund
with respect to the futures contract.

STOCK INDEX FUTURES. The fund may buy and sell stock index futures. A stock
index futures contract obligates the seller to deliver (and the buyer to take)
an amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made.

The fund may sell stock index futures contracts in anticipation of or during a
market decline to try to offset the decrease in market value of its equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.

OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market-side price movements.
The need to hedge against these risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
these investments to factors influencing the stock market as a whole.

Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account that represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.

FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the fund
or that are not currently available but that may be developed, to the extent
these opportunities are both consistent with the fund's investment goals and
legally permissible for the fund. Before making such an investment, the fund
will supplement its prospectus, if appropriate.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The fund may buy or sell forward
foreign currency exchange contracts. While these contracts are not presently
regulated by the CFTC, the CFTC may, in the future, assert authority to regulate
forward contracts. In this event, the fund's ability to use forward contracts
may be restricted. The fund's investments in these securities will be for
portfolio hedging purposes in an effort to stabilize principal fluctuations to
achieve the fund's primary investment goal, and not for speculation.

Forward contracts will reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the fund
than if it had not entered into these contracts. The use of forward foreign
currency contracts will not eliminate fluctuations in the underlying U.S. dollar
equivalent value of, or rates of return on, the fund's foreign currency
denominated portfolio securities, and the use of these techniques will subject
the fund to certain risks.

The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the fund
may not always be able to enter into forward foreign currency contracts at
attractive prices, and this will limit the fund's ability to use these contracts
to hedge or cross-hedge its assets. Also, with regard to the fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time, poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the fund's assets that are the
subject of the cross-hedges are denominated.

TEMPORARY INVESTMENTS When the fund's manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest the
fund's portfolio in a temporary defensive manner. Under such circumstances, the
fund may buy preferred stocks and rated or unrated debt securities, such as
notes, bonds, debentures, or commercial paper. The fund may also place some of
its cash reserves in securities of the U.S. government and its agencies, various
bank debt instruments, or repurchase agreements collateralized by U.S.
government securities.

TIMING OF THE FUND'S SECURITIES TRANSACTIONS Normally, the fund will buy
securities for investment with a view to long-term appreciation. The fund may on
occasion, however, buy securities with the expectation of realizing gains over
the short-term. Because the investment outlook of the types of securities that
the fund may buy may change as a result of unexpected developments in national
or international securities markets, or in economic, monetary or political
relationships, the fund will not treat its portfolio turnover as a limiting
factor. The fund may make changes in particular portfolio holdings whenever the
fund considers that a security no longer has optimum growth potential or has
reached its anticipated level of performance, or that another security appears
to have a relatively greater potential for capital appreciation and will make
such changes without regard to the length of time the fund has held a security.
The fund may consider the differences between the tax treatment of long-term
gains and short-term gains, however, in determining the timing of portfolio
transactions.

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

The fund may not:

1. Purchase the stock or securities of any issuer other than those of the U.S.
or its instrumentalities, if at the time of the investment the effect
thereof shall be to cause more than 5% of the value of its assets to be
invested at such time in the securities of such issuer;

2. As to 75% of its total assets, purchase stock or securities of an issuer,
other than the U.S. or its instrumentalities, if the effect thereof shall
be to cause more than 10% of the voting securities of such issuer to be
held by the fund;

3. Borrow money in an amount in excess of 5% of the value of its total assets,
and then only from banks for temporary or emergency purposes, and not for
direct investment in securities;

4. Lend its assets, except through the purchase or acquisition of bonds,
debentures, or other debt securities of a type customarily purchased by
institutional investors, or through loans of its portfolio securities, or
to the extent the entry into a repurchase agreement may be deemed a loan;

5. Underwrite the securities of other issuers or invest more than 10% of its
assets in illiquid securities, including certain securities with legal or
contractual restrictions on resale;

6. Invest in securities for the purpose of exercising management or control of
the issuer;

7. Maintain a margin account with a securities dealer or effect short sales;

8. Invest in commodities or commodity contracts, except that it may invest in
gold bullion and foreign currency in the form of gold coins;

