FRANKLIN GOLD FUND, 497, 1998-12-04

FRANKLIN GOLD FUND
497, 1998-12-04

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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

[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]

2 Goals and Strategies

3 Main Risks

6 Performance

7 Fees and Expenses

9 Management

11 Distributions and Taxes

12 Financial Highlights

YOUR ACCOUNT

[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]

13 Choosing a Share Class

18 Buying Shares

20 Investor Services

23 Selling Shares

25 Account Policies

27 Questions

FOR MORE INFORMATION

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

Back Cover

THE FUND

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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 that mine, process, or deal in gold, including
gold mining finance companies as well as operating companies with long-,
medium-, or short-life mines ("gold operation companies"). The fund concentrates
(invests more than 25% of total assets) in gold operation companies and
companies that mine, process, or deal in 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. The fund may purchase securities convertible into common stock, which may
be equity or debt securities.

[Begin callout]
THE FUND INVESTS PRIMARILY IN COMMON STOCKS OF GOLD OPERATION COMPANIES.
[End callout]

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.

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MAIN RISKS

STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies, or
industries or the securities market as a whole.

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 callout]
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 callout]

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 as 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. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.

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 denominated in that country's
currency 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.

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 which the fund may hold in its portfolio, and
their impact on the value of fund shares. 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.

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

The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.

If a company the fund is invested in is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page 9 for more information.

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

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

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PERFORMANCE

This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows 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.

[Insert bar graph]

- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -10.57% 41.89% -19.50% 5.90% -20.34% 73.72% -4.73% -1.28% 1.04% -35.70%
- --------------------------------------------------------------------------------------------
88 89 90 91 92 93 94 95 96 97
- --------------------------------------------------------------------------------------------
YEAR
</TABLE>

[Begin callout]
Best
Quarter:

Q2 '93
27.28%

Worst
Quarter:

Q4 '97
- -27.95%
[End callout]

Class I Annual Total Returns 1

AVERAGE ANNUAL TOTAL RETURNS

For the periods ended December 31, 1997

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

Franklin Gold Fund - Class I2 -38.62% 0.27% -1.34%
S&P 500(R)Index3 33.36% 20.27% 18.05%

SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------
Franklin Gold Fund - Class II2 -37.54% -16.36%
S&P 500(R)Index3 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 -0.40% for Class I.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May 1,
1994, Class I implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.

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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)

CLASS I CLASS II
- ---------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 1.99%
Paid at time of purchase 5.75% 1.00%
Paid at redemption None1 0.99%2
Exchange fee3 None None

Please see "Choosing a Share Class" on page 13 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) fees4 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 13) 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 26).
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 $6891 $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.

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MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.

The team responsible for the fund's management is:

R. MARTIN WISKEMANN, SENIOR VICE PRESIDENT OF ADVISERS

Mr. Wiskemann has been a manager on the fund since 1972 and has more than 30
years' experience in the securities industry.

SUZANNE WILLOUGHBY KILLEA CFA, VICE PRESIDENT OF ADVISERS

Ms. Killea has been a manager on the fund since 1994. She joined the Franklin
Templeton Group in 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 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.

When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.

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

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DISTRIBUTIONS AND TAXES

INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this dividend will vary and there
is no guarantee the fund will pay dividends.

To receive a dividend, you must be a shareholder on the record date. The record
date for the fund's dividends will vary. Please keep in mind that if you invest
in the fund shortly before the record date of a dividend, any dividend will
lower the value of the fund's shares by the amount of the dividend and you will
receive some of your investment back in the form of a taxable distribution. If
you would like information on upcoming record dates for the fund's dividends,
please call 1-800/DIAL BEN.

TAX CONSIDERATIONS In general, fund distributions are taxable to you 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.

BACKUP WITHHOLDING

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

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

When you sell your shares, 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.

