FRANKLIN BALANCE SHEET INVESTMENT FUND, 497, 1995-02-27

FRANKLIN BALANCE SHEET INVESTMENT FUND
497, 1995-02-27

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SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN BALANCE SHEET INVESTMENT FUND

DATED MARCH 1, 1994
AS AMENDED NOVEMBER 28, 1994

The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:

1. EXPENSE TABLE

Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."

2. MANAGEMENT OF THE FUND

Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.

3. HOW TO BUY SHARES OF THE FUND

(a) The following is added at the end of the first paragraph:

The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.

(b) Substitute the following for the sales charge table and the ensuing two
paragraphs:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $500,000...................................... 1.50% 1.52% 1.50%
$500,000 but less than $1,000,000....................... 1.00% 1.01% 1.00%
$1,000,000 or more...................................... none none (see below)**

</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
ransaction fee in the percentages set forth above.

**The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 1.00% on sales of $1 million but less than
$2 million, plus 0.80% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.

***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.

No front-end sales charge applies on investments of $1 million or more, but
a contingent deferred sales charge of 1% is imposed on certain redemptions
of investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares
of the Fund-Contingent Deferred Sales Charge."

<PAGE>

Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund (the "Templeton Funds"). (Franklin Funds and Templeton Funds are
collectively referred to as the "Franklin Templeton Funds.") Sales charge
reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification
to Distributors that the investment qualifies for a discount. References
throughout the Prospectus, for purposes of aggregating assets or describing
the exchange privilege, refer to the above descriptions.

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
certain designated retirement plans (excluding IRA and IRA rollovers),
certain non-designated plans, certain trust company and trust departments
of banks and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more. See definitions under
"Description of Special Net Asset Value Purchases" and as set forth in the
SAI.

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from
that fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6)
certain unit investment trusts and unit holders of such trusts reinvesting
their distributions from the trusts in the Fund; (7) registered securities
dealers and their affiliates, for their investment account only; and (8)
registered personnel and employeesof securities dealers and by their
spouses and family members, in accordance with the internal policies and
procedures of the employing securities dealer.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds.
While credit will be given for any contingent deferred sales charge paid on
the shares redeemed, a new contingency period will begin. Shares of the
Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In
order to exercise this privilege, a written order for the purchase of
shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days, however,
do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also
be handled by a securities dealer or other financial institution, who may
charge the shareholder a fee for this service. The redemption is a taxable
transaction but reinvestment without a sales charge may affect the amount
of gain or loss recognized and the tax basis of the shares reinvested. If
there has been a loss on the redemption, the loss may be disallowed if a
reinvestment in the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included
in the tax section of this Prospectus and the SAI.

Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent
deferred sales charge within 120 days of the payment date of such
distribution. To exercise

<PAGE>

this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the
Fund.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who
are participating in a comprehensive fee program (also known as a wrap fee
program).

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution.
In order to exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust Company
(the "Trust Company"), the Fund or Investor Services, within 120 days after
the plan distribution. A prospectus outlining the investment objectives
and policies of a fund in which the shareholder wishes to invest may be
obtained by calling toll free at 1-800/DIAL BEN (1-800/342-5236).

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR
THEM. Municipal investors considering investment of proceeds of bond
offerings into the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its investment
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a securities
dealer who has executed a dealer agreement with Distributors, Distributors
or one of its affiliates may make a payment, out of their own resources, to
such securities dealer in an amount not to exceed 0.25% of the amount
invested. Contact Franklin's Institutional Sales Department for additional
information.

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the employer establishing the plan have 200 or more employees or that
the amount invested or to be invested during the subsequent 13-month period
in the Fund or in any of the Franklin Templeton Investments totals at least
$1,000,000. Employee benefit plans not designated above or qualified under
Section 401 of the Code ("non-designated plans") may be afforded the same
privilege if they meet the above requirements as well as the uniform
criteria for qualified groups previously described under "Group Purchases"
which enable Distributors to realize economies of scale in its sales
efforts and sales related expenses.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and
bank trust departments for funds over which they exercise

<PAGE>

exclusive discretionary investment authority and which are held in a
fiduciary, agency, advisory, custodial or similar capacity. Such purchases
are subject to minimum requirements with respect to amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the amount invested or to be invested during the subsequent 13-month
period in this Fund or any of the Franklin Templeton Investments must total
at least $1,000,000. Orders for such accounts will be accepted by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
such order.

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or
more, without regard to where such assets are currently invested.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":

A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period
of 12 months of the calendar month following their purchase. The charge is
1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of
such shares, and is retained by Distributors. In determining if a charge
applies, shares not subject to a contingent deferred sales charge are
deemed to be redeemed first, in the following order: (i) shares
representing amounts attributable to capital appreciation of those shares
held less than 12 months; (ii) shares purchased with reinvested dividends
and capital gain distributions; and (iii) other shares held longer than 12
months; and followed by any shares held less than 12 months, on a "first
in, first out" basis.

The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company retirement plan accounts due
to death, disability or attainment of age 591/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee
benefit plans, including those due to plan termination or plan transfer;
redemptions through a Systematic Withdrawal Plan set up prior to February
1, 1995 and, for Systematic Withdrawal Plans setup thereafter, redemptions
of up to 1% monthly of an account's net asset value (3% quarterly, 6%
semiannually or 12% annually); and redemptions initiated by the Fund due to
a shareholder's account falling below the minimum specified account size.

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

<PAGE>

FRANKLIN
BALANCE SHEET
INVESTMENT FUND

PROSPECTUS MARCH 1, 1994
AS AMENDED NOVEMBER 28, 1994

[FRANKLIN LOGO]

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

Franklin Balance Sheet Investment Fund (the "Fund") is a non-diversified,
open-end management investment company with the investment objective of seeking
high total return. The Fund will seek capital appreciation primarily through
investment in securities that the Fund's investment manager believes are
undervalued in the marketplace. The Fund will also seek income when deemed
consistent with its objective. The Fund currently seeks to achieve its objective
by investing a portion of its total assets in the securities of closed-end
management investment companies. The Fund may also invest in other types of
securities which its investment manager believes represent intrinsic values not
reflected in the current market price of such securities and/or present
opportunities for high income.

This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. The Fund is designed for long-term investors and not as a trading
vehicle, and is not intended to present a complete investment program. An
investment in the Fund involves certain speculative considerations; see "Risk
Factors/Special Considerations." There can be no assurance that the Fund will
achieve its investment objective. After reading the Prospectus, it should be
retained for future reference; it contains information about the purchase and
sale of shares and other items which a prospective investor will find useful to
have.

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

A Statement of Additional Information concerning the Fund, dated March 1, 1994,
as may be amended from time to time, provides a further discussion of certain
areas in this Prospectus and other matters which may be of interest to some
investors. It has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated herein by reference. A copy is available without charge from
the Fund or the Fund's principal underwriter, Franklin/Templeton Distributors,
Inc. ("Distributors"), at the address or telephone number listed above.

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

This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No sales representative, dealer or
other

<PAGE>

person is authorized to give any information or make any representations other
than those contained in this Prospectus. Further information may be obtained
from the underwriter.

CONTENTS PAGE

Expense Table............................................................. 2

Financial Highlights...................................................... 4

Summary................................................................... 4

Investment Objective and Policies
of the Fund.............................................................. 5

Risk Factors/Special Considerations....................................... 10

Management of the Fund.................................................... 13

Distributions to Shareholders............................................. 13

Taxation of the Fund
and Its Shareholders..................................................... 15

How to Buy Shares of the Fund............................................. 16

Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments....................................... 22

Other Programs and Privileges
Available to Fund Shareholders........................................... 24

Exchange Privilege........................................................ 25

How to Sell Shares of the Fund............................................ 28

Telephone Transactions.................................................... 30

Valuation of Fund Shares.................................................. 31

How to Get Information Regarding
an Investment in the Fund................................................ 32

Performance............................................................... 33

General Information....................................................... 34

Account Registrations..................................................... 35

Important Notice Regarding
Taxpayer IRS Certifications.............................................. 36

Portfolio Operations...................................................... 36

Appendix.................................................................. 36

EXPENSE TABLE
- --------------------------------------------------------------------------------

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on the
aggregate operating expenses of the Fund (including fees set by contract) for
the fiscal year ended October 31, 1993.

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).......................... 1.50%
Maximum Sales Charge Imposed on Reinvested Dividends.......... NONE
Deferred Sales Charge......................................... NONE
Redemption Fees............................................... NONE
Exchange Fee (per transaction)................................ $5.00*
</TABLE>

<PAGE>

<TABLE>
<S> <C>
ANNUALIZED FUND OPERATING EXPENSES
(as a percentage of average net assets)

Management Fees.............................................. 0.63%**
12b-1 Fees................................................... 0.50%***
Other Expenses:
Registration Fees................................ 0.27%
Professional fees................................ 0.15%
Other............................................ 0.35%
-----
Total Other Expenses......................................... 0.77%
-----
Total Fund Operating Expenses................................ 1.90%**
=====
</TABLE>

*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge.

**Represents the amount that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager,
however, limits its management fees and assumes responsibility for making
payments to offset operating expenses otherwise payable by the Fund. With this
reduction, the Fund paid no management fees nor any of its operating expenses
for the fiscal year ended Oct. 31, 1993. This arrangement may be terminated by
the investment manager at any time.

***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules. Given the
Fund's maximum initial sales charge and the rate of the Fund's Rule 12b-1 fee,
however, it is estimated that this would take a substantial number of years.

Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges, and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.

EXAMPLE

As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the preceding
table, the Fund charges no redemption fees:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$34 $72 $114 $229

</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, INCLUDING FEES
SET BY CONTRACT, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are borne by the Fund and only indirectly by shareholders as
a result of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.

<PAGE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of its registration statement, as indicated
below, through the fiscal years ended October 31, 1993. The information for each
of the four fiscal years in the period ended October 31, 1993 has been audited
by Coopers & Lybrand, independent auditors, whose audit report thereon appears
in the financial statements in the Fund's Statement of Additional Information. A
copy of the Statement of Additional Information, containing such audit report
and further information regarding performance, as well as the Annual Report to
Shareholders, may be obtained as noted on the front cover of this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------- APRIL 2, 1990++
1993 1992 1991 TO OCTOBER 31, 1990
---- ---- ---- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE*

Net asset value at beginning of period.............................. $17.37 $15.54 $11.48 $15.00
------ ------ ------ ------
Net investment income............................................... .39 .53 .52 .29
Net realized and unrealized gains (losses) on securities............ 6.26 1.83 4.10 (3.63)
------ ------ ------ ------
Total from investment operations.................................... 6.65 2.36 4.62 (3.34)
------ ------ ------ ------
Less distributions:
Dividends from net investment income................................ (.43) (.53) (.56) (.18)
Distributions from capital gains.................................... (.62) -- -- --
------ ------ ------ ------
Total distributions................................................. (1.05) (.53) (.56) (.18)
------ ------ ------ ------
Net asset value at end of period.................................... $22.97 $17.37 $15.54 $11.48
====== ====== ====== ======
TOTAL RETURN**...................................................... 39.84% 15.51% 40.96% (22.36)%
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in 000's).............................. $22,317 $5,149 $3,572 $1,405
Ratio of expenses to average net assets++........................... --% --% --% --%
Ratio of expenses to average net assets
(excluding waiver and reimbursements by manager) (Note 6).......... 1.85% 2.60% 3.16% 3.54%+
Ratio of net income to average net assets........................... 1.89% 3.16% 3.79% 2.31%+
Portfolio turnover rate............................................. 31.36% 30.86% 31.94% 5.34%

</TABLE>

*Selected data for a share of capital stock outstanding throughout the period.

**Total return measures the change in value of an investment over the periods
indicated, it does not include the maximum 1.5% initial sales charge and assumes
reinvestment of dividends and capital gains distributions at net asset value.

++Effective date of registration.

+Annualized.

++During the periods indicated, Franklin Advisers, Inc., the investment manager,
did not impose management fees and reimbursed other expenses of the Fund.

SUMMARY
- --------------------------------------------------------------------------------

Franklin Balance Sheet Investment Fund (the "Fund") is a non-diversified,
open-end management investment company organized as a Massachusetts business
trust on September 11, 1989, and has registered with the SEC under the
Investment Company Act of 1940 (the "1940 Act"). The investment objective of the
Fund is to seek high total return, of which capital appreciation and income are
components. This investment objective is a fundamental policy of the Fund and
may not be changed without shareholder approval. Capital appreciation will be
sought primarily through investment in securities that the Fund's investment
manager believes are undervalued in the marketplace. Accordingly, the focus on

<PAGE>

balance sheet items will be an important element in the manager's investment
analysis. Income will also be sought when consistent with the Fund's objective.
As with any other investment, there is no assurance that the Fund's objective
will be achieved.