9. Invest directly in real estate (although it may invest in real estate
investment trusts) or in the securities of other open-end investment
companies, except that securities of another open-end investment company
may be acquired pursuant to a plan of reorganization, merger,
consolidation, or acquisition, and except to the extent the fund invests
its uninvested daily cash balances in shares of Franklin Money Fund and
other money market funds in the Franklin Group of Funds, provided (i)
its purchases and redemptions of such money market fund shares may not
be subject to any purchase or redemption fees, (ii) its investments may
not be subject to duplication of management fees, nor to any charge
related to the expenses of distributing the fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws), and
(iii) provided aggregate investments by the fund in any such money
market fund do not exceed (A) the greater of (i) 5% of the fund's total
net assets or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money market fund;

10. Invest in assessable securities or securities involving unlimited liability
on the part of the fund; or

11. Purchase or retain in its portfolio any security if any officer, director,
or security holder of the issuer is at the same time an officer, director,
or employee of the fund or of the fund's manager and this person owns
beneficially more than 1/2 of 1% of the securities and if all persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities
of the issuer.

In addition to the fundamental restrictions listed above, the fund presently has
the following additional restrictions, which are not fundamental and may be
changed without shareholder approval.

The fund may not:

1. Pledge, mortgage, or hypothecate its assets as security for loans, nor
engage in joint or joint and several trading accounts in securities, except
that an order to buy or sell may be combined with orders from other persons
to obtain lower brokerage commissions, and except that the fund may
participate in a joint repurchase agreement with other funds in the
Franklin Templeton Group of Funds;

2. Invest in real estate limited partnerships or in interests, other than
publicly traded equity securities, in oil, gas, or other mineral leases,
exploration, or development. Investments in marketable securities issued by
real estate investment trusts are not subject to this restriction.

3. Invest more than 5% of its net assets in warrants, other than those
acquired by the fund as a part of a unit, valued at the lower of cost or
market, including not more than 2% that are not listed on the New York or
American Stock Exchange.

4. Invest in commodities or commodity contracts, except that the fund may
invest up to 10% of its total assets in gold bullion and gold coins, up to
5% of its total assets in options and futures, and more than 5% of its
total assets in options and futures for hedging purposes only or when these
investments are covered by cash or securities.

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

The fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.

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.

THE FUND'S RISKS

GOLD AND PRECIOUS METALS RISKS Like all investments, there are risks associated
with an investment in the fund and its policies of investing in securities of
companies engaged in mining, processing, or dealing in gold or other precious
metals and in gold bullion. These investments may involve the following special
considerations:

1. FLUCTUATIONS IN THE PRICE OF GOLD. The price of gold has recently been
subject to substantial upward and downward movements over short periods
of time and may be affected by unpredictable international monetary and
political policies, such as currency devaluations or reevaluations,
economic conditions within an individual country, trade imbalances or
trade or currency restrictions between countries, and world inflation
rates and interest rates. The price of gold, in turn, is likely to
affect the market prices of securities of companies mining, processing,
or dealing in gold and, accordingly, the value of the fund's investments
in these securities.

2. POTENTIAL EFFECT OF CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL OF
SALES. Currently there are only four major sources of supply of primary
gold production, and the market share of each source cannot be readily
ascertained. One of the largest national producers of gold bullion and
platinum is the Republic of South Africa. Changes in political and
economic conditions affecting South Africa may have a direct impact on
its sales of gold. Under South African law, the only authorized sales
agent for gold produced in South Africa is the Reserve Bank of South
Africa, which, through its retention policies, controls the time and
place of any sale of South African bullion. The South African Ministry
of Mines determines gold mining policy. South Africa depends
predominantly on gold sales for the foreign exchange necessary to
finance its imports, and its sales policy is necessarily subject to
national and international economic and political developments.

3. TAX AND CURRENCY LAWS. Changes in the tax or currency laws of the U.S. and
foreign countries may inhibit the fund's ability to pursue, or may increase
the cost of pursuing, its investment policies.

4. UNPREDICTABLE MONETARY POLICIES, ECONOMIC AND POLITICAL CONDITIONS. The
fund's assets may be less liquid or the change in the value of its
assets may be more volatile (and less related to general price movements
in the U.S. markets) than investments in the securities of U.S.
companies, particularly because the price of gold and other precious
metals may be affected by unpredictable international monetary policies,
economic and political considerations, governmental controls, and
conditions of scarcity, surplus, or speculation. In addition, the use of
gold or Special Drawing Rights (which are also used by members of the
International Monetary Fund for international settlements) to settle net
deficits and surpluses in trade and capital movements between nations
subjects the supply and demand, and therefore the price, of gold to a
variety of economic factors that normally would not affect other types
of commodities.