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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 19951 1994
- ----------------------------------------------------------------------------------------------------

PER SHARE DATA ($)
Net asset value, beginning of year 11.44 14.65 15.07 14.88 15.63
--------------------------------------------------------
Net investment income .10 .07 .21 .18 .19
Net realized and unrealized gains (losses) (3.96) (2.37) .01 .27 (.75)
--------------------------------------------------------
Total from investment operations (3.86) (2.30) .22 .45 (.56)
--------------------------------------------------------
Dividends from net investment income (.10) (.09) (.13) (.20) (.19)
In excess of net investment income -- -- -- (.06) --
Distributions from net realized gains -- (.82) (.51) -- --
--------------------------------------------------------
Total distributions (.10) (.91) (.64) (.26) (.19)
--------------------------------------------------------
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 ($ x 1,000) 189,591 291,544 364,032 391,966 418,698
Ratios to average net assets: (%)
Expenses 1.19 1.05 .95 .95 .81
Net investment income 1.05 .55 .99 1.20 1.30
Portfolio turnover rate (%) 6.09 16.05 28.74 6.36 1.46
</TABLE>

CLASS II

Per share data ($)
<S> <C> <C> <C> <C>
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 (losses) (3.93) (2.38) (.02) .09
---------------------------------------------
Total from investment operations (3.90) (2.40) .10 .21
Dividends from net investment income (.04) (.02) (.03) (.12)
In excess of net investment income -- -- -- (.06)
Distributions from net realized gains -- (.82) (.51) --
---------------------------------------------
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 1,000) 20,353 20,783 12,977 3,104
Ratios to average net assets: (%)
Expenses 1.96 1.83 1.74 1.733
Net investment income (loss) .25 (.16) .16 .333
Portfolio turnover rate (%) 6.09 16.05 28.74 6.36

</TABLE>

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

[Insert graphic of pencil marking an "X"]
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% or less o Initial sales charge of 1%

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

o Lower annual expenses than Class II due o Higher annual expenses than Class I
due to lower distribution fees to higher distribution fees

SALES CHARGES - CLASS I

THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET 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 15), 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 each class (please see page 14).

DISTRIBUTION AND SERVICE (12B-1) FEES Class I has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute Class I 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.

SALES CHARGES - CLASS II

WE INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS I SHARES, SINCE THERE IS
NO INITIAL SALES CHARGE AND CLASS I'S 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. The way we calculate the CDSC is
the same for each class (please see below).

DISTRIBUTION AND SERVICE (12B-1) FEES Class II has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay distribution
and other fees of up to 1% per year for the sale of Class II 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.

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

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

CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS I & II
The CDSC for each class, discussed earlier, 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 21
for exchange information).

SALES CHARGE REDUCTIONS AND WAIVERS

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

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

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

o Cumulative Quantity Discount - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
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.

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

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

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

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) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.

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

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

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

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

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

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

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

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

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

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

o certain unit investment trusts and their holders reinvesting trust
distributions

o group annuity separate accounts offered to retirement plans

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

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

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

o to pay account fees

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

o for 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

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 also must qualify under our group
investment program to buy Class I shares without an initial sales charge.

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

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

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

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 $100 $50
Franklin Templeton entities, and their immediate family members
- --------------------------------------------------------------------------------

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
- --------------------------------------------------------------------------------------

<S> <C> <C>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] representative representative
Through your investment
representative

- --------------------------------------------------------------------------------------
[Insert graphic of envelope] Make your check payable to Make your check payable to
By Mail Franklin Gold Fund. Franklin Gold Fund.
Include your account
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.

- --------------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control control number and wire
By Wire number and wire instructions.
instructions.
1-800/632-2301 To make a same day wire
(or 1-650/312-2000 Mail your signed investment, please call us
collect) application to Investor by 1:00 p.m. pacific time
Services. Please include and make sure your wire
the wire control number or arrives by 3:00 p.m.
your new account number on
the application.

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.

- --------------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder Services
arrows pointing in opposite at the number below, or at the number below or our
directions] send signed written automated TeleFACTS
By Exchange instructions. The TeleFACTS system, or send signed
system cannot be used to written instructions.
TeleFACTS(R) open a new account.
1-800/247-1753 (Please see page 21 for
(around the clock access) (Please see page 21 for information on exchanges.)
information on exchanges.)