The Fund may invest in equity and debt securities which, in the opinion of the
Fund's investment manager, represent intrinsic values not reflected in the
current market price of such securities and/or present opportunities for high
income. Shares of the Fund may be purchased (minimum initial investment of
$2,500 and $100 thereafter or for investments by retirement plans, $1,000 and
$100, respectively) at the current public offering price, which is equal to the
net asset value per share plus a sales charge based upon a variable percentage
(ranging from 1.5% to 0%) of the offering price depending upon the amount
invested. (See "How to Buy Shares of the Fund" and "Valuation of Fund Shares.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------

The Fund may invest an unlimited amount of its total assets in the securities of
any companies which, in the opinion of the Fund's investment manager, represent
an opportunity for (i) significant capital appreciation due to intrinsic values
not reflected in the current market price of such securities and/or (ii) high
income. The securities of such companies, which include common and preferred
stocks and secured or unsecured bonds, commercial paper or notes, will typically
be purchased at prices below the book value of the company; however, the
investment manager also will take into account a variety of other factors in
order to determine whether to purchase, and once purchased, whether to hold or
sell such securities. In addition to book value, the investment manager may
consider the following factors among others: valuable franchises or other
intangibles; ownership of valuable trademarks or trade names; control of
distribution networks or of market share for particular products; ownership of
real estate the value of which is understated; underutilized liquidity and other
factors that would identify the issuer as a potential takeover target or
turnaround candidate.

The Fund generally favors common stocks, although it has no limit on the
percentage of its assets which may be invested in preferred stock and debt
obligations of such issuers. The percentage of the Fund's assets invested for
capital appreciation or high income or both will vary at any time in accordance
with the investment manager's appraisal of what securities will best meet the
Fund's objective of high total return.

The Fund may invest a portion of its total assets in the securities of
registered closed-end management investment companies ("closed-end funds"),
which are traded on a national securities exchange or in the over-the-counter
markets and which the investment manager believes are undervalued in the
marketplace. Consistent with its objective of capital appreciation, the Fund may
also purchase securities issued by unit investment trusts ("UITs"), when in the
manager's view such securities are trading at a discount from net asset value.
The Fund's investment in the securities of closed-end funds and UITs will be
subject to certain restrictions and conditions imposed by the 1940 Act. (See
"1940 Act Provisions" in the Statement of Additional Information.) The Fund may,
consistent with its investment objective, invest in any securities of any
closed-end fund without regard to whether the investment objectives and policies
of such closed-end fund are similar to or consistent with those of the Fund.

Franklin Advisers, Inc. (the "Manager" or "Advisers") will consider the
following, among other factors, in evaluating closed-end funds: (i) the
historical mar-

<PAGE>

ket discounts, (ii) portfolio characteristics, (iii) repurchase, tender offer,
and dividend reinvestment programs, (iv) provisions for converting into an
open-end fund, and (v) quality of management.

The securities of closed-end funds in which the Fund invests are traded on a
national securities exchange or in the over-the-counter markets. The Fund
invests in the securities of closed-end funds which, at the time of investment
by the Fund, are either trading at a discount to net asset value or which, in
the opinion of the Manager, present an opportunity for capital appreciation or
high income irrespective of whether such securities are trading at a discount or
at a premium to net asset value. There can be no assurance that the market value
of the securities of the closed-end funds in which the Fund invests will
increase, particularly with respect to securities trading at a premium to net
asset value. For further information regarding the conditions under which the
securities of a closed-end fund may trade at a discount to net asset value, see
"Characteristics of the Closed-End Funds in Which the Fund Will Invest" in the
Statement of Additional Information.

In anticipation of and during temporary defensive periods or when investments of
the type in which the Fund intends to invest are not available at prices that
the Manager believes are attractive, the Fund may invest up to 100% of its total
assets in: (1) securities of the U.S. government and certain of its agencies and
instrumentalities, which mature in one year or less from the date of purchase,
including U.S. Treasury bills, notes and bonds, and securities of the Government
National Mortgage Association, the Federal Housing Administration and other
agency or instrumentality issues or guarantees which are supported by the full
faith and credit of the United States; (2) obligations issued or guaranteed by
other U.S. government agencies or instrumentalities, some of which are supported
by the right of the issuer to borrow from the U.S. government (e.g., obligations
of the Federal Home Loan Banks) and some of which are backed by the credit of
the issuer itself (e.g., obligations of the Student Loan Marketing Association);
(3) bank obligations, including negotiable or non-negotiable certificates of
deposit (subject to the 10% aggregate limit on the Fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments secured
by such obligations, issued by banks and savings institutions which are subject
to regulation by the U.S. government, its agencies or instrumentalities and
which have assets of over one billion dollars, unless such obligations are
guaranteed by a parent bank which has total assets in excess of five billion
dollars; (4) commercial paper considered by the Manager to be of high quality,
which must be rated within the two highest grades by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service ("Moody's") or, if not rated,
issued by a company having an outstanding debt issue rated at least AA by S&P or
Aa by Moody's; and (5) corporate obligations including, but not limited to,
corporate notes, bonds and debentures considered by the Manager to be high grade
or which are rated within the two highest rating categories by S&P and Moody's.
(See "Appendix" in this Prospectus for a discussion of ratings.)

OPTIONS STRATEGIES

When seeking high current income to achieve its investment objective of high
total return, the Fund may write covered call options on any of the securities
it actually owns which are listed for trading on a national securities exchange,
and it may also purchase listed call and put options for portfolio hedging
purposes.

Call options are short-term contracts (generally having a duration of nine
months or less) which give the purchaser of the option the right to buy,

<PAGE>

and obligate the writer to sell, the underlying security at the exercise price
at any time during the option period, regardless of the market price of the
underlying security. The purchaser of an option pays a cash premium, which
typically reflects, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand factors, and interest rates.

Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian.

When the Fund writes or sells covered call options, it will receive a cash
premium which can be used in whatever way is believed by the Manager to be most
beneficial to the Fund. The risks associated with covered option writing are
that in the event of a price rise on the underlying security which would likely
trigger the exercise of the call option, the Fund will not participate in the
increase in price beyond the exercise price. It will generally be the Fund's
policy, in order to avoid the exercise of a call option written by it, to cancel
its obligation under the call option by entering into a "closing purchase
transaction," if available, unless it is determined to be in the Fund's interest
to deliver the underlying securities from its portfolio. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option written by the Fund, and has the effect of cancelling the Fund's
position as a writer of such an option. The premium which the Fund will pay in
executing a closing purchase transaction may be higher or lower than the premium
it received when writing the option, depending in large part upon the relative
price of the underlying security at the time of each transaction.

One risk involved in both the purchase and sale of options is that the Fund may
not be able to effect a closing purchase transaction at a time when it wishes to
do so or at an advantageous price. There is no assurance that a liquid market
will exist for a given contract or option at any particular time. To mitigate
this risk, the Fund will ordinarily purchase and write options only if a
secondary market for the option exists on a national securities exchange or in
the over-the-counter market. Another risk is that during the option period, if
the Fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price in return for the premium on the option (although, of course,
the premium can be used to offset any losses or add to the Fund's income) but,
as long as its obligation as a writer of such an option continues, the Fund will
have retained the risk of loss should the price of the underlying security
decline. In addition, the Fund has no control over the time when it may be
required to fulfill its obligation as a writer of the option; once the Fund has
received an exercise notice, it cannot effect a closing transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. The aggregate premiums paid on all such
options which are held at any time will not exceed 20% of the Fund's total net
assets.

<PAGE>

The Fund may also purchase put options on common stock that it owns or may
acquire through the conversion or exchange of other securities to protect
against a decline in the market value of the underlying security or to protect
the unrealized gain in an appreciated security in its portfolio without actually
selling the security. A put option gives the holder the right to sell the
underlying security at the option exercise price at any time during the option
period. The Fund may pay for a put either separately or by paying a higher price
for securities which are purchased subject to a put, thus increasing the cost of
the securities and reducing the yield otherwise available from the same
securities.

In the case of put options, any gain realized by the Fund will be reduced by the
amount of the premium and transaction costs it paid and may be offset by a
decline in the value of its portfolio securities. If the value of the underlying
stock exceeds the exercise price (or never declines below the exercise price),
the Fund may suffer a loss equal to the amount of the premium it paid plus
transaction costs. The Fund may also close out its option positions before they
expire by entering into a closing purchase transaction as discussed above and
subject to the same risks.

To the extent that the Fund does invest in options, it may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. Such investments will be
subject to special tax rules that may affect the amount, character and timing of
income earned by the Fund and distributed to shareholders. For more information,
see the "Additional Information Regarding Taxation" section of the Statement of
Additional Information.

OTHER CONSIDERATIONS

While the Fund intends to operate as a non-diversified, open-end management
investment company for purposes of the 1940 Act, it intends to qualify as a
regulated investment company under the Code. As a non-diversified investment
company under the 1940 Act, the Fund may invest more than 5% and up to 25% of
its assets in the securities of any one issuer at the time of purchase. However,
for purposes of the Code, as of the last day of any fiscal quarter, the Fund may
not have more than 25% of its total assets invested in any one issuer, and, with
respect to 50% of its total assets, the Fund may not have more than 5% of its
total assets invested in any one issuer, nor may it own more than 10% of the
outstanding voting securities of any one issuer. These limitations do not apply
to investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities or to securities of investment companies that
qualify as regulated investment companies under the Code.

The Fund is subject to a number of other investment restrictions which may only
be changed by the affirmative vote of a majority of the Fund's outstanding
shares. Further information on investment restrictions is included in the
Statement of Additional Information.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

For the purpose of earning additional income, the Fund may also engage to a
limited extent in the following investment practices each of which may involve
certain special risks. The Statement of Additional Information contains more
detailed information about these practices, including limitations designed to
reduce these risks.

Lending of Portfolio Securities. With approval of the Board of Trustees and
subject to the following conditions, the Fund may lend its portfolio securities
to qualified securities dealers or other institutional investors, provided that
such loans do not exceed 25% of the value of the Fund's total assets at the time

<PAGE>

of the most recent loan, and further provided that the borrower deposits and
maintains 102% cash collateral for the benefit of the Fund. The lending of
securities is a common practice in the securities industry. The Fund will engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term,
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund will continue to be entitled to
all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.

Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. However, the
Fund intends to enter into repurchase agreements only with government securities
dealers recognized by the Federal Reserve Board or with member banks of the
Federal Reserve System. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by the Fund to the seller, collateralized by the underlying
security. The U.S. government security subject to resale (the collateral) will
be held pursuant to a written agreement and the Fund's custodian will take title
to, or actual delivery of, the security.

Borrowing. As a matter of fundamental policy, the Fund does not borrow money or
mortgage or pledge any of its assets, except that it may borrow up to 15% of its
total assets (including the amount borrowed) from banks in order to meet
redemption requests that might otherwise require the untimely disposition of
portfolio securities or for other temporary or emergency purposes and may pledge
its assets in connection therewith. The Fund will not purchase any securities
while any such borrowings exceed 5% of its total assets.

Short-Selling. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay to the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.

The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or in-

<PAGE>
terest the Fund may be required to pay in connection with a short sale.

No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the Fund's net assets. In addition, short sales of the securities
of any single issuer, which must be listed on a national exchange, may not
exceed 5% of the Fund's net assets or 5% of any class of such issuer's
securities.

The Fund will place in a segregated account with its custodian bank an amount of
cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). This segregated account will be marked to market
daily, provided that at no time will the amount deposited in it plus the amount
deposited with the broker as collateral be less than the market value of the
securities at the time they were sold short.

In addition to the short sales discussed above, the Fund also may make short
sales "against the box," i.e., when a security identical to one owned by the
Fund is borrowed and sold short. The Fund at no time will have more than 15% of
the value of its net assets in deposits on short sales against the box.

Any of the Fund's fundamental policies may be changed only by the affirmative
vote of a majority of the Fund's outstanding shares.

HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES

The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well. To the extent the Fund's investments consist of debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. To the extent the Fund's
investments consist of common stocks, a decline in the market, expressed for
example by a drop in the Dow Jones Industrials or the Standard & Poor's 500
average or any other equity based index, may also be reflected in declines in
the Fund's share price. History reflects both increases and decreases in the
prevailing rate of interest and in the valuation of the market, and these may
reoccur unpredictably in the future.

RISK FACTORS/SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------

SUMMARY

An investment in shares of the Fund involves certain speculative considerations.
An investment in shares of the Fund may involve a higher degree of risk than an
investment in shares of more traditional open-end, diversified investment
companies because the Fund may invest up to 100% of its assets in the securities
of issuers (including closed-end funds) with less than three years continuous
operation. The securities of certain closed-end funds in which the Fund will
invest may lack a liquid secondary market; for further information see
"Char-

<PAGE>

acteristics of the Closed-End Funds in Which the Fund Will Invest" in the
Statement of Additional Information. The Fund also may invest up to 25% of its
assets in (i) securities of an issuer in default with respect to such securities
and/or (ii) high yielding, fixed-income securities with limited market
liquidity. Such securities, which are commonly referred to as "junk bonds" in
the popular media, are subject to the risk that the issuer will be unable to pay
interest or repay principal and are sensitive to fluctuations in interest rates
as well as individual corporate developments. Further information is included
under "Additional Risk Factors/Special Considerations Relating to Fixed-Income
Securities" below.

As a non-diversified investment company, for purposes of the 1940 Act, the Fund
may concentrate its investments in the securities of a smaller number of issuers
than if it were a diversified company under the 1940 Act. An investment in the
Fund therefore will entail greater risk than an investment in a diversified
investment company because a higher percentage of investments among fewer
issuers may result in greater fluctuation in the total market value of the
Fund's portfolio, and economic, political or regulatory developments may have a
greater impact on the value of the Fund's portfolio than would be the case if
the portfolio were diversified among more issuers. However, the Fund intends to
comply with the diversification and other requirements applicable to regulated
investment companies under the Code. (See "Other Considerations.") All
securities in which the Fund may invest are inherently subject to market risk,
and the market value of the Fund's investments will fluctuate.