5. NEW AND DEVELOPING MARKETS FOR PRIVATE GOLD OWNERSHIP. Between 1933 and
December 31, 1974, a market did not exist in the U.S. in which gold
bullion could be purchased by individuals for investment purposes. Since
it became legal to invest in gold, markets have developed in the U.S.
Any large purchases or sales of gold bullion could have an effect on the
price of gold bullion. Recently, several central banks have sold gold
bullion from their reserves. Sales by central banks and/or rumors of
these sales have had a negative effect on gold prices.

6. EXPERTISE OF THE MANAGER. The successful management of the fund's
portfolio may be more dependent upon the skills and expertise of the
fund's manager than is the case for most mutual funds because of the
need to evaluate the factors identified above. Moreover, in some
countries, disclosures concerning an issuer's financial condition and
results and other matters may be subject to less stringent regulatory
provisions, or may be presented on a less uniform basis than is the case
for issuers subject to U.S. securities laws. Issuers and securities
exchanges in some countries may be subject to less stringent
governmental regulations than is the case for U.S. companies.

FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below.

There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.

There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value.

Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.

In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.

The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Some countries may adopt policies that would prevent the fund from transferring
cash out of the country or withhold portions of interest and dividends at the
source.

The fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Certain
currencies may not be internationally traded.

Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the fund's portfolio
securities are denominated may have a detrimental impact on the fund. The fund's
manager endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it places
the fund's investments.

The fund's Board of Directors (Board) considers at least annually the likelihood
of the imposition by any foreign government of exchange control restrictions
that would affect the liquidity of the fund's assets maintained with custodians
in foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The Board also
considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith, or gross negligence on the part of
the fund's manager, any losses resulting from the holding of the fund's
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the shareholders. No assurance can be given that the
Board's appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not occur.

EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.

Resources has created an interdepartmental team to handle all Euro-related
changes to enable the Franklin Templeton Funds to process transactions
accurately and completely with minimal disruption to business activities. While
the implementation of the Euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps that they
believe are reasonably designed to address the Euro issue.

INTEREST RATE RISK To the extent the fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.

OPTIONS, FUTURES, AND OPTIONS ON FUTURES The fund's ability to hedge effectively
all or a portion of its securities through transactions in options, futures, and
options on futures depends on the degree to which price movements in the
underlying security, currency, or index correlate with price movements in the
relevant portion of the fund's securities. Inasmuch as these securities will not
duplicate the components of any index or the underlying securities or
currencies, the correlation will not be perfect. Consequently, the fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index, currency, or other securities underlying
the hedging instrument and the hedged securities that would result in a loss on
both the securities and the hedging instrument. Accordingly, successful use by
the fund of options, futures, and options on futures will be subject to the
manager's ability to predict correctly movements in the direction of the
securities or currency markets generally or of a particular segment. This
requires different skills and techniques than predicting changes in the price of
individual securities.

Positions in options, futures, and options on futures may be closed out only on
an exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close an option or futures position also could have
an adverse impact on the fund's ability to hedge its securities effectively. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the option or futures contract.

There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the fund writes an OTC option, it generally can close
out that option before its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of a put or call option might also
find it difficult to terminate its position on a timely basis in the absence of
a secondary market.

The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits, and it may impose other sanctions or
restrictions. The fund does not believe that these limits will have an adverse
impact on the fund's strategies for hedging its securities.

The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general market trends by the manager may still not result in
a successful transaction.

Futures contracts entail other risks as well. Although the fund believes that
the use of these contracts will benefit the fund, if the manager's judgment
about the general direction of the market is incorrect, the fund's overall
performance would be poorer than if it had not entered into any futures
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds held
in its portfolio, and interest rates decrease instead, the fund will lose part
or all of the benefit of the increased value of its bonds that it has hedged
because it will have offsetting losses in its futures positions. In addition, if
the fund has insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. These sales may, but will
not necessarily be at increased prices that reflect the rising market. The fund
may have to sell securities at a time when it may be disadvantageous to do so.

HIGH YIELD SECURITIES Because the fund may invest in securities below investment
grade, an investment in the fund is subject to a higher degree of risk than an
investment in a fund that invests primarily in higher-quality securities. You
should consider the increased risk of loss to principal that is present with an
investment in higher risk securities, such as those in which the fund invests.
Accordingly, an investment in the fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals.