- --------------------------------------------------------------------------------------
</TABLE>

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)

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

[Begin callout]
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 callout]

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

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

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

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

Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
26).

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

[Insert graphic of certificate]
SELLING SHARES

You can sell your shares at any time.

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

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

A notary public CANNOT provide a signature guarantee.
[End callout]

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 may need to complete additional forms. For
participants under age 591/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.

SELLING SHARES
- --------------------------------------------------------------------------------------

<S> <C>
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment representative
shaking]
Through your investment
representative

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

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

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

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

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

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

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.

- --------------------------------------------------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the fund you are
pointing in opposite considering.
directions]
By Exchange Call Shareholder Services at the number below or our
automated TeleFACTS system, or send signed written
TeleFACTS(R) instructions. See the policies above for selling
1-800/247-1753 shares by mail or phone.
(around-the-clock access)
If you hold share certificates, you will need to
return them to the fund before your exchange can
be processed.
- --------------------------------------------------------------------------------------
</TABLE>

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)

[Insert graphic of paper and pen]
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 callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.

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

The 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. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise made large or frequent exchanges. 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 1.001 --
12B-1 FEE TO DEALER 0.25 1.002

A dealer commission of up to 1% may be paid on Class I NAV purchases by certain
retirement plans1 and up to 0.25% on Class I 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 starting in the
13th month.

[Insert graphic of question mark]
QUESTIONS

If you have any questions about the fund or your account, you can write to us at
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 NUMBER MONDAY 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.

PROSPECTUS & APPLICATION

FRANKLIN
GOLD FUND

ADVISOR CLASS

INVESTMENT STRATEGY

GROWTH

DECEMBER 1, 1998

[Insert Franklin Templeton Ben Head]

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

2 Goals and Strategies

3 Main Risks

6 Performance

7 Fees and Expenses

8 Management

10 Distributions and Taxes

11 Financial Highlights

YOUR ACCOUNT

12 Qualified Investors

15 Buying Shares

16 Investor Services

18 Selling Shares

20 Account Policies

22 Questions

FOR MORE INFORMATION

Back Cover

INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING

INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES

WHERE TO LEARN MORE ABOUT THE FUND

THE FUND

[Insert graphic of bullseye and arrows] 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.

[begin callout]
The fund invests primarily in common stocks of gold operation companies.
[end callout]

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

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

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.

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

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

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

[INSERT GRAPHIC OF A BULL AND A BEAR] PERFORMANCE

[Begin callout}
Best
Quarter:

Q2 '93
27.28%

Worst
Quarter:

Q4 '97
- -27.93%
[End callout]

ADVISOR CLASS ANNUAL TOTAL RETURNS 1,2

[Insert bar graph]

- --------------------------------------------------------------------------------
- -10.57% 41.89% -19.50% 5.90% -20.34% 73.72% -4.73% -1.28% 1.04% -35.54%
- --------------------------------------------------------------------------------
88 89 90 91 92 93 94 95 96 97
- --------------------------------------------------------------------------------
Year

AVERAGE ANNUAL TOTAL RETURNS

For the periods ended December 31, 1997

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

Franklin Gold Fund - Advisor Class2 -35.54% 1.25% -0.86%
S&P 500(R)Index3 33.36% 20.27% 18.05%

1. As of September 30, 1998, the fund's year-to-date return was 1.72%.
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. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.

[INSERT GRAPHIC OF PERCENTAGE SIGN] FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. 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 on purchases None
Exchange fee1 None

ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)

ADVISOR CLASS
- ------------------------------------------------------------------------------
Management fees 0.54%
Distribution and service (12b-1) fees None
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 21).

EXAMPLE

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

1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------
$98 $306 $531 $1,178

[INSERT GRAPHIC OF BRIEFCASE] MANAGEMENT

Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its affiliates
manage over $208 billion in assets.

The team responsible for the fund's management is:

R. MARTIN WISKEMANN, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Wiskemann has been a manager on the fund since 1972 and has more than 30
years' experience in the securities industry.