The Fund, by investing in securities of closed-end funds, indirectly pays a
portion of the operating expenses, management expenses and brokerage costs of
such companies. Thus, shareholders will indirectly pay higher total management
and operating expenses and other costs than they would otherwise incur if they
directly owned the securities of such closed-end funds. The Fund's shareholders
will also incur some duplicative costs such as advisory, administrative and
brokerage fees. The Fund's investment strategy may result (i) in duplicative
holdings, if two or more of the closed-end funds in whose securities the Fund
invests own the same portfolio security and/or (ii) in situations whereby one
closed-end fund in whose securities the Fund invests buys a portfolio security
that another closed-end fund in whose securities the Fund invests is selling.
However, the Fund offers the opportunity for a professionally managed portfolio
of the securities of different closed-end funds and/or other companies that the
investment manager believes are undervalued in the marketplace.

ADDITIONAL RISK FACTORS/SPECIAL CONSIDERATIONS RELATING TO FIXED-INCOME
SECURITIES

The Fund also may invest up to 25% of its total assets (as measured at the time
of such investment) in other securities, including fixed-income and convertible
securities of an issuer in default with respect to such securities, that the
Manager believes represent intrinsic values not reflected in the current market
prices of such securities. These securities may be non-rated debt and/or debt
rated D, the lowest rating category by S&P and Moody's. Debt rated D is in
default, and payment of interest and/or repayment of principal is in arrears.
Such debt obligations are rated below investment grade and are regarded as
extremely speculative investments with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. Such securities
are also generally considered to be subject to greater risk than securities with
higher ratings with regard to a general deterioration of prevailing economic
conditions. Further information concerning the ratings of debt obligations,
including the rating categories of S&P and

<PAGE>

Moody's, is provided in the Appendix to this Prospectus. Of course, there can be
no assurance that the Fund will achieve its goal of total return with respect to
such investments because any perceived intrinsic values may never be reflected
in the market price for such securities. The market values of fixed-income and
convertible securities of an issuer in default with respect to such securities
tend to reflect the particular economic circumstances of the issuer to a greater
extent than securities of other issuers and, therefore, the risks associated
with acquiring such securities may be greater than would be the case with other
securities. Moreover, the risks and special considerations described in this
section with respect to high yielding, fixed-income securities are also
applicable to the fixed-income and convertible securities of an issuer in
default. The Fund did not purchase any such securities during the fiscal year
ended October 31, 1993.

The Fund also may, consistent with its investment objective, invest its assets
in fixed-income and convertible securities offering high current income (subject
to the 25% of total assets limitation previously noted under this heading). Such
high yielding, fixed-income securities will ordinarily be in the lower rating
categories of recognized rating agencies or will be non-rated. The market values
of such securities tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates, and tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher rated securities. Companies that issue high yielding, fixed-income
securities are often highly leveraged and may not have available to them more
traditional methods of financing. In addition, the relative youth and
accelerated growth of the high yielding, fixed-income securities market during
favorable economic conditions without weathering a major economic recession, the
potential for legislative proposals to limit the use of certain high yielding
securities and the potential that the credit ratings of high yielding securities
may not change on a timely basis to reflect subsequent developments present
special risks with respect to the Fund's investment in such securities.
Therefore, the risk associated with acquiring the securities of such issuers
generally is greater than is the case with higher rated securities. The Fund may
retain a security which subsequent to the Fund's investment in such security has
its rating lowered if, under the circumstances, the Manager determines such
continued investment is consistent with the Fund's investment objective.

High yielding, fixed-income securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from the Fund.
In addition, the Fund may have difficulty disposing of such high yielding
securities because there may be a thin trading market for such securities. There
is no established retail secondary market for many of these securities, and the
Fund anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
also have an adverse impact on market price and may make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. The Fund may also acquire high yielding, fixed-income securities
during an initial underwriting or which are sold without registration under the
federal securities laws. Such securities involve special considerations and
risks.

Factors having an adverse effect on the market value of high yielding
securities, to the extent the Fund has invested in such securities, will
adversely impact the Fund's net asset value. In addition to the factors noted
above, such factors include: (i) potential adverse publicity; (ii) heightened
sensitivity to general economic conditions; and (iii) likely ad-

<PAGE>
verse impact of an economic recession or downturn. The Fund may also incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. (The
Statement of Additional Information contains further information relating to
fixed-income securities.)

MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------

The Board of Trustees has the primary responsibility for the overall management
of the Fund and for electing the officers of the Fund who are responsible for
administering its day-to-day operations.

Franklin Advisers, Inc., serves as the Fund's investment manager. Advisers is a
wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly
owned holding company, the principal shareholders of which are Charles B.
Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann, who own approximately
20%, 16% and 10%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry. Advisers acts as investment manager to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of over $75 billion.

Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.

For fiscal year ended October 31, 1993, Advisers did not impose any management
fees and, in addition, assumed responsibility for making payments to offset
operating expenses otherwise payable by the Fund. Without this action, the Fund
would have paid management fees of .63% of its average daily net assets and
total operating expenses, including management fees, of 1.85% of its average
daily net assets. This action by Advisers to limit its management fees and
assume responsibility for payment of expenses related to the operations of the
Fund may be terminated by Advisers at any time.

Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.

Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.

DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------

There are two types of distributions which the Fund may make to its
shareholders:

1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities. Distri-

<PAGE>
butions by the Fund derived from net short-term and net long-term capital gains
(after taking into account any net capital loss carryovers) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gain in any year or adjust the timing of these distributions for
operational or other reasons.

DISTRIBUTION DATE

Although subject to change by the Fund's Board of Trustees, without prior notice
to or approval by shareholders, the Fund's current policy is to declare income
dividends quarterly, payable in March, June, September and December, for
shareholders of record on the 14th day of the month or prior business day,
payable on or about the last business day of that month.

The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed, and is subject to the discretion of the Fund's Board of Trustees.
Fund shares are quoted ex-dividend on the first business day following the
record date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.

In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.

DIVIDEND REINVESTMENT

Unless requested otherwise, in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares, valued
at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the Statement
of Additional Information for more information.

Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.

DISTRIBUTIONS IN CASH

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds trans-

<PAGE>
fer. If this last option is requested, the shareholder should allow at least 15
days for initial processing. Dividends which may be paid in the interim period
will be sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's Shareholder Services
Department. Dividend and capital gain distributions are eligible for investment
in another fund in the Franklin Group of Funds or the Templeton Group at net
asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS
- --------------------------------------------------------------------------------

The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.

The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.

For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.

For corporate shareholders, 60.38% of the income dividends paid by the Fund for
the fiscal year ended October 31, 1993, qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the Statement of Additional
Information.

Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.

Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. All or a portion of the sales charge incurred in purchasing shares
of the Fund will not be included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for purposes of determining
gain or loss with respect to such shares) if the sales proceeds are reinvested
in the Fund or in another fund in the Franklin/Templeton Group and a sales
charge which would otherwise apply to the reinvestment is reduced or eliminated.
Any portion of such sales charge excluded from the tax basis of the shares sold
will be added to the tax basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of Fund shares.

The Fund will inform shareholders of the source of their dividends and
distributions at the time they

<PAGE>
are paid and will promptly, after the close of each calendar year, advise them
of the tax status for federal income tax purposes of such dividends and
distributions.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.

Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.

HOW TO BUY SHARES OF THE FUND
- --------------------------------------------------------------------------------

Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference however is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $2,500 and subsequent
investments must be $100 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. For investments by
retirement plans, the investments are $1,000 and $100, respectively. The Fund
and Distributors reserve the right to refuse any order for the purchase of
shares.

PURCHASE PRICE OF FUND SHARES

Shares of the Fund are offered at the public offering price, which is the net
asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund, or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."

Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
---------------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $500,000 1.50% 1.52% 1.50%
$500,000 but less than $1,000,000 1.00% 1.01% 1.00%
$1,000,000 but under $5,000,000 0.50% 0.50% 0.50%
$5,000,000 and over None None None
- ---------------------------------------------------------------------------------------------------
</TABLE>

*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.

<PAGE>
All of all such sales charges are paid to the securities dealer, if any,
involved in the trade who may therefore be deemed an "underwriter" under the
Securities Act of 1933, as amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of many of the funds in the
Franklin Group of Funds and in the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark II and Franklin Government Securities Trust) (the "Franklin
Group of Funds"), (b) other investment products underwritten by Distributors or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction) (the products in
subparagraphs (a) and (b) are referred to as the "Franklin Group"), and (c) the
open-end U.S. registered investment companies in the Templeton Group of Funds
except Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Group"). Sales charge reductions based upon purchases in more
than one of the funds in the Franklin Group or the Templeton Group (the
"Franklin/Templeton Group") may be effective only after notification to
Distributors that the investment qualifies for a discount.

Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and other
funds in the Franklin Group of Funds or the Templeton Group. Compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising,
sales campaigns and/or shareholder services and programs regarding one or more
of the Franklin Group of Funds or the Templeton Group and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.

Distribution Plan. The Fund has adopted a Plan pursuant to Rule 12b-1 under the
1940 Act (the "Plan"), whereby it reimburses Distributors or others in an amount
equal to 0.25% per annum of the average daily net assets of the Fund for
expenses incurred by such parties for the promotion and distribution of the
shares of the Fund, including but not limited to, the printing of prospectuses,
statements of additional information and reports used for sales purposes,
expenses (including personnel of Distributors) of preparation of sales
literature and related expenses, advertisements and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares. Such payments are made monthly.
In addition, pursuant to the Plan, the Fund may pay Distributors or others a
service fee to reimburse such parties for personal services provided to
shareholders of the Fund and/or the maintenance of shareholder accounts. The
total amount of service fees paid by the Fund shall not exceed 0.25% per year

<PAGE>

of the average daily net assets of the Fund. Such payments are made pursuant to
distribution and/or service agreements entered into between such service
providers and Distributors or the Fund directly. The maximum amount which the
Fund may pay on a yearly basis for the promotion and distribution of shares,
including service fees, is 0.50% per year of the average daily net assets of the
Fund. Payments in excess of reimbursable expenses under the Plan in any year
must be refunded. Further, expenses of Distributors other than for service fees
in excess of 0.25% per year of the Fund's average net assets that otherwise
qualify for payment may not be carried forward into successive annual periods.

The Plan also covers payments by certain parties to the extent such payments are
deemed to be for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of rule 12b-1. The
payments under the Plan are included in the maximum operating expenses which may
be borne by the Fund.

Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the Statement of Additional Information.

QUANTITY DISCOUNTS IN SALES CHARGES

Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the Franklin/Templeton
Group, other than Franklin Valuemark II, may be combined with those of the
investor's spouse and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an account under
exclusive investment authority) may be considered in determining whether a
reduced sales charge is available, even though there may be a number of
beneficiaries of the account.

In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:

1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of the
sales charge. Any redemptions made by the shareholder during the 13-month period
will be subtracted from the amount of the purchases for purposes of determining
whether the

<PAGE>

terms of the Letter of Intent have been completed. If the Letter of Intent is
not completed within the 13-month period, there will be an upward adjustment of
the sales charge as specified below, depending upon the amount actually
purchased (less redemptions) during the period.

AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent has been
completed, or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, the investor will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge which would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for the investor's account
will be deposited to an account in the name of the investor or delivered to the
investor or to the investor's order. If within 20 days after written request
such difference in sales charge is not paid, the redemption of an appropriate
number of reserved shares to realize such difference will be made. In the event
of a total redemption of the account prior to fulfillment of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the investor. By completing
the Letter of Intent section of the Shareholder Application, an investor grants
to Distributors a security interest in the reserved shares and irrevocably
appoints Distributors as attorney-in-fact with full power of substitution to
surrender for redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter of Intent will conform
with the requirements of Rule 22d-1 under the 1940 Act. The investor or the
investor's securities dealer must inform Investor Services or Distributors that
this Letter is in effect each time a purchase is made.

Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still

<PAGE>

owned by the group, plus the amount of the current purchase. For example, if
members of the group had previously invested and still held $400,000 of Fund
shares and now were investing $150,000, the sales charge would be 1.00%.
Information concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.

A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.

If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.

PURCHASES AT NET ASSET VALUE

Shares of the Fund may be purchased at net asset value (without sales charge) by
employee benefit plans qualified under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, subject to minimum
requirements with respect to number of employees or amount of purchase, which
may be established by Distributors. Currently those criteria require that the
employer establishing the plan have 500 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund or
another company or companies in the Franklin/Templeton Group totals at least
$1,000,000. Employee benefit plans not qualified under Section 401 of the Code
may be afforded the same privilege if they meet the above requirements as well
as the uniform criteria for qualified groups, previously described under Group
Purchases, which enable Distributors to realize economies of scale in its sales
efforts and sales related expenses. If investments by employee benefit plans at
net asset value are made through a dealer who has executed a dealer agreement
with Distributors, Distributors or one of its affiliates may make a payment, out
of their own resources, to such dealer in an amount not to exceed 1.00% of the
amount invested.