The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Prices of high-yield securities are often closely linked with the issuer's stock
price and typically will rise and fall in response to business developments,
general stock market activity, or other factors that affect stock prices.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.

Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.

The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities tend
to lose much of their value before they default. Thus, the fund's net asset
value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.

High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for the fund to manage the timing of its income. Under the tax code and U.S.
Treasury regulations, the fund may have to accrue income on defaulted securities
and distribute the income to shareholders for tax purposes, even though the fund
is not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of fund shares.

Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on the market price of a security and on the fund's ability to sell a security
in response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the fund's portfolio.

The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The fund may also incur special costs in disposing of restricted securities,
although the fund will generally not incur any costs when the issuer is
responsible for registering the securities.

The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The fund's manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any other
person concerning the acquisition of these securities.

The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the fund's net asset value.

The fund relies on the manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the manager takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management, and regulatory matters.

REPURCHASE AGREEMENTS The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, the fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by the fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to the fund, these risks can be controlled through
careful monitoring procedures.

OFFICERS AND DIRECTORS

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

The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.

POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE FUND DURING THE PAST FIVE YEARS

Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111

Director

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

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

Director

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 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).

*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Director

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

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

Director

Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Director, General Host Corporation (nursery and
craft centers).

*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404

Chairman of the Board and Director

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 50 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. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Director

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 53 of
the investment companies in the Franklin Templeton Group of Funds.

Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014

Director

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

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

Director

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

*R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404

President and Director

Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President and Director,
ILA Financial Services, Inc.; and officer and/or director or trustee, as the
case may be, of 15 of the investment companies in the Franklin Templeton Group
of Funds.

Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Chief Financial Officer

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

Deborah R. Gatzek (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.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 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 32 of
the investment companies in the Franklin Templeton Group of Funds.

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

Vice President

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

* This Board member is considered an "interested person" under federal
securities laws.

Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.

The fund currently pays nonaffiliated Board members $150 per month plus $150 per
meeting attended. As shown above, the nonaffiliated Board members also serve as
directors or trustees of other investment companies in the Franklin Templeton
Group of Funds, which may pay them fees for their services. The fees payable to
nonaffiliated Board members by the fund are subject to reductions resulting from
fee caps limiting the amount of fees payable to Board members who serve on other
boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to nonaffiliated Board members by the fund and by
other funds in the Franklin Templeton Group of Funds.

NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE FUND* FUNDS** SERVES
- --------------------------------------------------------------------------------
Frank H. Abbott, III $3,462 $165,937 27
Harris J. Ashton 3,330 344,642 49
S. Joseph Fortunato 3,298 361,562 51
David W. Garbellano*** 300 91,317 n/a
Frank W. T. La Haye 3,462 141,433 27
Gordon S. Macklin 2,280 337,292 49

*For the fiscal year ended July 31, 1998.
**For the calendar year ended December 31, 1997.
***Deceased, September 27, 1997.

Nonaffiliated Board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or Board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or Board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.

MANAGEMENT AND OTHER SERVICES

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

The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the fund's Board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.

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

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

MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:

o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over $250
million; and
o 9/240 of 1% of the value of net assets in excess of $250 million.

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

For the last three fiscal years ended July 31, the fund paid the following
management fees:

Management Fees Paid ($)
- -------------------------------------------------
1998 1,416,311
1997 1,822,259
1996 2,024,845

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

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

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

o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.

During the periods shown, the manager paid FT Services the following
administration fees:

Administration Fees Paid ($)
------------------------------------------------
1998(1) 382,884
1997(2) 413,362

(1) For the fiscal year ended July 31, 1998. (2) For the period from October 1,
1996, through July 31, 1997.

SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.

For its services, Investor Services receives 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 Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.

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

PORTFOLIO TRANSACTIONS

The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the fund's Board of Directors may give.

When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the fund is
negotiated between the fund's manager and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of the
persons responsible for placement and review of the transactions. These opinions
are based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.

The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.

It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager 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 fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.

During the last three fiscal years ended July 31, the fund paid the following
brokerage commissions:

Brokerage Commissions ($)
------------------------------------------------
1998 113,547
1997 279,557
1996 552,944

As of July 31, 1998, the fund did not own securities of its regular
broker-dealers.