SUZANNE WILLOUGHBY KILLEA CFA, VICE PRESIDENT OF ADVISERS Ms. Killea has been a
manager on the fund since 1994. She joined the Franklin Templeton Group in 1991.

[INSERT GRAPHIC OF DOLLAR
SIGNS AND STACKS OF COINS] DISTRIBUTIONS AND TAXES

[begin callout]
BACKUP WITHHOLDING

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

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.

[Insert graphic of a dollar bill] 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 19971
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.43 13.12
Net investment income .14 .07
Net realized and unrealized losses (3.84) (1.67)
Total from investment operations (3.70) (1.60)
Less distributions from net investment income (.12) (.09)
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 1,000) 2,207 3,211
Ratios to average net assets: (%)
Expenses .96 .833
Net investment income 1.30 .803
Portfolio turnover rate (%) 6.09 16.05

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

YOUR ACCOUNT

[Insert graphic of pencil marking an "x"]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.

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.

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

o 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.

[INSERT GRAPHIC OF A PAPER WITH LINES
AND SOMEONE WRITING] 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
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[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR INVESTMENT representative representative
REPRESENTATIVE
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Make your check payable Make your check payable
to Franklin Gold Fund. to Franklin Gold Fund.
[Insert graphic of Include your number on
account envelope] the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. 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.
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Call to receive a wire Call to receive a wire
control number and wire control number and wire
[Insert graphic of three instructions. instructions.
lightening bolts]
Mail your signed To make a same day wire
application to Investor investment, please call
BY WIRE Services. Please us by 1:00 p.m. pacific
include the wire time and make sure your
control number wire arrives by 3:00 p.m.
1-800/632-2301 or your new account
(or 1-650/312-2000 collect) number on the application.

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.
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[Insert graphic of two arrows Call Shareholder Call Shareholder
pointing in opposite Services at the Services at the number
directions] number below, or send below, or send signed
signed written written instructions.
instructions. (Please (Please see page 17 for
BY EXCHANGE see page 17 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)

[INSERT GRAPHIC OF PERSON WITH A HEADSET] 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
an existing account in the same share class of the fund or in Advisor Class or
Class I shares of another Franklin Templeton Fund. For distributions invested in
Class I shares of another Franklin Templeton Fund, initial sales charges and
contingent deferred sales charges (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 callout]
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 callout]

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

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.

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

*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.

[Insert graphic of a certificate] SELLING SHARES

You can sell your shares at any time.

[Begin callout]
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 callout]

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

SELLING SHARES
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TO SELL SOME OR ALL OF YOUR SHARES
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[Insert graphic of hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ------------------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
to Investor Services.
BY MAIL 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.
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[Insert graphic of phone] As long as your transaction is for $50,000
or less, you do not hold share certificates
and you have not changed your address by
BY PHONE 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.
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[Insert graphic of three lightning You can call or write to have redemption
bolts] proceeds of $1,000 or more wired to a
bank or escrow account. See the policies
BY WIRE above for selling shares by mail or phone.

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.
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[Insert graphic of two arrows Obtain a current prospectus for the fund
pointing in opposite directions] 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.
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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)

[INSERT GRAPHIC OF PAPER AND PEN] 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.

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.

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 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.

[Insert graphic of question mark] QUESTIONS

HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
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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.

FRANKLIN
GOLD FUND -

CLASS I & CLASS II

STATEMENT OF
ADDITIONAL INFORMATION

DECEMBER 1, 1998

777 MARINERS ISLAND BLVD., P.O. BOX 7777
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 ....................................... 2

Risks ...................................................... 7

Officers and Directors ..................................... 12

Management and Other Services .............................. 15

Portfolio Transactions ..................................... 17

Distributions and Taxes .................................... 18

Organization, Voting Rights
and Principal Holders ..................................... 19

Buying and Selling Shares .................................. 20

Pricing Shares ............................................. 26

The Underwriter ............................................ 27

Performance ................................................ 29

Miscellaneous Information .................................. 31

Description of Bond Ratings ................................ 32

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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

The fund's principal investment goal is capital appreciation. Its 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
equity 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).