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check, or by
telephone or other means of electronic data transfer directly from the bank or
trust company, with payment by federal funds received by the close of business
on the next business day following such

<PAGE>

order. If an investment by a trust company or bank trust department at net asset
value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds(R) or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The use of the term "securities dealer"
shall include other financial institutions which, pursuant to an agreement with
Distributors (directly or through affiliates), handle customer orders and
accounts with the Fund. Such reference however is for convenience only and does
not indicate a legal conclusion of capacity. The redemption is a taxable
transaction but a reinvestment without a sales charge may affect the amount of
gain or loss recognized and the tax basis of the shares reinvested. If there has
been a loss on the redemption, the loss may be disallowed if a reinvestment is
made within a 30-day period. Information regarding the possible tax consequences
of such a reinvestment is included in the tax section of this Prospectus and the
Statement of Additional Information.

Shares of the Fund may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in a registered management
investment company which charges a contingent deferred sales charge and which
has investment objectives similar to those of the Fund.

Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees or directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) former participants in the
Franklin/Templeton Profit Sharing/401(k) plan, who elect to make a direct
rollover of all, or a portion of, their eligible distribution account balance
from such plan, (3) registered securities dealers and their affiliates, for
their investment account only, and (4) registered personnel and employees of
securities dealers and by their spouses and family members in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.

Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Group of Funds, or the Templeton

<PAGE>

Group (including former participants of the Franklin/Templeton Profit Sharing
401(k) plan). In order to exercise this privilege a written order for the
purchase of shares of the Fund must be received by Franklin Templeton Trust
Company ("FTTC"), the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies of a
fund in which the shareholder wishes to invest may be obtained by calling toll
free at 1-800/DIAL BEN (1-800/342-5236).

Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.

GENERAL

Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.

PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
- --------------------------------------------------------------------------------

Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an already existing retirement plan, or FTTC
may provide the plan documents and trustee or custodian services. A plan
document must be adopted in order for a plan to be in existence.

FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and IRS requirements.

Please note that the separate applications other than the one contained in this
Prospectus must be used to establish an FTTC retirement account. To obtain a
retirement plan brochure or application, call toll free 1-800/DIAL BEN
(1-800/342-5236).

The Franklin IRA is an individual retirement account in which the contributions,
annually limited to the lesser of $2,000 or 100% of an individual's earned
compensation, accumulate on a tax-deferred basis until withdrawn. Under the
current tax law, individuals who (or whose spouses) are covered by a company
retirement plan (termed "active participants") may be restricted in the amount
they may claim as an IRA deduction on their re-

<PAGE>

turns. The IRA deduction is gradually reduced to the extent that a taxpayer's
adjusted gross income exceeds certain specified limits.

Two IRAs, with a combined limit of $2,250 or 100% of earned compensation, may be
established by a married couple in which only one spouse is a wage earner. The
$2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.

A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such as
a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding law
enacted in 1993.

The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax-deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per employee. The
SAR-SEP allows employees to contribute a portion of their salary to an IRA on a
pre-tax basis through salary deferrals. The maximum annual salary deferral limit
for a SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals) or
$9,240 (1994 limit; indexed for inflation).

The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
certain non-profit and educational institutions [ss.501(c)(3) organizations and
public schools]. The 403(b) Plan allows participants to determine the annual
amount of salary they wish to defer. The maximum annual salary deferral amount
is generally the lesser of 25% of compensation (adjusted for deferrals) or
$9,500.

The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to make
contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows the
employer to contribute up to the lesser of $30,000 or 25% of compensation* per
employee; however, contributions are required annually at the rate (percentage)
elected by the employer at the outset of the plan. In order to achieve a
combined contribution rate of 25% while maintaining a certain degree of
flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).

FTTC can add optional provisions to the Profit Sharing and Money Purchase
Pension Plans described above and provide a Defined Benefit, Target Benefit, and
401(k) Plans on a custom designed basis. Business Retirement Plans, whether
standard or custom designed, may require an annual report (Form 5500) to be
filed with the IRS.

Redemptions from any Franklin retirement plan accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."

Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.

*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.

<PAGE>

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
- --------------------------------------------------------------------------------

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

SHARE CERTIFICATES

Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the broker.

CONFIRMATIONS

A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.

AUTOMATIC INVESTMENT PLAN

Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.

The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments are then made from the liquidation of shares at net asset value
on the day of the transaction (which is generally the first business day of the
month in which the payment is scheduled) with payment generally received by the
shareholder three to five days after the date of liq-

<PAGE>

uidation. By completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record.

Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance sent to the shareholder. A subsequent deposit of
shares will not result in a payment under the plan retroactive to the
distribution date. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. The entire Systematic
Withdrawal Plan payment cannot be considered as actual yield or income since
part of such a Systematic Withdrawal Plan payment may be a return of the
shareholder's investment. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the additional purchases. The
shareholder should ordinarily not make additional investments of less than
$5,000 or three times the annual withdrawals under the plan during the time such
a plan is in effect. A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Fund, and it will terminate automatically if
all shares are liquidated or withdrawn from the account, or upon the Fund's
receipt of notification of the death or incapacity of the shareholder.
Shareholders may change the amount (but not below the specified minimums) and
schedule of withdrawal payments or suspend one such payment by giving written
notice to Investor Services at least seven business days prior to the end of the
month preceding a scheduled payment. Share certificates may not be issued while
a Systematic Withdrawal Plan is in effect.

INSTITUTIONAL ACCOUNTS

There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1/800-321-8563.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of a Fund") which are eligible for sale in the shareholder's
state of residence and in conformity with such fund's stated eligibility
requirements and investment minimums. Investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to exchange into for
all specific requirements or limitations on exercising the exchange privilege,
for example, minimum holding periods or applicable sales charges

<PAGE>

Exchanges may be made in any of the following ways:

EXCHANGES BY MAIL

Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.

EXCHANGES BY TELEPHONE

SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTORS SERVICES AT 1-800/632-2301
OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753.
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR
ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."

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

EXCHANGES THROUGH SECURITIES DEALERS

As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.

MISCELLANEOUS INFORMATION

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least twelve months prior to executing the exchange (six months with respect to
shares purchased prior to September 30, 1994, by persons who were shareholders
of the Fund as of July 30, 1994). When an investor requests the exchange of the
total value of the Fund account, declared but unpaid income dividends will be
transferred to the fund being exchanged into and will be invested at net asset
value. Capital gain distributions will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, the shareholder
may realize a gain or loss for federal income tax purposes. Backup withholding
and information reporting may also apply. Information regarding the

<PAGE>

possible tax consequences of such an exchange is included in the tax section in
this Prospectus and in the Statement of Additional Information.

There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.

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

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

TIMING ACCOUNTS

Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.

RESTRICTIONS ON EXCHANGES

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

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

The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.

The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.

<PAGE>

HOW TO SELL SHARES OF THE FUND
- --------------------------------------------------------------------------------

A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:

REDEMPTIONS BY MAIL

Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:15 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price calculated
on the following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.

TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:

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

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

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

(4) share certificates, if the redemption proceeds are in excess of $50,000; or

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

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

<PAGE>

Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.

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

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

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

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

Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.

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

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

REDEMPTIONS BY TELEPHONE

Shareholders who file a Telephone Transaction Application (the "Application")
may redeem shares of the Fund by telephone. THE APPLICATION MAY BE OBTAINED BY
WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE.
SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."

For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:15 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.

SELLING SHARES THROUGH SECURITIES DEALERS

The Fund will accept redemption orders by telephone or other means of electronic
transmission

<PAGE>

from securities dealers who have entered into a dealer or similar agreement with
Distributors. This is known as a repurchase. The only difference between a
normal redemption and a repurchase is that if the shareholder redeems shares
through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should reference the Fund, the
account number, the fact that the repurchase was ordered by a dealer and the
dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest during the time between
receipt of the dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
dealer may charge a fee for handling the order. The Statement of Additional
Information contains more information on the redemption of shares.

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.

OTHER

For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the broker may call
Franklin's Dealer Services Department.

TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------

Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.

All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file an Application as described under "How

<PAGE>

to Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.

VERIFICATION PROCEDURES

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

RESTRICTED ACCOUNTS

Telephone redemptions and dividend option changes may not be accepted on FTTC
retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend
payment. While the telephone exchange privilege is extended to
Franklin/Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans. Changes to dividend options must also
be made in writing.

To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
registered investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this Prospectus.

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

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

VALUATION OF FUND SHARES
- --------------------------------------------------------------------------------

The net asset value per share of the Fund is determined as of 1:15 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum sales charge of the Fund).

The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including without limitation the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
out-

<PAGE>

standing at the time. For the purpose of determining the aggregate net assets of
the Fund, cash and receivables are valued at their realizable amounts. Interest
is recorded as accrued and dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Over-the-counter
portfolio securities for which market quotations are readily available are
valued within the range of the most recent bid and ask prices as obtained from
one or more dealers that make markets in the securities. Portfolio securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market as determined by
the Manager. Portfolio securities underlying actively traded call options are
valued at their market price as determined above. The current market value of
any option held by the Fund is its last sales price on the relevant exchange
prior to the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, the options are valued within
the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. In the case of
securities of closed-end funds, the last quoted sales price, or the mean between
the quoted bid and ask prices, may be lower or higher than the net asset value
of such securities. Other securities for which market quotations are readily
available are valued at the current market price which may be obtained from a
pricing service based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued at
fair value as determined following procedures approved by the Board of Trustees.
All money market instruments with a maturity of more than 60 days are valued at
current market, as discussed above. All money market instruments with a maturity
of 60 days or less are valued at their amortized cost, which the Board of
Trustees has determined in good faith constitutes fair value for purposes of
complying with the 1940 Act. This valuation method will continue to be used
until such time as the trustees determine that it does not constitute fair value
for such purposes. With the approval of trustees, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------

Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
50 followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS system is also available for exchanges. See "Exchange Privilege".

<PAGE>

To assist shareholders and brokers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:

HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
-----------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.

</TABLE>

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

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

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

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

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

<PAGE>

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

GENERAL INFORMATION
- --------------------------------------------------------------------------------

REPORTS TO SHAREHOLDERS

The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this Prospectus. Additional information on Fund performance is included
in the Fund's Annual Report to Shareholders and the Statement of Additional
Information.

ORGANIZATION

The Fund was organized as a Massachusetts business trust on September 11, 1989.
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. All shares have
one vote and, when issued, are fully paid, non-assessable and redeemable.
Currently, the Fund issues only one series of shares. Additional series may be
added in the future by the Board of Trustees.

Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of the Fund may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund in the Franklin Group as described in
"Exchange Privilege."

VOTING RIGHTS

All shares have equal voting, dividend and liquidation rights. The shares have
noncumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of trustees can elect 100% of the trustees if
they choose to do so. The Fund is not required, nor does it intend, to hold
annual meetings; it may, however, hold special shareholder meetings for such
purposes as changing fundamental investment restrictions, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by a majority of
the Board of Trustees or by shareholders holding at least ten percent of the
shares entitled to vote at the meeting. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $1,250 ($500 for an IRA
account), but only where the value of such account has been reduced by the
shareholder's prior voluntary redemption of shares and has been inactive (except
for the reinvestment of distributions) for a period of at least six months,
provided advance notice is given to the shareholder. More information is
included in the Statement of Additional Information.

<PAGE>

OTHER INFORMATION

Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).

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

ACCOUNT REGISTRATIONS
- --------------------------------------------------------------------------------

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

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

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

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

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

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

<PAGE>

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

IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS
- --------------------------------------------------------------------------------

Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the TIN furnished by the shareholder is incorrect or that
the shareholder is subject to backup withholding for previous under-reporting of
interest or dividend income.

The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.

PORTFOLIO OPERATIONS
- --------------------------------------------------------------------------------

The following persons have been primarily responsible for the day-to-day
management of the Fund's portfolio since its inception:

William Lippman
Portfolio Manager of Advisers

Mr. Lippman holds a bachelor of business administration degree from City College
New York and a master's degree in business administration from the Graduate
School of Business Administration of New York University. He has been with
Advisers since 1988, and prior thereto served as president of Pilgrim Group and
L.F. Rothschild Fund Management.

Bruce C. Baughman
Portfolio Manager of Advisers

Mr. Baughman holds a bachelor of arts degree from Stanford University and a
master of science degree in accounting from New York University. He has been
with Advisers since 1988, and prior thereto, he worked as a senior analyst for
Pilgrim Group of Funds and vice president for L.F. Rothschild Fund Management.

Margaret McGee
Portfolio Manager of Advisers

Ms. McGee holds a bachelor of arts degree from William Paterson College. She has
been with Advisers since 1988, and prior thereto was operations supervisor for
Pilgrim Group, Inc.

APPENDIX
- --------------------------------------------------------------------------------

STANDARD & POOR'S CORPORATION

Long-Term Debt

AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.

A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes

<PAGE>

in circumstances and economic conditions than debt in the higher rated
categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

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

CI: The rating CI 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.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

Commercial Paper

A Standard & Poor's commercial paper rating is 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. The top two categories are as follows:

A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.

Notes

A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:

- -Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).

- -Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).

Note rating symbols are as follows:

SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.

SP-2: Satisfactory capacity to pay principal and interest.

SP-3: Speculative capacity to pay principal and interest.

<PAGE>

MOODY'S INVESTORS SERVICE

Long-Term Debt

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

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

Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

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

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or are the lowest rated class of
bonds. Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.

Nonrated: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.

3. There is a lack of essential data pertaining to the issuer.

4. The issue was privately placed, in which case the rating is not published in
Moody's publications.

<PAGE>

Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.

Short-Term Debt

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year.