DISTRIBUTIONS AND TAXES

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

DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitute its 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 derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
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
paid from long-term capital gains realized by the fund 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.

EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt instruments are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital. The fund may be
subject to foreign withholding taxes on income from certain of its foreign
securities. If more than 50% of the fund's total assets at the end of the fiscal
year are invested in securities of foreign corporations, the fund may elect to
pass-through to you your pro rata share of foreign taxes paid by the fund. If
this election is made, the year-end statement you receive from the fund will
show more taxable income than was actually distributed to you. However, you will
be entitled to either deduct your share of such taxes in computing your taxable
income or claim a foreign tax credit for such taxes against your U.S. federal
income tax. The fund will provide you with the information necessary to complete
your individual income tax return if such election is made.

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.

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 tax code,
has qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. As a regulated investment company, the fund
generally pays no federal income tax on the income and gains it distributes to
you. The fund's Board of Directors 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 shareholders. 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.

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 that cause you to
recognize a gain or loss. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares. All or a portion of any loss
that you realize upon the redemption of your fund shares will be disallowed to
the extent that you buy other shares in the fund (through reinvestment of
dividends or otherwise) within 30 days before or after your share redemption.
Any loss disallowed under these rules will be added to your tax basis in the new
shares you buy.

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 Franklin Templeton Fund, 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,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association (GNMA) or
Federal National Mortgagee Association (FNMA) securities, bankers' acceptances,
commercial paper and repurchase agreements collateralized by U.S. government
securities do not generally qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from investments in foreign rather than domestic U.S.
securities, no portion of its distributions will generally be eligible for the
intercorporate dividends-received deduction. None of the dividends paid by the
fund for the most recent calendar year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.

INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities. Such
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by the fund are treated
as ordinary income or capital gain, accelerate the recognition of income to the
fund or defer the fund's ability to recognize losses, and, in limited cases,
subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.

For more information, please call 1-800/ DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.

ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS

The fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a California corporation in 1968, and
is registered with the SEC.

The fund currently offers three classes of shares, Class I, Class II and Advisor
Class. The fund may offer additional classes of shares in the future.
The full legal title of each class is:

o Franklin Gold Fund, Franklin Gold Fund Series,
Franklin Gold Fund - Class I
o Franklin Gold Fund, Franklin Gold Fund Series,
Franklin Gold Fund - Class II
o Franklin Gold Fund, Franklin Gold Fund Series,
Franklin Gold Fund - Advisor Class

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

The fund has cumulative voting rights. For Board member elections, this means
the number of votes you will have is equal to the number of shares you own times
the number of Board members to be elected. You may cast all of your votes for
one candidate or distribute your votes between two or more candidates.

The fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may be called by shareholders holding at least 10% of the outstanding shares to
vote on the removal of a Board member. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member. A special meeting may also be called by any three Board members or by
the written request of shareholders holding at least 20% of the shares entitled
to vote at the meeting.

As of September 11, 1998, the principal shareholders of the fund, beneficial or
of record, were as follows:

NAME AND ADDRESS SHARE PERCENTAGE (%)
CLASS
- ---------------------------------------------------------------
Franklin Templeton Trust Advisor 27.219
Company(1), Trustee for Franklin
Resources Profit Sharing Plan
ATTN: Trading
PO Box 2438
Rancho Cordova, CA 95741-2438
Advisor 8.748
Franklin Templeton Fund Allocator
Moderate Target Fund
c/o Fund Accounting Dept.
Attn: Kimberley Monasterio
1810 Gateway 3rd Fl.
San Mateo, CA 94404-2470
Advisor 14.173
Franklin Templeton Fund Allocator
Growth Target Fund
c/o Fund Accounting Dept.
Attn: Kimberley Monasterio
1810 Gateway 3rd Fl.
San Mateo, CA 94404-2470

(1)Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.

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.

As of September 11, 1998, the officers and Board members, as a group, owned of
record and beneficially .007% of the fund's total outstanding Class I shares and
2.597% of the fund's total outstanding Advisor Class shares. The Board members
may own shares in other funds in the Franklin Templeton Group of Funds.

BUYING AND SELLING SHARES

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

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

All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.

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.

If you buy shares through the reinvestment of dividends, the shares 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.

INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class I and
1% for Class II. The initial sales charge for Class I shares may be reduced for
certain large purchases, as described in the prospectus. We offer several ways
for you to combine your purchases in the Franklin Templeton Funds to take
advantage of the lower sales charges for large purchases. The Franklin Templeton
Funds include the U.S. registered mutual funds in the Franklin Group of Funds(R)
and the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.

CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class I shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you 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 (LOI). You may buy Class I shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:

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

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

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

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

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

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

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

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

For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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.

GROUP PURCHASES. If you are a member of a qualified group, you may buy Class I
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, although any such plan that purchased the fund's Class I
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

o Accounts managed by the Franklin Templeton Group

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

o Group annuity separate accounts offered to retirement plans

o Chilean retirement plans that meet the requirements described under
"Retirement plans" below

RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class I shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the tax code,
including 401(k), money purchase pension, profit sharing and defined benefit
plans), SIMPLEs (savings incentive match plans for employees) or SEPs (employer
sponsored simplified employee pension plans established under section 408(k) of
the tax code) must also meet the requirements described above under "Group
purchases" to be able to buy Class I shares without an initial 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 CDSC 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.

SALES IN TAIWAN. 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.

The fund's Class I shares 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, Class I
shares may be offered with the following schedule of sales charges:

Size of Purchase - U.S. dollars Sales Charge (%)
- ---------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0

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

Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 1% on sales of $1 million 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.

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 of Class I shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.

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

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

Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without an initial sales charge may also be
subject to a CDSC 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.

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

o Account fees

o Sales of shares purchased without an initial 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 in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.

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

o Returns of excess contributions from employee benefit plans

o Redemptions by Franklin Templeton 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

EXCHANGE PRIVILEGE If you request the exchange of the total value of your
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.
Backup withholding and information reporting may apply.

If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the 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 goals 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.

SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares 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. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.

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

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

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

You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The 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.

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 Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the fund's Board reserves the right to make payments in whole or in part in
securities or other assets of the fund, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the fund. In these circumstances, the securities distributed
would be valued at the price used to compute the fund's net assets and you may
incur brokerage fees in converting the securities to cash. The fund does not
intend to redeem illiquid securities in kind. If this happens, however, you may
not be able to recover your investment in a timely manner.

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

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

GENERAL INFORMATION If dividend checks are returned to the 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.

The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to your, 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
the prospectus.

Franklin Templeton Investor Services, Inc. (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.

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

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

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

PRICING SHARES

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

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

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

When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.

The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.

The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
fund's Board.

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 NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the fund's Board.

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

THE FUND'S UNDERWRITER

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

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

The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended July 31:

Amount Received in
Connection with
Total Commissions Amount Retained by Redemptions and
Received ($) Distributors ($) Repurchases ($)
------------------------------------------------------------------------------
1998 1,307,674 130,573 24,246
1997 1,365,973 137,857 24,272
1996 1,764,475 183,271 9,175

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

DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under the plan, each class may pay or reimburse Distributors
or others for the expenses of activities that are primarily intended to sell its
shares. 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.

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

THE CLASS I PLAN. Payments by the fund under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have incurred
them.

In implementing the Class I plan, the fund's Board has determined that the
annual fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.25% by the average daily net assets represented by the
fund's Class I shares that were acquired by investors on or after May 1, 1994,
the effective date of the plan (new assets), and (ii) the amount obtained by
multiplying 0.15% by the average daily net assets represented by the fund's
Class I shares that were acquired before May 1, 1994 (old assets). These fees
will be paid to the current securities dealer of record on the account. In
addition, until such time as the maximum payment of 0.25% is reached on a yearly
basis, up to an additional 0.05% will be paid to Distributors under the plan.
The payments made to Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance with the plan, such as
advertising.

The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) of the
average daily net assets of Class I and, as Class I shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994, increases in relation to outstanding Class I
shares, the expenses attributable to payments under the plan will also increase
(but will not exceed 0.25% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class I plan, the
plan permits the fund's Board to allow the fund to pay a full 0.25% on all
assets at any time. The approval of the fund's Board would be required to change
the calculation of the payments to be made under the Class I plan.

The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.

THE CLASS II PLAN. Under the Class II plan, the fund may pay Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them. The fund may also pay a servicing
fee of up to 0.25% per year of Class II's average daily net assets, payable
quarterly, under the Class II plan. This fee may be used to pay securities
dealers or others for, among other things, helping to establish and maintain
customer accounts and records, helping with requests to buy and sell shares,
receiving and answering correspondence, monitoring dividend payments from the
fund on behalf of customers, and similar servicing and account maintenance
activities.