EQUITY SECURITIES 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.

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.

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.

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.

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, through its conversion feature, the potential for
capital appreciation resulting from a market price advance in its underlying
common stock. The fund uses the same criteria to rate convertible debt
securities that it uses to rate other debt securities.

A convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. 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. A convertible security issued by an operating company is
generally 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. However, 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. A convertible security issued by an investment
bank 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, because the holder of a convertible security will have
recourse only to the issuer. In addition, the issuer may redeem a convertible
security after a specified date and under circumstances established at the time
the security is issued.

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 the issuer's debt obligations in the event of
insolvency. An issuer's failure to make a dividend payment is generally not an
event of default entitling a 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.

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.

DERIVATIVE SECURITIES Although the fund has no present intention of investing in
the following, it has the authority to enter into options, futures, options on
financial futures, and forward foreign currency exchange contracts, which are
generally considered "derivative securities."

The fund may take advantage of opportunities in 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.

OPTIONS The fund may buy or write (sell) put and call options that trade on
securities exchanges or in the over-the-counter (OTC) market. The fund may also
buy or write put and call options on currencies and may buy call and put options
on stock indices. The fund may write an option only if the option is "covered."
The fund does not currently intend to engage in options transactions, although
the fund reserves the right to do so.

An option on a security or currency is a contract that gives the purchaser of
the option the right to buy (a call option) or to sell (a put option) the
security or currency from or to the writer of the option at a set price during
the term of the option.

The fund receives a premium when it writes a call option. A decline in the price
or value of the security or currency during the option period would offset the
amount of the premium. If a call option the fund has written is exercised, the
fund incurs a profit or loss from the sale of the underlying security or
currency.

The fund may generally terminate its obligation under an option by entering into
a closing transaction. When the fund has written an option, the fund will
realize a profit from a closing transaction if the price of the transaction is
less than the premium and will realize a loss if the price is more than the
premium.

The operation of put options, including their related risks and rewards, is
substantially identical to that of call options. The fund will commit no more
than 5% of its assets to premiums when buying put options.

If a put option the fund holds 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, 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.

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.

Call and put options on stock indices are similar to options on securities. An
option on a stock index gives the holder the right to receive cash if the
closing level of the underlying index is greater than (or less than, in the case
of a put option) the exercise price of the option. The amount of cash is equal
to the difference between the closing level and the exercise price, expressed in
dollars multiplied by a specified number. Gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market).

FUTURES CONTRACTS The fund may enter into futures contracts based upon financial
indices (financial futures). Although some financial futures contracts call for
making or taking delivery or acquisition of securities, in most cases these
obligations are closed out before the settlement date by buying or selling an
identical financial futures contract. Other financial futures contracts call for
cash settlements. 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 change in the value of a specific stock index during the term of the
contract.

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 sum of
the fund's initial deposits on its existing financial futures and premiums paid
on options on financial futures contracts may not exceed 5% of the market value
of the fund's total assets.

The fund may buy and sell call and put options on stock index futures to hedge
against risks of market-side price movements. Options on stock index futures are
similar to options on securities. An option on a stock index future gives the
holder the right to receive in cash 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.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS A forward foreign currency exchange
contract (forward contract) is an obligation to purchase or sell a specific
currency for an agreed price at a future date that is individually negotiated
and privately traded by currency traders and their customers.

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

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.

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.

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

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

RISKS

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.

The price of gold has recently been subject to substantial upward and downward
movements over short periods of time. It 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.

The following provides more detail about factors that may affect the price of
gold and other metals:

1. 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.

2. 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.

3. 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.

4. 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.

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.

The fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.

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.

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 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.

Franklin Resources, Inc. 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 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.

LOWER-RATED SECURITIES Because the fund invests 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 exclusively 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.

The market value of high yield, lower-rated 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-rated 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-rated securities also tend to be more sensitive to economic conditions
than higher-rated 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-rated securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-rated 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-rated 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.