Among the obligations covered are commercial paper, Eurocommercial paper, bank
deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated. Issuers rated Prime-1 (or
supporting institutions) have a superior ability for repayment of senior short
term debt obligations. Prime-1 repayment ability will often be evidenced by many
of the following characteristics:

- -Leading market positions in well-established industries.

- -High rates of return on funds employed.

- -Conservative capitalization structure with moderate reliance on debt and ample
asset protection.

- -Broad margins in earnings coverage of fixed financial charges and high internal
cash generation.

- -Well-established access to a range of financial markets and assured sources of
alternate liquidity.

SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN BALANCE SHEET INVESTMENT FUND

DATED MARCH 1, 1994

1. The following substitutes for the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":

ADDITIONAL NFORMATION REGARDING PURCHASES

Special Net Asset Value Purchases. As discussed in the Prospectus under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of the Fund
without a front-end sales charge ("net asset value") or a contingent
deferred sales charge. Distributors or one of its affiliates may make
payments, out of its own resources, to securities dealers who initiate and
are responsible for such purchases, as indicated below. As a condition for
these payments, Distributors or its affiliates may require reimbursement
from the securities dealers with respect to certain redemptions made within
12 months of the calendar month following purchase, as well as other
conditions, all of which may be imposed by an agreement between
Distributors, or its affiliates, and the securities dealer.

The following amounts may be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and taxable income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more; and (ii) purchases of most taxable income
Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on
sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or
more. These payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net asset value by
certain trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of
$10 million or more, Distributors, or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.

Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the Prospectus. At any time
within 90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder Application,
with the Letter of Intent section completed, may be filed with the Fund.
After the Letter of Intent is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment
indicated on the Letter. Sales charge reductions based upon purchases in
more than one of the Franklin Templeton Funds will be effective only after
notification to Distributors that the investment qualifies for a discount.
The shareholder's holdings in the Franklin Templeton Funds acquired more
than 90 days before the Letter of Intent is filed will be counted towards
completion of the Letter of Intent but will not be entitled to a
retroactive downward adjustment in the sales charge. Any redemptions made
by the shareholder, other than by a designated benefit plan, during the
13-month period will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month
period, there will be an upward adjustment of the sales charge, depending
upon the amount actually purchased (less redemptions) during the period.
The upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the sales
charge structure for the Fund will be entitled to complete the Letter of
Intent at the lower of (i) the new sales charge structure; or (ii) the
sales charge structure in effect at the time the Letter of Intent was filed
with the Fund.

As mentioned in the Prospectus, five percent (5%) of the amount of the
total intended purchase will be reserved in shares of the Fund registered
in the investor's name, unless the investor is a designated benefit plan.
If the total purchases, less redemptions, equal the amount specified under
the Letter, the reserved shares will be deposited to an account in the name
of the investor or delivered to the investor or the investor's order. If
the total purchases, less redemptions, exceed the amount specified under
the Letter of Intent and is an amount which would qualify for a further
quantity discount, a retroactive price adjustment will be made by
Distributors and the securities dealer through whom purchases were made
pursuant to the Letter of Intent (to reflect such further quantity
discount) on purchases made within 90 days before and on those made after
filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price
applicable to a single purchase or the dollar amount of the total
purchases. If the total purchases, less redemptions, are less than the
amount specified under the Letter, the investor will remit to Distributors
an amount equal to the difference in the dollar amount of sales charge
actually paid and the amount of sales charge which would have applied to
the aggregate purchases if the total of such purchases

<PAGE>

had been made at a single time. Upon such remittance the reserved shares
held for the investor's account will be deposited to an account in the name
of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption of the
account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the
balance will be forwarded to the investor.

If a Letter of Intent is executed on behalf of a benefit plan (such plans
are described under "Purchases at Net Asset Value" in the Prospectus), the
level and any reduction in sales charge for these designated benefit plans
will be based on actual plan participation and the projected investments in
the Franklin Templeton Funds under the Letter of Intent. Benefit plans are
not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan,
nor are benefit plans entitled to receive retroactive adjustments in price
for investments made before executing the Letter of Intent.

2. The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:

REINVESTMENT DATE

Shares acquired through the reinvestment of dividends will be purchased at
the net asset value determined on the business day following the dividend
record date (sometimes known as "ex-dividend date"). The processing date
for the reinvestment of dividends may vary from month to month, and does
not affect the amount or value of the shares acquired.

<PAGE>

FRANKLIN [FRANKLIN LOGO]
BALANCE SHEET
INVESTMENT FUND

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
MARCH 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN

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

CONTENTS PAGE

About the Fund (See also the Prospectus "About the Fund")................ 2

The Fund's Investment Objective and Policies (See also the Prospectus
"Investment Objective and Policies of the Fund")........................ 2

Officers and Trustees.................................................... 7

Investment Advisory and Other Services (See also the Prospectus
"Management of the Fund")............................................... 9

The Fund's Policies Regarding Brokers Used on Portfolio Transactions..... 10

Additional Information Regarding Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund," "How to Sell Shares of the Fund," and
"Valuation of Shares of the Fund")...................................... 11

Additional Information Regarding Taxation................................ 13

The Fund's Underwriter................................................... 14

General Information...................................................... 15

Financial Statements..................................................... 20

A Prospectus for the Franklin Balance Sheet Investment Fund (the "Fund") dated
March 1, 1994, as may be amended from time to time, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address listed above or from the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address listed above.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT CONTAINS
INFORMATION IN ADDITION TO, AND IN MORE DETAIL THAN, THE INFORMATION SET FORTH
IN THE PROSPECTUS. THIS STATEMENT IS INTENDED TO PROVIDE YOU WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS.

<PAGE>

ABOUT THE FUND
- --------------------------------------------------------------------------------

The Fund is a non-diversified, open-end management investment company, commonly
called a "mutual fund." It was organized as a Massachusetts business trust on
September 11, 1989, and is registered under the Investment Company Act of 1940,
as amended ("1940 Act"). The Fund has only one class of shares with a par value
of $0.01 per share.

THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

As noted in the Prospectus, the Fund's investment objective is to seek high
total return, of which capital appreciation and income are components. This
objective is a fundamental policy and may not be changed without approval of
shareholders. The Fund will seek capital appreciation primarily through
investment in securities that the Fund's manager believes are undervalued in the
marketplace. The Fund will also seek income when deemed consistent with its
objective.

CHARACTERISTICS OF THE CLOSED-END FUNDS IN WHICH THE FUND WILL INVEST

The Fund currently intends to invest a portion of its total assets in the common
shares of closed-end funds which are traded on a national securities exchange or
in the over-the-counter markets. Typically, the common shares of closed-end
funds are offered to the public in a one-time initial public offering by a group
of underwriters who retain a spread or underwriting commission of between 4% and
6% of the initial public offering price. Such securities are then listed for
trading on the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers Automated Quotation ("NASDAQ") System
and, in some cases, may be traded in other over-the-counter markets. Because the
common shares of closed-end funds cannot be redeemed upon demand to the issuer
like the shares of an open-end investment company (such as the Fund), investors
seek to buy and sell common shares of closed-end funds in the secondary market.

The Fund also may invest in senior securities, such as preferred stock and debt
obligations, of closed-end funds. Closed-end funds may issue senior securities
for the purpose of leveraging the closed-end fund's common shares in an attempt
to enhance the current return to such closed-end fund's common shareholders. The
Fund's investment in the common shares of closed-end funds that are financially
leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price
and net asset value than an investment in shares of investment companies without
a leveraged capital structure. The Fund will not invest in senior securities of
closed-end funds rated lower than A by Standard & Poor's Corporation ("S&P") and
Moody's Investors Service ("Moody's") and the Fund will not own more than 3% of
the total outstanding stock (including common and preferred stock and certain
senior securities that have been afforded voting rights as a consequence of the
existence of dividend arrears) of any single closed-end fund.

The Fund generally will only purchase securities of closed-end funds in the
secondary market. The Fund will incur normal brokerage costs on such purchases
similar to the expenses the Fund would incur for the purchase of securities of
any other type of issuer in the secondary market. The Fund may, however, also
purchase securities of a closed-end fund in an initial public offering when, in
the opinion of the investment manager based on a consideration of the nature of
the closed-end fund's proposed investments, the prevailing market conditions and
the level of demand for such securities, they represent an attractive
opportunity for capital appreciation. The initial offering price will include a
dealer spread, which may be higher than the applicable brokerage cost if the
Fund purchased such securities in the secondary market.

Closed-end funds invest the net proceeds of their public offering in the
securities of other companies consistent with their investment objectives and
policies. Certain closed-end funds seek to provide current income to investors,
others seek to provide appreciation in value, while others may seek a
combination of both income and appreciation. Closed-end funds may have a policy
of investing in certain types of securities such as equity or debt securities;
some may concentrate in particular industry sectors or geographic areas, while
others may invest in a variety of securities to achieve a particular type of
return or a particular tax result. The indicated characteristics and risks apply
to the securities of closed-end funds regardless of whether such securities
trade at a market discount or premium. As of December 31, 1993, there were
approximately 378 closed-end funds traded on national securities exchanges or on
the over-the-counter markets with assets in excess of $87 billion. In order to
comply with federal tax regulations, the Fund will generally invest in
closed-end funds that qualify as "regulated investment companies" under federal
income tax law.

<PAGE>

The common shares of many closed-end funds, after their initial public offering,
frequently trade at a price per share which is less than the net asset value per
share, the difference representing the "market discount" of such common shares.
This market discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as to the fact
that the common shares of closed-end funds are not redeemable by the holder upon
demand to the issuer at the next-determined net asset value but rather are
subject to the principles of supply and demand in the secondary market. A
relative lack of secondary market purchasers of closed-end fund common shares
also may contribute to such common shares trading at a discount to their net
asset value.

Although the Fund intends primarily to purchase common shares of closed-end
funds which trade at a market discount and which the investment manager believes
present the opportunity for capital appreciation or increased income due in part
to such market discount, there can be no assurance that the market discount on
common shares of any closed-end fund will ever decrease. In fact, it is possible
that this market discount may increase and the Fund may suffer realized or
unrealized capital losses due to further decline in the market price of the
securities of such closed-end funds, thereby adversely affecting the net asset
value of the Fund's shares. Similarly, there can be no assurance that the common
shares of closed-end funds which trade at a premium will continue to trade at a
premium or that the premium will not decrease subsequent to a purchase of such
shares by the Fund. Although no assurances can be given, the investment manager
believes that its market research and analysis and the diversification policies
of the Fund will enable the Fund to avoid significant declines in the net asset
value of the Fund's shares due to losses related to an individual issuer.

The Fund may also invest in the securities of closed-end funds which (i)
concentrate their portfolios in the issuers of specific industries or in
specific geographic areas and (ii) are non-diversified for purposes of the 1940
Act. However, because the Fund does not intend to concentrate its investments in
any single industry and because the closed-end funds in which the Fund will
invest will generally satisfy the diversification requirements applicable to a
regulated investment company under the Code, the Fund does not believe that its
investment in closed-end funds which concentrate in specific industries or
geographic areas or which are non-diversified for purposes of the 1940 Act
present any special risks to the shareholders of the Fund. The Fund will treat
its entire investment in the securities of a closed-end fund that concentrates
in a specific industry as an investment in securities of an issuer in the
industry in which such fund concentrates its portfolio.

The Fund will not invest in the securities of closed-end funds that invest more
than 10% of their assets in the securities of other investment companies. The
Fund will also not invest directly in the securities of open-end investment
companies; however, the Fund may retain the securities of a closed-end
investment company that has converted to open-end fund status subsequent to the
Fund's investment in the securities of such closed-end fund.

1940 ACT PROVISIONS

The Fund will structure its investments in the securities of closed-end funds
and unit investment trusts ("UITs") to comply with applicable provisions of the
1940 Act. The presently applicable provisions require that (i) the Fund and
affiliated persons of the Fund not own together more than 3% of the total
outstanding stock of any one investment company, (ii) the Fund not offer its
shares at a public offering price that includes a sales charge of more than 1.5%
and (iii) the Fund will either seek instructions from its shareholders with
regard to the voting of all proxies with respect to its investment in the
securities of closed-end funds and UITs and vote such proxies only in accordance
with such instructions, or vote the shares held by it in the same proportion as
the vote of all other holders of such securities. For purposes of applying the
3% of total outstanding stock limitation, the Fund will aggregate its purchases
of a closed-end fund or a UIT with the purchases, if any, by other investment
companies managed or sponsored by the investment manager. The Fund intends to
vote the shares of any closed-end fund held by it in the same proportion as the
vote of all other holders of such fund's securities. The effect of such "mirror"
voting is to neutralize the Fund's influence on corporate governance matters
regarding the closed-end funds in which the Fund invests.

Closed-end funds may, under certain circumstances, convert into open-end
investment companies. Pursuant to applicable provisions of the 1940 Act, the
Fund may not redeem more than 1% of the outstanding redeemable securities of an
open-end investment company during any period of 30 days or less. Consequently,
should the Fund own more

<PAGE>

than 1% of the outstanding redeemable securities of an open-end investment
company after such fund's conversion from closed-end fund status, the amount in
excess of 1% may be treated as an investment in illiquid securities. Because the
Fund may not hold at any time more than 10% of the value of its total assets in
illiquid securities (securities that cannot be disposed of within seven days in
the normal course of business at approximately the amount at which the Fund has
valued the securities), the Fund may seek to divest itself, prior to any such
conversion, of securities in excess of 1% of the outstanding redeemable
securities of a converting fund. The Fund may, however, retain such securities
and any amount in excess of 1% of the open-end fund, thereby subject to the
limits on redemption, would be treated as an investment in illiquid securities
subject to the aggregate limit of 10% of the Fund's total assets.