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

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

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

Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the fund's Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the non-interested
members of the fund's Board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
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 the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.

The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
Board members, cast in person at a meeting called for the purpose of voting on
any such amendment.

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

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

Distributors' Eligible
Expenses Amount Paid by the Fund
- -------------------------------------------------------------------------------
Class I $559,960 $557,188
Class II 282,896 203,396

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 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.

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

When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended July 31, 1998, were:

1 Year 5 Years 10 years
- ----------------------------------------------------------------------------
Class I -37.64% -12.02% -1.97%

1 Year Since inception (5/1/95)
- -----------------------------------------------------------
Class II -35.62% -16.76%

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

1 Year 5 Years 10 years
- ----------------------------------------------------------------------------
Class I -37.64% -47.29% -18.08%

1 Year Since inception (5/1/95)
- -----------------------------------------------------------
Class II -35.62% -45.69

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 cumulative
total return, average annual total return and other measures of performance 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
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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.

COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, 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(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average is a
combination of the Dow Jones Industrial Average (30 blue-chip stocks that are
generally leaders in their industry), the Dow Jones Transportation Average (20
transportation stocks), and the Dow Jones Utilities Average (15 utility stocks
involved in the production of electrical energy).

b) Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.

c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.

d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.

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

f) 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.

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

h) 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.

i) 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.

j) 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.

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

l) 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.

m) 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 Certificates of Deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
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.

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 50 years and
now services more than 3 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 $236 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts (as of June 30, 1998). The Franklin Templeton Group of Funds offers 119
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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers. 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.

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.

DESCRIPTION OF RATINGS FOR DEBT SECURITIES

CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE, INC. (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. These 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 that are speculative to a high degree.
These 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.

STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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.

COMMERCIAL PAPER RATINGS

MOODY'S

Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:

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

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

S&P

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

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

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

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

FRANKLIN
GOLD
FUND

ADVISOR CLASS

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777

DECEMBER 1, 1998 SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)

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

CONTENTS

- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------

GOALS AND STRATEGIES

Options, futures, options on futures, and forward foreign currency exchange
contracts are generally considered "derivative securities."

WRITING PUT OPTIONS. The operation of put options, including their related risks
and rewards, is substantially identical to that of call options.

BUYING PUT OPTIONS. The fund may buy put options. The fund may enter into
closing sale transactions with respect to these options, exercise them, or allow
them to expire.

The fund may not:

3. Borrow money in an amount in excess of 5% of the value of its total assets,
and then only from banks for temporary or emergency purposes, and not for
direct investment in securities;

5. Underwrite the securities of other issuers or invest more than 10% of its
assets in illiquid securities, including certain securities with legal or
contractual restrictions on resale;

6. Invest in securities for the purpose of exercising management or control of
the issuer;

7. Maintain a margin account with a securities dealer or effect short sales;

8. Invest in commodities or commodity contracts, except that it may invest in
gold bullion and foreign currency in the form of gold coins;

10. Invest in assessable securities or securities involving unlimited liability
on the part of the fund; or

In addition to the fundamental restrictions listed above, the fund presently has
the following additional restrictions, which are not fundamental and may be
changed without shareholder approval.

The fund may not:

The fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.

THE FUND'S RISKS

3. TAX AND CURRENCY LAWS. Changes in the tax or currency laws of the
U.S. and foreign countries may inhibit the fund's ability to pursue,
or may increase the cost of pursuing, its investment policies.

OFFICERS AND DIRECTORS

The affiliations of the officers and Board members and their principal
occupations for the past five years are shown below.

POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE FUND DURING THE PAST FIVE YEARS

Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111

Director

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

Director

*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Director

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

Director

*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404

Chairman of the Board and Director

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

Vice President and Director

Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014

Director

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

Director

*R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404

President and Director

Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Chief Financial Officer

Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404

Vice President and Secretary

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 32 of
the investment companies in the Franklin Templeton Group of Funds.

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

Vice President

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

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

*For the fiscal year ended July 31, 1998.
**For the calendar year ended December 31, 1997.
***Deceased, September 27, 1997.

MANAGEMENT AND OTHER SERVICES

MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:

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