Lower rated, fixed-income securities may not be as liquid as higher-rated
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.
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. 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.

Economic conditions, such as a recession, may adversely affect the value of
outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. For example, highly
publicized defaults on some high yield securities and concerns about a sluggish
economy could depress 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.

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. 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.

The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to 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 or may
not 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.

FORWARD CONTRACTS 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.

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.

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. 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 share
classes. 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 PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS

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

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) Director
191 Clapboard Ridge Road
Greenwich, CT 06830

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) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404

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) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945

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

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

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

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) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014

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) Director
8212 Burning Tree Road
Bethesda, MD 20817

Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, 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) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404

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) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404

Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton 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) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

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 pays noninterested board members $150 per month plus $150 per meeting
attended. Board members who serve on the audit committee of the fund and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the fund. Members
of a committee are not compensated for any committee meeting held on the day of
a board meeting. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the 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 noninterested board members by the fund and by other funds in
the Franklin Templeton Group of Funds.

NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME THE FUND1 GROUP OF FUNDS2 EACH SERVES3
- --------------------------------------------------------------------------------
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. Garbellano4........... 300 91,317 n/a
Frank W. T. LaHaye............. 3,462 141,433 27
Gordon S. Macklin.............. 2,280 337,292 49

1. For the fiscal year ended July 31, 1998.
2. For the calendar year ended December 31, 1997.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 168 U.S. based
funds or series.
4. Deceased, September 27, 1997.

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

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

MANAGEMENT AND OTHER SERVICES

MANAGER AND SERVICES PROVIDED 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 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 of the
fund's shares 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 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 last two fiscal years ended July 31, the manager paid FT Services the
following administration fees:

ADMINISTRATION
FEES PAID ($)
- --------------------------------
1998 .......... 382,884
19971 ......... 413,362

1. 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 board 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 is negotiated between
the 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, constitutes the fund's net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS The fund may 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 securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities 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 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 board reserves the right not to maintain the qualification of the fund
as a regulated investment company if it determines such course of action to be
beneficial to 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 tax 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 of the following year that are treated by you as received in December
of the prior year) 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 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 or Federal
National Mortgage Association 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.
These 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.

ORGANIZATION, VOTING RIGHTS
AND PRINCIPAL HOLDERS

The fund is a diversified, open-end management investment company, commonly
called a mutual fund. The fund was organized as a California corporation on June
20, 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
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. The fund 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
consider 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:

Name and Address Share Class Percentage (%)

Franklin Templeton
Trust Company1,
Trustee for Franklin
Resources Profit
Sharing Plan
Attn: Trading
PO Box 2438
Rancho Cordova, CA
95741-2438.................... Advisor 27.219

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 8.748

Franklin Templeton
Fund Allocator
Growth Target Fund
c/o Fund Accounting Dept.
Attn: Kimberley Monasterio
1810 Gateway 3rd Fl.
San Mateo, CA
94404-2470.................... Advisor 14.173

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 2.597% of the fund's Advisor Class shares and less than
1% of the outstanding shares of the fund's other classes. The board members may
own shares in other funds in the Franklin Templeton Group of Funds.

BUYING AND SELLING SHARES

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

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

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

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 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 applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class 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 charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.

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

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 share class. 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 expenses, including:

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

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

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

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

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

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

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

o 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 group purchase requirements described above 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:

SALES
SIZE OF PURCHASE - U.S. DOLLARS 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 any share class will generally be waived for:

o Account fees

o Sales of Class I 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, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan

o Distributions from individual retirement accounts (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 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,
interest-bearing 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 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 you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
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.

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.

PRICING SHARES

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

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

The 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 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
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 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 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
TOTAL CONNECTION WITH
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, 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, the fund may pay or reimburse Distributors or
others for the expenses of activities that are primarily intended to sell shares
of the class. These expenses may include, among others, distribution or service
fees paid to securities dealers or others who have executed a servicing
agreement with the 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 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 board to allow the fund to pay a full 0.25% on all assets at
any time. The approval of the board would be required to change the calculation
of the payments to be made under the Class 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 board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. 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 noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.