The Fund will not invest in the securities of closed-end funds which are managed
by the investment manager or UITs that are sponsored by the manager. The
foregoing policy is not a fundamental policy of the Fund and can therefore be
changed by a majority vote of the Board of Trustees of the Fund without any
requirement for a vote of the Fund's shareholders.

In addition to the policies stated in the Prospectus, the investment
restrictions set forth below have been adopted by the Fund to limit certain
risks that may otherwise result from investment in specific types of securities
or from engaging in certain types of transactions which such restrictions are
designed to prohibit. Unless specifically approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund, consisting of the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting
of shareholders if the holders of more than 50% of its voting securities are
represented at the meeting or (ii) more than 50% of the Fund's outstanding
voting securities, the Fund MAY NOT:

1. Have invested as of the last day of any fiscal quarter (i) more than 25% of
its total assets in the securities of any one issuer, or (ii) with respect to
50% of the Fund's total assets, more than 5% of its total assets in the
obligations of any one issuer, except for securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.

2. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding fixed-income securities of an issuer are considered as one class.

3. Invest in the stock of any investment company if a purchase of such stock
would result in the Fund and affiliates of the Fund owning together more than 3%
of the total outstanding stock of such investment company.

4. Borrow money, except from banks, in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (not leveraging) purposes in an amount up to 15% of
the value of the Fund's total assets (including the amount borrowed) based on
the lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of the
Fund's total assets, the Fund will not make any additional investments.

5. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings for temporary or emergency purposes and permissible options,
short selling or other hedging transactions.

6. Purchase securities on margin or underwrite securities. (Does not preclude
the Fund from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)

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

8. Make loans to others except through the purchase of debt obligations
referred to in the Prospectus and the entry into repurchase agreements and
portfolio lending agreements, provided that the value of securities subject to
such lending agreements may not exceed 25% of the value of the Fund's total
assets. Any loans of portfolio securities will be made according to guidelines
established by the Securities and Exchange Commission ("SEC") and the Fund's
Board of Trustees, including maintenance of collateral of the borrower equal at
all times to at least 102% of the current market value of the securities loaned.

9. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.

10. Invest in warrants (valued at the lower of cost or market) in excess of 5%
of the value of the Fund's net assets. No more than 2% of the value of the
Fund's net assets may be invested in warrants (valued at the lower of cost or
market) which

<PAGE>
are not listed on the New York or American Stock Exchanges.

11. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but the Fund may
deal with such persons or firms as brokers and pay a customary brokerage
commission; nor invest in securities of any company if, to the knowledge of the
Fund, any officer, director or trustee of the Fund or the investment advisor
owns more than 0.5% of the outstanding securities of such company and such
officers, directors and trustees (who own more than 0.5%) in the aggregate own
more than 5% of the outstanding securities of such company.

12. Underwrite the securities of other issuers, except insofar as the Fund may
be technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.

13. Purchase or hold the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's total assets would be
invested in securities that are subject to legal or contractual restrictions on
resale ("restricted securities"), in securities that are not readily marketable
(including over-the-counter options) or in repurchase agreements maturing in
more than seven days.

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

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

16. Engage in the short sales of securities, except short sales "against the
box," if the cash or securities deposited in the segregated account with the
Fund's custodian to collateralize its short positions in the aggregate exceed
25% of the Fund's net assets.

If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.

The Fund's emphasis on securities believed to be undervalued by the market uses
a technique followed by certain very wealthy investors highlighted by the media
and a number of private partnerships with very high minimum investments. It
requires not only the resources to undertake exhaustive research of little
followed, out-of-favor securities, but also the patience and discipline to hold
these investments until their intrinsic values are ultimately recognized by
others in the marketplace. There can be no assurance that such technique will be
successful for the Fund or that the Fund will achieve its investment objective.

Other Policies. Pursuant to an undertaking given to the Texas State Securities
Board, the Franklin Balance Sheet Investment Fund may not 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.

ADDITIONAL RISK FACTORS/SPECIAL CONSIDERATIONS RELATING TO FIXED-INCOME
SECURITIES

The Fund also may invest up to 25% of its total assets in fixed-income and
convertible securities offering high current income. Such high yielding,
fixed-income securities will ordinarily be in the lower rating categories of
recognized rating agencies or non-rated securities of comparable quality
(sometimes referred to as "junk bonds" in the popular media). The market values
of such securities tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Such lower rated securities
also tend to be more sensitive to economic conditions than are higher rated
securities. These lower-rated fixed-income securities are considered by S&P and
Moody's, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation
and will generally involve more credit risk than securities in the higher rating
categories. Even securities rated BBB or Baa by S&P and Moody's, ratings which
are considered investment grade, possess some speculative characteristics.

Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts, or the unavailability

<PAGE>

of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.

The Fund may have difficulty disposing of such high yielding securities because
there may be a thin trading market for such securities. Because not all dealers
maintain markets in all high yielding, fixed-income securities, there is no
established retail secondary market for many of these securities, and the Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
high yielding, fixed-income securities does exist, it is generally not as liquid
as the secondary market for higher rated securities. The lack of a liquid
secondary market may also have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities may also make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. Market quotations are generally available on many high yield issues
only from a limited number of dealers and may not necessarily represent firm
bids of such dealers or prices for actual sales.

Potential liquidity problems associated with the Fund's investment in high
yielding securities and other securities in which the Fund invests, such as the
securities of closed-end investment companies, may negatively affect the Fund's
net asset value, liquidity and ability to redeem Fund shares in accordance with
applicable provisions of the 1940 Act.

In addition, since the high yield bond market is relatively new, much of its
growth prior to 1990 paralleled a long economic expansion. The recession which
followed disrupted the market for high yield bonds and adversely affected the
value of many outstanding bonds and the ability of issuers of such bonds to
repay principal and interest. Those adverse effects may continue even as the
economy recovers.

At fiscal year-end, October 31, 1993, the Fund did not own any securities which
were in default.

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

The Fund may also acquire high yielding, fixed-income securities during an
initial underwriting. Such securities involve special risks because they are new
issues. The Fund has no arrangement with any person concerning the acquisition
of such securities, and the investment advisor will carefully review the credit
and other characteristics pertinent to such new issues.

From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yielding securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such securities generally, could
negatively affect the financial condition of issuers of high yield securities by
removing or reducing a source of future financing, and could negatively affect
the value of specific high yield issues and the high yield market in general.
The likelihood of any such legislation or the effect thereof is uncertain. The
liquidity of high yielding securities may be negatively affected by provisions
of The Financial Institutions Reform, Recovery and Enforcement Act of 1989 that
prohibit savings associations from acquiring or retaining any corporate debt
security that is not investment grade.

Factors adversely impacting the market value of high yielding securities will,
to the extent the Fund has invested in such securities, adversely impact the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The Fund will rely on the
investment advisor's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the investment advisor will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic condi-

<PAGE>

tions and trends, its operating history, the quality of the issuer's management
and regulatory matters.

Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100% but this rate should not be construed as a
limiting factor. The portfolio turnover of the Fund was 30.86% for the fiscal
year ended October 31, 1992 and 31.36% for the fiscal year ended October 31,
1993.

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

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

POSITIONS AND
OFFICES WITH
NAME AND ADDRESS THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*William J. Lippman President, Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
One Parker Plaza Trustee and Chief Franklin/Templeton Distributors, Inc. and Franklin Management, Inc.; officer
Fort Lee, NJ 07024 Executive Officer and/or director or trustee of many funds in the Franklin Group of Funds.

Frank T. Crohn Trustee Chairman and Chief Executive Officer, Financial Benefit Life Insurance
7251 West Palmetto Park Road Company and Financial Benefit Group, Inc.; Director, Unity Mutual Life
Boca Raton, FL 33433 Insurance Company; Trustee, Hampton Utilities Trust and Franklin Managed
Trust.

Charles Rubens II Trustee Private Investor; Trustee, Hampton Utilities Trust and Franklin Managed
18 Park Road Trust.
Scarsdale New York, NY 10583

Leonard Rubin Trustee Chairman of the Board, Carolace Embroidery Co., Inc.; President, F.N.C.
501 Broad Avenue Textiles, Inc.; Vice President, Trimtex Co. Inc.; Trustee,
Ridgefield, NJ 07657 Hampton Utilities Trust and Franklin Managed Trust.

Rupert H. Johnson, Jr. Vice President Executive Vice President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; President and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; director
of certain of the investment companies in the Templeton Group of Funds; and
officer and/or director, trustee or managing general partner, as the case may
be, of most other subsidiaries of Franklin Resources, Inc. and of most of the
investment companies in the Franklin Group of Funds.

</TABLE>

<PAGE>

Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
777 Mariners Island Blvd. Executive Vice President and Director, Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; director of certain of the
investment companies in the Templeton Group of Funds; officer and/or
director, as the case may be, of other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee of all the investment companies
in the Franklin Group of Funds.

Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources, Inc. and Franklin Advisers,
777 Mariners Island Blvd. and Treasurer Inc.; Vice President Franklin/Templeton Distributors, Inc.; officer
San Mateo, CA 94404 or director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing general partner, as the
case may be, of all the investment companies in the Franklin Group of Funds.

Edward V. McVey Vice President Senior Vice President/National Sales Manager, Franklin/Templeton
777 Mariners Island Blvd. Distributors, Inc.; and officer of many of the investment companies
San Mateo, CA 94404 in the Franklin Group of Funds.

R. Martin Wiskemann Vice President Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
777 Mariners Island Blvd. Inc.; Senior Vice President, Franklin Management, Inc.; Vice President,
San Mateo, CA 94404 Treasurer and Director, ILA Financial Services, Inc. and Arizona Life
Insurance Company of America; and officer and/or director, as the case
may be, of many of the investment companies in the Franklin Group of Funds.

Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources, Inc. and
777 Mariners Island Blvd. and Secretary Franklin/Templeton Distributors, Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc.; and officer of all the investment companies in the
Franklin Group of Funds.

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

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager are paid fees of $500 per quarter plus $250 per meeting
attended and are reimbursed for expenses incurred in connection with attending
such meetings. During the fiscal year ended October 31, 1993, fees totaling
$9,619 were paid by the Fund to trustees of the Fund who were not affiliated
with the investment manager. No officer or trustee received any other
compensation directly from the Fund. As of December 7, 1993, the trustees and
officers, as a group, owned of record and beneficially approximately 41,918
shares of the Fund. Certain officers or trustees 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.

<PAGE>

INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly-owned holding company whose shares are listed on the
New York Stock Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services. The Manager and other subsidiary companies of Resources currently
manage over $109 billion in assets for over 3.2 million shareholders. Please
refer to the table above which indicates officers and trustees who are
affiliated persons of the Fund and who are also affiliated persons of
Distributors, the Fund's principal underwriter, and of Advisers. Charles B.
Johnson, Chairman of the Board of Advisers and Rupert H. Johnson, Jr., President
of Advisers, are brothers and are, respectively, the father and uncle of Charles
E. Johnson, Vice-President of Advisers.

Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's activities are subject
to the review and supervision of the Fund's Board of Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. The Fund bears
all of its expenses not assumed by the Manager. See the Statement of Operations
in the financial statements at the end of this Statement of Additional
Information for additional details of these expenses.

Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed and accrued daily and paid monthly at an annual rate of 0.625 of 1%
for the first $100 million of average daily net assets of the Fund; 0.50 of 1%
on net assets in excess of $100 million up to $250 million; 0.45 of 1% on net
assets in excess of $250 million up to $10 billion; 0.44 of 1% on net assets in
excess of $10 billion up to and including $12.5 billion; 0.42 of 1% on net
assets in excess of $12.5 billion up to and including $15 billion; and 0.40 of
1% on net assets in excess over $15 billion.

The Manager has limited its management fees and assumed responsibility for
making payments to offset operating expenses otherwise payable by the Fund. This
action by the Manager to limit its management fees and to assume responsibility
for payment of the expenses related to the operations of the Fund may be
terminated by the Manager at any time. In addition, the management agreement
specifies that the management fee will be reduced to the extent necessary to
comply with the most stringent limits on the expenses which may be borne by the
Fund as prescribed by any state in which the Fund's shares are offered for sale.
The most stringent current limit requires the Manager to reduce or eliminate its
fee to the extent that aggregate operating expenses of the Fund (excluding
interest, taxes, brokerage commissions and extraordinary expenses such as
litigation costs) would otherwise exceed in any fiscal year 2.5% of the first
$30 million of average net assets of the Fund, 2% of the next $70 million of
average net assets of the Fund and 1.5% of average net assets of the Fund in
excess of $100 million. Expense reductions have not been necessary based on
state requirements. For the fiscal years ended October 31, 1991, 1992, and 1993,
the Manager waived the management fees the Fund was otherwise contractually
obligated to pay of $14,254, $26,642, and $65,810, respectively.

The management agreement is effective through April 30, 1994. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Trustees or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Trustees who
are not parties to the management agreement or interested persons of any such
party (other than as trustees of the Fund), cast in person at a meeting called
for that purpose. The management agreement may be terminated without penalty at
any time by the Fund or by the Manager on 30 days' written notice and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.

Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's

<PAGE>

transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.

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

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended October 31, 1993,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report and this Statement
of Additional Information.

THE FUND'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------

Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Fund's Board of Trustees may give.

When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. As a general rule, the Fund
does not purchase bonds in underwritings where it is not given any choice, or
only limited choice, in the designation of dealers to receive the commission.
The Fund will seek to obtain prompt execution of orders at the most favorable
net price.

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

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

It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment ad-

<PAGE>
visory capacities with other clients. Provided that the Fund's officers are
satisfied that the best execution is obtained, the sale of Fund shares may also
be considered as a factor in the selection of securities dealers to execute the
Fund's portfolio transactions.

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing 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 Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.

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

For fiscal years ended October 31, 1991, 1992 and 1993, the Fund paid total
brokerage commissions of $6,634, $7,254 and $28,422, respectively. As of October
31, 1993, the Fund did not own securities of any broker-dealer.

ADDITIONAL INFORMATION REGARDING FUND SHARES
- --------------------------------------------------------------------------------

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

Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.

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

Under agreements with certain banks in the Republic of China (Taiwan), the
Fund's shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to Distributors to help defray the expenses of
maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.

Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- --------------------------------------------------
<S> <C>
Up to U.S. $100,000...................... 3%
U.S. $100,000 to U.S. $1,000,000......... 2%
Over U.S. $1,000,000..................... 1%

</TABLE>

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS

Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Fund. Such reference
however is for convenience only and does not indicate a legal conclusion of
capacity.
11

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

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with Distributors, Distributors or its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested, paid pro rata on a quarterly basis on average quarterly
balances for a period of one year.

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 such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the Trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash.

REDEMPTIONS BY THE FUND

Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.

CALCULATION OF NET ASSET VALUE

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

The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific time which will not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Board of Trustees.

REINVESTMENT DATE

The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.

SPECIAL SERVICES

The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.

Franklin/Templeton Investor Services, Inc. may pay certain financial
institutions, which maintain omnibus accounts with the Fund on behalf of
numerous beneficial owners, for recordkeeping oper-

<PAGE>

ations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.

ADDITIONAL INFORMATION REGARDING TAXATION
- --------------------------------------------------------------------------------

As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code, qualified as such for the
fiscal year ended October 31, 1993, and intends to so qualify during the current
fiscal year. The Trustees reserve the right not to maintain the qualification of
the Fund as a regulated investment company if they determine such course of
action to be beneficial to the 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 shareholders will be ordinary dividend income to the
extent of the Fund's available earnings and profits.

Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Funds's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.

Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by a
Fund as a dividend will not qualify for the dividends-received deduction.

Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt-financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.

The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December, but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare such dividends, if any, in December and to pay
these dividends in December or January to avoid the imposition of this tax, but
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.

Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.

All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days

<PAGE>
before or after such redemption. Any loss disallowed under these rules will be
added to the tax basis of the shares purchased.

Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.

The Fund's investment in zero coupon and delayed interest bonds, or bonds that
provide for payment of interest in kind, may cause the Fund to recognize income
and make distributions to shareholders prior to the receipt of cash payments.

Payment-in-kind obligations are subject to special tax rules concerning the
amount, character and timing of income required to be accrued by the Fund.

The Fund's investment in options are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security.

When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some "hedging transactions"), this combination of positions could be treated
as a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses.

As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").

This requirement may limit the Fund's ability to engage in options and hedging
transactions because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.

The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.

Gain realized by a Fund from transactions entered into after April 30, 1993 that
are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent of
the applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.

THE FUND'S UNDERWRITER
- --------------------------------------------------------------------------------

Pursuant to an underwriting agreement in effect until April 30, 1994,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

Distributors pays the expenses of 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 underwriting agreement will continue in effect for successive annual periods
provided that its continuance is specifically approved at least annually by a
vote of the Fund's Board of Trustees or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Fund's trustees who are not parties to the underwriting agreement or
inter-

<PAGE>

ested persons of any such party (other than as trustees of the Fund), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days'written notice.

Distributors allows the entire underwriting commission on the sale of Fund
shares to the securities dealer of record, if any, on an account. In connection
with the offering of the Fund's shares, aggregate underwriting commissions for
the fiscal years ended October 31, 1991, 1992 and 1993, were $6,634, $10,901,
and $143,922, respectively. After allowances to dealers, Distributors retained
none of the commissions for the 1991 fiscal year, and for the fiscal years ended
October 31, 1992 and 1993, it retained $32 and $73, respectively. Distributors
received no other compensation from the Fund for acting as underwriter.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

PERFORMANCE

As noted in the Prospectus, the Fund may, from time to time, quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.

Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information computed
as required by the SEC. Current yield and average annual compounded total return
quotations used by the Fund are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the Fund to compute or express performance follows.

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order and that income dividends and
capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees.

In considering the quotations of total return by the Fund, investors should
remember that the 1.5% maximum 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 an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge the longer an
investor retains the investment in the Fund. The average annual compounded rates
of return for the Fund for the indicated periods ended on the date of the
financial statements included herein was as follows:

Period Ending October 31, 1993:

One Year: 37.78%

From inception (April 2, 1990): 16.72%

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Fund for the
indicated periods ended on the date of the financial statements included herein
was as follows:

Period Ending October 31, 1993:

One Year: 37.78%

From inception (April 2, 1990): 74.11%

YIELD

Current yield reflects the income per share earned by the Fund's portfolio
investments.

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annual-

<PAGE>
izing the result. Expenses accrued for the period include any fees charged to
all shareholders during the base period. The yield for the Fund for the 30-day
period ended on the date of the financial statements included herein was 2.07%.

This figure was obtained using the following SEC formula:

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

where

a = dividends and interest earned during the period

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

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

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

The above formula will be used in calculating quotations of yield, based on
specified 30-day periods identified in the advertisement or communication. Yield
calculations assume the maximum applicable sales load.

The Fund's current yield and total return may be compared to relevant indices,
including U.S. domestic and international taxable bond indices and data from
Lipper Analytical Services, Inc. or S&P's Indices.

CURRENT DISTRIBUTION RATE

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

VOLATILITY

Occasionally, statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard and Poor's 500 Stock Index. 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 premise is that greater volatility connotes greater risk undertaken in
achieving performance.

OTHER PERFORMANCE QUOTATIONS

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

Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.

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

OTHER FEATURES AND BENEFITS

From time to time, evaluations of the Fund's performance by independent sources
may be used in advertisements and in information furnished to present or
prospective shareholders. Fund advertisements or information may also include a
discussion of the benefits of investing in the shares of closed-end investment
companies by purchasing the shares of a mutual fund, such as the Fund, which
invest a substantial portion of its assets in closed-end fund shares. Such
advertisements or information may include symbols or headlines which summarize
the information discussed in more detail.

<PAGE>

Such advertisements and sales literature may also note that deeply discounted
securities offer growth potential, but that finding these deeply discounted
securities involves expensive and extensive research generally available only to
large institutional investors and very affluent investors. Further, it may be
noted that the Fund is the first to offer the research and potential benefits of
buying discounted securities in the mutual fund format.

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

Shareholders should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield or total return for
any period should not be considered as a representation of what an investment
may earn or what a shareholder's total return or yield may be in any future
period. Shareholders should also note that although the Fund believes that there
are substantial benefits to be realized by investing in the shares of closed-end
funds, such investments also involve certain risks. (See "Risk Factors/Special
Considerations" in the Prospectus.) The Fund may include in its advertising or
sales material information relating to investment objectives and performance
results of funds belonging to the Templeton Group of Funds. Resources is the
parent company of the advisers and underwriter of both the Franklin Group of
Funds and Templeton Group of Funds.

The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Cost Planner may assist
an investor 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 Income Planning
Guide leads an investor through the steps to start a retirement savings program.
Of course, an investment in the Fund cannot guarantee that such goals will be
met.

MISCELLANEOUS INFORMATION

The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $109 billion in
assets under management for more than 3.2 million shareholder accounts and
offers 93 U.S.-based mutual funds. The Fund may identify itself by its Quotron
code, FRBSX, or its CUSIP number, S&P 352423107.

The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was also
ranked number one. Franklin has been ranked number one in service quality by
Dalbar for five of the past six years.

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 may exceed 5% of
the total shares outstanding. To the best knowledge of the Fund, the only other
entity holding beneficially or of record more than 5% of the Fund's outstanding
common stock is Franklin Resources, Inc., 777 Mariners Island Boulevard, San
Mateo CA 94404. Resources, which provided the initial capital of the Fund,
owned, as of December 7, 1993, 154,075 shares or 12.59% of the total shares of
the Fund outstanding.

OWNERSHIP AND AUTHORITY DISPUTES

In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (i) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (ii) interplead disputed funds
or accounts with a court of competent jurisdiction; or (iii) surrender ownership
of all or a portion of the account

<PAGE>

to the Internal Revenue Service in response to a Notice of Levy.

DISTRIBUTION EXPENSES

The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. The Plan provides that the Fund shall pay Distributors or
others monthly at a rate of 0.25% per annum of average net assets for certain
expenses incurred in the distribution of Fund shares. In addition, the Plan
provides that up to an additional 0.25% may be paid to Distributors or others as
a service fee to reimburse such service providers for personal services provided
to shareholders of the Fund and/or the maintenance of shareholder accounts.
Thus, the amounts payable under the Plan total 0.50%. The basic terms of the
Plan are set forth in the Prospectus.

The Plan covers not only payments to Distributors for expenses incurred in the
promotion and distribution of shares of the Fund under the Plan, but also any
payments by certain parties, including Distributors or the Manager, in the
ordinary course of their business to the extent such payments are deemed to be
payments for activities primarily intended to result in the sale of shares
issued by the Fund.

To the extent fees are for distribution or marketing functions, as distinguished
from administrative services or agency transactions, certain banks will not be
entitled to participate in the Plan as a result of applicable Federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. However, such banking institutions currently are permitted to receive
fees from Distributors under the Plan for administrative servicing or for agency
transactions. If a bank were prohibited from providing such services, its
customers who are shareholders would be permitted to remain shareholders of the
Fund and alternate means for continuing the servicing of such shareholders would
be sought. In such an event, changes in the services provided might occur and
such shareholders might no longer be able to avail themselves of any automatic
investment or other services then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of federal law expressed
herein, and banks and financial institutions selling Fund shares may be required
to register as dealers pursuant to state law.

The Plan has been approved by Resources, the Fund's initial shareholder, and by
the Trustees, including those Trustees who are not interested persons as defined
in the 1940 Act. In approving the Plan and after consideration of such
information as they deemed reasonably necessary for an informed determination,
the Trustees determined that the Plan was in the best interests of the Fund and
its shareholders.

The Plan is effective through March 31, 1994, and thereafter renewable annually
by the Fund's Board of Trustees, including a majority of the Trustees who are
non-interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan. It is also required that the selection
and nomination of such Trustees be done by the non-interested Trustees. The Plan
and any distribution or service agreement may be terminated at any time without
penalty, by vote of a majority of the outstanding voting shares of the Fund, or
by vote of a majority of the non-interested trustees on 60 days' written notice,
or by Distributors, or by any act that terminates the management agreement with
the Manager or the underwriting agreement with Distributors. Distributors may
also terminate a distribution or service agreement at any time upon written
notice.

For the fiscal year ended October 31, 1993, the total amount which would have
been incurred by the Fund pursuant to the Plan but which was borne by Advisers
was $47,405, all of which was used to reimburse Distributors for compensation to
dealers.

MISCELLANEOUS

The organizational expenses of the Fund are being amortized on a straight line
basis over a period of five years from the commencement of the offering of the
Fund's shares. Investors purchasing shares of the Fund after the effective date
of the Fund's Registration Statement under the Securities Act of 1933 will be
bearing such expenses during the amortization period only as such charges are
accrued daily against the investment income of the Fund. (See "Notes to
Financial Statement.")

The Fund is registered with the SEC as a management investment company. Such
registration does not involve supervision of the management or policies of the
Fund. The Prospectus and this Statement of Additional Information omit certain
of the information contained in the Registration Statement filed with the SEC,
copies of which may be obtained from the SEC upon payment of the prescribed fee.

<PAGE>

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

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS

To The Shareholders and Board of Trustees
of Franklin Balance Sheet Investment Fund:

We have audited the accompanying statement of assets and liabilities of Franklin
Balance Sheet Investment Fund (the Fund), including the statement of investments
in securities and net assets, as of October 31, 1993, and the related statement
of operations for the year then ended and the statements of changes in net
assets for each of the two years in the period then ended, and the financial
highlights included under the caption "Financial Highlights" for the periods
indicated in note 7. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash held by
the custodian as of October 31, 1993, confirmation by correspondence with
brokers as to securities purchased but not received at that date, or other
auditing procedures where confirmations from brokers were not received. An audit
also includes assessing the accounting principles used and significiant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Balance Sheet Investment Fund as of October 31, 1993, and the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and its financial highlights for
the periods indicated in note 7, in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND

San Francisco, California
November 22, 1993

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993

<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS 77.0%
CLOSED-END FUNDS 19.0%
20,000 Charles Allmon Trust, Inc. ................................ $ 202,500
31,200 Convertible Holdings, Inc. ................................ 351,000
25,000 (a)Counsellors Tandem Securities Fund, Inc. .................. 400,000
30,000 Gemini II, Inc., Capital Shares ........................... 596,250
35,000 Inefficient Market Fund, Inc. ............................. 376,250
35,000 Irish Investment Fund, Inc. ............................... 306,250
20,000 Mexico Fund, Inc. ......................................... 540,000
10,000 Morgan Grenfell SMALLCap Fund, Inc. ....................... 120,000
15,000 Petroleum & Resources Corp. ............................... 451,875
24,300 Pilgrim Regional Bankshares ............................... 270,338
11,000 Quest for Value Dual Purpose Fund, Inc., Capital Shares ... 284,625
15,000 (a)Southeastern Thrift & Bank Fund, Inc. ..................... 281,250
4,000 (a)Worldwide Value Fund, Inc. ................................ 64,000
----------
TOTAL CLOSED-END FUNDS (COST $3,593,824) ............... 4,244,338
----------
OTHER COMMON STOCKS 58.0%
BANKS & THRIFTS 20.2%
20,000 (a)ALBANK Financial Corp. .................................... 400,000
15,000 Ameriana Bancorp .......................................... 315,000
11,000 BSB Bancorp, Inc. ......................................... 473,000
15,000 First Shenango Bancorp., Inc. ............................. 225,000
31,000 Grove Bank ................................................ 589,000
10,000 Plains Spirit Financial Corp. ............................. 238,750
10,000 Progressive Bank, Inc. .................................... 181,250
1,300 San Diego Financial Corp. ................................. 886,600
25,000 (a)St. Francis Capital Corp. ................................. 375,000
10,000 UF Bancorp., Inc. ......................................... 270,000
6,500 USBANCORP, Inc. ........................................... 164,125
20,000 (a)Westco Bancorp, Inc. ...................................... 395,000
----------
4,512,725
----------
CONSUMER GOODS & SERVICES 2.6%
9,900 Allen Organ Co., Class B .................................. 308,138
7,700 Genesee Corp., Class B .................................... 280,088
----------
588,226
----------
INDUSTRIAL 2.1%
21,000 (a)Avondale Industries, Inc. ................................. 147,000
35,000 Oshkosh Truck Corp., Class B .............................. 328,125
----------
475,125
----------
INSURANCE - LIFE 1.8%
23,200 USLICO Corp. .............................................. 408,900
----------
INSURANCE - PROPERTY & CASUALTY 8.0%
6,000 Baldwin & Lyons, Inc., Class B ............................ 264,000
15,000 Continental Corp., N.Y. ................................... 489,375
40,000 Merchants Group, Inc. ..................................... 675,000
23,500 Re Capital Corp. .......................................... 352,500
----------
1,780,875
----------
MISCELLANEOUS 7.4%
20,000 (a)Aydin Corp. ............................................... 310,000
30,000 Carolina Freight Corp. .................................... 386,250
2,600 (a)ESCO Electronics Corp. .................................... 25,675
25,000 Pennsylvania Enterprises, Inc. ............................ 725,000
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>

VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C>
OTHER COMMON STOCKS (CONT.)
MISCELLANEOUS (CONT.)
5,000 (a)Sierra Tucson Co., Inc. ................................ $ 22,500
5,500 (a)Trico Products Corp. ................................... 181,500
-----------
1,650,925
-----------
NATURAL RESOURCES 4.3%
10,000 Champion International Corp. ........................... 293,750
15,000 James River Corp. of Virginia .......................... 300,000
30,000 (a)Pool Energy Services Co. ............................... 333,750
-----------
927,500
-----------
OIL & GAS 2.7%
48,700 Enex Resources Corp. ................................... 371,338
20,000 (a)Total Petroleum (North America), Ltd. .................. 235,000
-----------
606,338
-----------
RETAIL SPECIAL LINES 6.5%
30,000 (a)Fabri-Centers of America ............................... 468,750
50,000 Hechinger Co., Class A ................................. 481,250
22,900 (a)Luria (L.) & Son, Inc. ................................. 283,388
20,000 (a)Syms Corp. ............................................. 220,000
-----------
1,453,388
-----------
RETAIL STORES 2.4%
15,000 Jacobson Stores, Inc. .................................. 178,125
10,000 Mercantile Stores Co., Inc ............................. 357,500
500 Michaels (J.), Inc. .................................... 5,000
-----------
540,625
-----------
TOTAL OTHER COMMON STOCKS (COST $10,995,126) ..... 12,944,627
-----------
TOTAL COMMON STOCKS (COST $14,588,950) ........... 17,188,965
-----------
</TABLE>

FACE
AMOUNT
- ----------
<S> <C>

SHORT TERM GOVERNMENT SECURITIES 20.6%

$4,600,000 (b)U.S. Treasury Bills, 2.955%-3.43%, 11/04/93-12/16/93
(COST $4,587,973) .................................... 4,587,973
-----------
TOTAL INVESTMENTS (COST $19,176,923) 97.6% .......... 21,776,938
OTHER ASSETS AND LIABILITIES, NET 2.4%............... 540,245
-----------
NET ASSETS 100.0% ................................... $22,317,183
===========

At October 31, 1993, the net unrealized appreciation
based on the cost of investments for federal income
tax purposes of $19,176,923 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ................................... $ 2,654,251
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................. (54,236)
-----------
Net unrealized appreciation ....................... $ 2,600,015
===========
</TABLE>

(a)Non-income producing.

(b)Certain short-term securities are traded on a discount basis; the interest
rates shown are the discount rates at the time of purchase by the Fund.

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1993

<TABLE>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $19,176,923) $21,776,938

Cash 298,703
Receivables:
Dividends 7,298
Capital shares sold 748,019
Unamortized organization costs (Note 2) 23,109
-----------
Total assets 22,854,067
-----------

Liabilities:
Payables:
Investment securities purchased 509,719
Capital shares repurchased 4,056
Payable to manager for organization costs 23,109
-----------
Total liabilities 536,884
-----------
Net assets, at value $22,317,183
===========

Net assets consist of:
Undistributed net investment income $ 21,667
Unrealized appreciation on investments 2,600,015
Accumulated net realized gain 1,043,164
Capital shares 9,714
Additional paid-in capital 18,642,623
-----------
Net assets, at value $22,317,183
===========

Computation of net asset value and offering price per share:
Net asset value and redemption price per share ($22,317,183
divided by 971,394 shares outstanding) $22.97
===========

Maximum offering price* (100/98.5 of $22.97) $23.32
===========
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1993

<TABLE>
<S> <C> <C>
Investment income:
Dividends $ 141,782
Interest 57,571
---------
Total income $ 199,353

Expenses:
Shareholder servicing costs (Note 6) 3,657
Distribution fees (Note 6) 47,405
Reports to shareholders 3,909
Professional fees 15,431
Registration fees 28,308
Trustees' fees and expenses 9,619
Amortization of organization costs 16,313
Custodian fees 1,161
Other 3,437
Payments from manager (Note 6) (129,240)
---------
Total expenses --
Net investment income 199,353
----------
Realized and unrealized gain on investments:
Net realized gain 1,043,829
Net unrealized appreciation during the year 2,247,740
Net realized and unrealized gain on investments 3,291,569
----------
Net increase in net assets resulting from operations $3,490,922
==========
</TABLE>

*On sales of $500,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund." The
accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1993 AND 1992

<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:

Operations:

Net investment income ........................................................ $ 199,353 $ 134,769

Net realized gain from security transactions ................................. 1,043,829 197,570

Net unrealized appreciation during the year .................................. 2,247,740 246,595
----------- ----------

Net increase in net assets resulting from operations ....................... 3,490,922 578,934

Distributions to shareholders from:

Undistributed net investment income .......................................... (196,906) (131,327)

Net realized gain ............................................................ (190,024) --

Increase in net assets from capital share transactions (Note 4) .............. 14,063,887 1,129,505
----------- ----------

Net increase in net assets ................................................. 17,167,879 1,577,112

Net assets:

Beginning of year ............................................................ 5,149,304 3,572,192
----------- ----------

End of year (including undistributed net investment income
of $21,667 - 10/31/93 and $19,220 - 10/31/92)............................... $22,317,183 $5,149,304
=========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Balance Sheet Investment Fund (the Fund) is an open-end,
non-diversified management investment company (mutual fund), registered under
the Investment Company Act of 1940, as amended.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.

a. SECURITIES VALUATIONS:

Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale, at
the mean between the most recent quoted bid and asked prices. Other securities,
for which market quotations are readily available, are valued at current market
values obtained from a pricing service, which are 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 securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Manager. Securities
for which market quotations are n ot readily available, if any, are valued at
their fair value as determined following procedures approve d by the Board of
Trustees. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.

b. INCOME TAXES:

It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required.

c. SECURITY TRANSACTIONS:

Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.

d. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:

Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.

Distributions from undistributed net investment income and net realized capital
gains from security transactions, to the extent they exceed available capital
loss carryovers, are generally made each year to avoid the 4% excise tax imposed
on regulated investment companies by the Internal Revenue Code.

2. UNAMORTIZED ORGANIZATION COSTS

The organization costs of the Fund are amortized on a straight-line basis over a
period of five years from April 2, 1990 (the effective date of registration
under the Securities Act of 1933). In the event Franklin Resources, Inc. (which
was the sole shareholder prior to April 2, 1990) redeems its s hares within the
five-year period, the pro-rata share of the then-unamortized deferred
organization cost will be deducted from the redemption price paid to Franklin
Resources, Inc. New investors purchasing shares of the Fund subsequent to that
date bear such costs during the amortization period onl y as such charges are
accrued daily against investment income.

3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At October 31, 1993, for income tax purposes, the Fund had accumulated
undistributed net realized gains of $1,043,164.

For income tax purposes, the aggregate cost of securities and unrealized
appreciation are the same as for financial statement purposes at October 31,
1993.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)

4. CAPITAL SHARES

At October 31, 1993, there was an unlimited number of $.01 par value shares of
beneficial interest authorized, and additional paid-in capital of $18,642,623.
Transactions in the Fund's shares for the years ended October 31, 1993 and 1992,
were as follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
1993 1992
---------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold ................................ 527,674 $10,941,636 45,297 $ 769,228
Shares issued in reinvestment of
distributions ............................ 17,495 327,893 7,074 113,788
Shares redeemed ............................ (21,660) (428,872) (21,262) (360,569)
Changes from exercise of exchange privilege:
Shares sold ................................ 189,127 4,019,091 36,730 628,769
Shares redeemed ............................ (37,635) (795,861) (1,257) (21,711)
------- ----------- ------ ----------
Net increase ................................ 675,001 $14,063,887 66,582 $1,129,505
======= =========== ====== ==========
</TABLE>

5. PURCHASES AND SALES OF SECURITIES

Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended October 31, 1993 aggregated $12,154,448 and
$2,746,498, respectively.

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of a management agreement, provides for
furnishing of investment advice, administrative services, office space and
facilities to the Fund, and receives fees computed daily on the net assets of
the Fund at an annualized rate of 5/8 of 1% of the first $100 million of net
assets of the Fund; 1/2 of 1% of net assets in excess of $100 million up to $250
million, 45/100 of 1% of net assets in excess of $250 million up to $10 billion,
44/100 of 1% of net assets in excess of $10 billion up to $12.5 billion, 42/100
of 1% of net assets in excess of $12.5 billion up to $15 billion and 40/100 of
1% of net assets in excess of $15 billion. Fees which would have been incurred
by the Fund under the agreement aggregated $65,810, for the year ended October
31, 1993. The terms of the management agreement provide that annual aggregate
expenses of the Fund be limited to the extent necessary to comply with the
limitations set forth in the laws, regulations and administrative
interpretations of the states in which the Fund's shares are registered. The
Fund's expenses did not exceed these limitations; however, for the year ended
October 31, 1993, Franklin Advisers, Inc. did not impose management fees, and
made payments of $129,240 for other expenses as shown in the Statement of
Operations.

In its capacity as underwriter for the shares of the Fund, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Fund's capital shares
for the year ended October 31, 1993 totalling $143,922 of which $143,849 was
paid to other dealers. Commissions are deducted from the gross proceeds
received from the sale of the capital shares of the Fund and as such are not
expenses of the Fund.

Under the terms of a shareholder servicing agreement with Franklin/Templeton
Investor Services, Inc. the Fund pays costs on a per shareholder account basis.
Shareholder servicing costs of $3,657 were incurred for the year ended October
31, 1993, of which $3,291 was for services provided by Franklin /Templeton
Investor Services.

Under the terms of a Distribution Plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940, the Fund will reimburse Franklin/Templeton Distributors,
Inc. in an amount up to 0.50% per annum of the Fund's net assets for costs
incurred in the furnishing of promotion, offering and marketing of the Fund's
shares. Fees which would have been incurred by the Fund under the Distribution
Plan, but were borne by Franklin Advisers, Inc., aggregated $47,405 for the year
ended October 31, 1993.

<PAGE>
FRANKLIN BALANCE SHEET INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES CONT.)

At October 31, 1993, Franklin Resources, Inc. owned 16% of the Fund's
outstanding shares.

Certain officers and trustees of the Fund are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.

7. FINANCIAL HIGHLIGHTS

Selected data for each share of beneficial interest outstanding throughout each
period are set forth in the Prospectus under the caption "Financial Highlights".

- --------------------------------------------------------------------------------
The percentage of income dividends paid by the Fund during the year ended
October 31, 1993 which qualified for the 70% dividends-received deduction for
corporations was 60.38%.
- --------------------------------------------------------------------------------