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

For the fiscal year ended 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:

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

SINCE
INCEPTION
1 YEAR (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%

SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------
Class II ..................... -35.62% -44.90%

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:

o 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).

o 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.

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

o 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.

o 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.

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

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

o 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.

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

o 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.

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

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

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

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 is one of the
oldest mutual fund organizations 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 $208 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 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, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.

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

DESCRIPTION OF BOND RATINGS

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

DECEMBER 1, 1998

[Insert Franklin Templeton Ben Head]
777 MARINERS ISLAND BLVD., P.O. BOX 7777
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

Goals and Strategies ....................... 2

Risks ...................................... 7

Officers and Directors ..................... 12

Management and Other Services .............. 15

Portfolio Transactions ..................... 17

Distributions and Taxes .................... 18

Organization, Voting Rights
and Principal Holders ..................... 19

Buying and Selling Shares .................. 20

Pricing Shares ............................. 23

The Underwriter ............................ 23

Performance ................................ 24

Miscellaneous Information .................. 26

Description of Bond Ratings ................ 26

[Begin callout]
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.
[End callout]

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

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.

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).

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

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.

RISKS
- ------------------------------------------------------------------------------

The following provides more detail about factors that may affect the price of
gold and other metals:

3. 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.

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. 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.

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 PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS WITH 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

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

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

Chairman of
the Board

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

*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

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

TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON GROUP OF
RECEIVED FROM TEMPLETON GROUP FUNDS ON WHICH
NAME THE FUND1 OF FUNDS2 EACH SERVES3
- ------------------------------------------------------------------------------

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. Garbellano4 ...... 300 91,317 n/a
Frank W. T. LaHaye ........ 3,462 141,433 27
Gordon S. Macklin ......... 2,280 337,292 49

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.

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.

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

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 last two fiscal years ended July 31, the manager paid FT Services the
following administration fees:

ADMINISTRATION
FEES PAID ($)
- ------------------------------------------------------------------------------

1998...............382,884
19971..............413,362
1. For the period from October 1, 1996, through July 31, 1997.

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.

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 board may give.

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

The fund is a diversified, open-end management investment company, commonly
called a mutual fund. The fund was organized as a California corporation on June
20, 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 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

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

SHARE
NAME AND ADDRESS CLASS PERCENTAGE (%)
- ------------------------------------------------------------------------------

Franklin Templeton
Trust Company1,
Trustee for Franklin
Resources Profit
Sharing Plan
Attn: Trading
PO Box 2438
Rancho Cordova, CA
95741-2438 ..........................Advisor 27.219

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 8.748

Franklin Templeton
Fund Allocator
Growth Target Fund
c/o Fund Accounting Dept.
Attn: Kimberley Monasterio
1810 Gateway 3rd Fl.
San Mateo, CA
94404-2470 ..........................Advisor 14.173

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

As of September 11, 1998, the officers and board members, as a group, owned of
record and beneficially 2.597% of the fund's Advisor Class shares and less than
1% of the outstanding shares of the other classes. The board members may own
shares in other funds in the Franklin Templeton Group of Funds.

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

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.

GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.

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.

DEALER COMPENSATION 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.

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 and sell shares, you pay the net asset value (NAV) per share.

The fund calculates the NAV per share each business day at the close of trading
on the New York Stock Exchange (normally 1:00 p.m. pacific time). The 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.

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

Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.

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

For periods before January 2, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class I performance for the relevant
time period, excluding the effect of Class I's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the fund's Class I shares. For periods after January 2, 1997,
Advisor Class standardized performance quotations are calculated as described
below.

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 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.

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

1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
Advisor Class......... -32.46% -10.59% -1.18%

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period

CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes 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
- ------------------------------------------------------------------------------
Advisor Class ....... -32.46% -42.85% -11.16%

OTHER PERFORMANCE QUOTATIONS 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.

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

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

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

o 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.

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

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

MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------

DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------

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.

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.

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.

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.

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.

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

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

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

S&P

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.