TEMPLETON INSTITUTIONAL FUNDS INC, 497, 1998-05-07

TEMPLETON INSTITUTIONAL FUNDS INC
497, 1998-05-07

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TEMPLETON INSTITUTIONAL
FUNDS, INC.

STATEMENT OF
ADDITIONAL INFORMATION [FRANKLIN TEMPLETON LOGO]
100 FOUNTAIN PARKWAY, P.O. BOX 33030

MAY 1, 1998 ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
How Do the Funds Invest Their Assets?... 2
What Are the Risks of Investing in the
Funds?................................ 6
Investment Restrictions................. 9
Officers and Directors.................. 10
Investment Management and Other
Services.............................. 16
How Do the Funds Buy Securities for
Their Portfolios?..................... 18
How Do I Buy, Sell and Exchange
Shares?............................... 19
How Are Fund Shares Valued?............. 21
Additional Information on Distributions
and Taxes............................. 22
The Funds' Underwriter.................. 22
How Do the Funds Measure Performance?... 22
Miscellaneous Information............... 25
Financial Statements.................... 26
Useful Terms and Definitions............ 27
</TABLE>

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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- ---------------------------------------------------------

Templeton Institutional Funds, Inc. (the "Company") is an open-end management
investment company currently consisting of four separate series (the "funds,"
individually a "fund"). The funds are Growth Series, Foreign Equity Series,
Emerging Markets Series and Emerging Fixed Income Markets Series. All of the
funds, with the exception of Emerging Fixed Income Markets Series, are
diversified series of the Company. Emerging Fixed Income Markets Series is a
non-diversified series of the Company.

Growth Series' investment objective is to achieve long-term capital growth. The
fund seeks to achieve its objective by investing in stocks and debt obligations
of companies and governments of any nation.

Foreign Equity Series' investment objective is to achieve long-term capital
growth. The Fund seeks to achieve its objective by investing in stocks and debt
obligations of companies and governments outside the U.S.

Emerging Markets Series' investment objective is to achieve long-term capital
growth. The fund seeks to achieve its objective by investing in securities of
issuers of countries having emerging markets.

Emerging Fixed Income Markets Series' investment objective is to achieve high
total return. The fund seeks to achieve its objective by investing primarily in
a portfolio of debt obligations of companies, governments and government-related
entities in emerging market countries.

The Prospectus, dated May 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the funds.
For a free copy, call 1-800/DIAL BEN.

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

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

- ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;

- ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;

- ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

PAGE

HOW DO THE FUNDS INVEST THEIR ASSETS?
- ---------------------------------------------------------

The following gives more detailed information about the funds' investment
policies and the types of securities that each may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?" in
the Prospectus.

Each fund may invest a portion of its assets, and may invest without limit for
defensive purposes, in commercial paper which, at the date of investment, must
be rated Prime-1 by Moody's or A-1 by S&P or, if not rated, be issued by a
company which at the date of investment has an outstanding debt issue rated Aaa
or Aa by Moody's or AAA or AA by S&P.

REPURCHASE AGREEMENTS. The funds may enter into repurchase agreements.
Repurchase agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under a repurchase agreement, the seller is required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price. Each fund's Investment Manager will monitor the value of
such securities daily to determine that the value equals or exceeds the
repurchase price. Repurchase agreements may involve risks in the event of
default or insolvency of the seller, including possible delays or restrictions
upon a fund's ability to dispose of the underlying securities. A fund will enter
into repurchase agreements only with parties who meet creditworthiness standards
approved by the Company's Board, i.e., banks or broker-dealers which have been
determined by a fund's Investment Manager to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.

DEBT SECURITIES. Each of the funds may invest a portion of its assets in debt
securities, including bonds, notes, debentures, commercial paper, certificates
of deposit, time deposits and bankers' acceptances. Debt securities purchased by
a fund may be rated as low as C by Moody's or S&P or, if unrated, of comparable
quality as determined by the fund's Investment Manager. As an operating policy,
which may be changed by the Board without shareholder approval, each fund, with
the exception of Emerging Fixed Income Markets Series, will limit its investment
in debt securities rated lower than Baa by Moody's or BBB by S&P to 5% of its
total assets. The Board may consider a change in this operating policy if, in
its judgment, economic conditions change such that a different level of
investment in high risk, lower quality debt securities would be consistent with
the interests of the funds and their shareholders. Commercial paper purchased by
the funds will meet the credit quality criteria set forth above.

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

The funds investing in debt securities may accrue and report interest on high
yield bonds structured as zero coupon bonds or pay-in-kind securities as income
even though they receive no corresponding cash payment until a later time,
generally the security's maturity date. In order to qualify for beneficial tax
treatment, a fund must distribute substantially all of its net investment income
to shareholders on an annual basis (see "Additional Information on Distributions
and Taxes"). Thus, a fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or leverage itself by borrowing
cash, so that it may satisfy the distribution requirement.

FUTURES CONTRACTS. The funds may purchase and sell financial futures contracts.
Although some financial futures contracts call for making or taking delivery of
the underlying securities, in most cases these obligations are closed out before
the settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract. Other financial
futures contracts by their terms call for cash settlements.

The funds may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.

At the time a fund purchases a futures contract, an amount of cash or liquid
assets equal to the market value of the futures contract will be deposited in a
segregated account with the fund's custodian. When writing a futures contract, a
fund will maintain with its custodian liquid assets that, when added to the
amounts deposited with a futures commission

PAGE

merchant or broker as margin, are equal to the market value of the instruments
underlying the contract. Alternatively, a fund may "cover" its position by
owning the instruments underlying the contract (or, in the case of an index
futures contract, a portfolio with a volatility substantially similar to that of
the index on which the futures contract is based), or holding a call option
permitting the fund to purchase the same futures contract at a price no higher
than the price of the contract written by the fund (or at a higher price if the
difference is maintained in liquid assets with the fund's custodian).

OPTIONS ON SECURITIES OR INDICES. The funds may write (i.e., sell) covered put
and call options and purchase put and call options on securities or securities
indices that are traded on U.S. and foreign exchanges or in the over-the-counter
markets.

An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.

A fund may write a call or put option only if the option is "covered." A call
option on a security written by a fund is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
on a security is also covered if a fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the fund in cash or liquid assets in a segregated account with its
custodian. A put option on a security written by a fund is "covered" if the fund
maintains cash or liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.

A fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the fund's Investment Manager,
are expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. Nevertheless, where a fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, a fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. A fund will cover put options on stock indices that it
writes by segregating liquid assets equal to the option's exercise price, or in
such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations.

A fund will receive a premium from writing a put or call option, which increases
the fund's gross income in the event the option expires unexercised or is closed
out at a profit. If the value of a security or an index on which a fund has
written a call option falls or remains the same, the fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the portfolio securities being
hedged. If the value of the underlying security or index rises, however, a fund
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the fund's investments. By writing a put
option, a fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase a fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.

A fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, a fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of a fund's investments does not decline as
anticipated, or if the value of the option does not increase, the fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of a fund's security holdings being hedged.

PAGE

A fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the fund anticipates purchasing in the
future. Similarly, a fund may purchase call options on a securities index to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options, a
fund will bear the risk of losing all or a portion of the premium paid if the
value of the underlying security or index does not rise.

There can be no assurance that a liquid market will exist when a fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although a fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, the fund may experience losses in some cases as a result of
such inability.

FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign
currency exchange rate risks, the funds may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The funds may
also conduct their foreign currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market.

A fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. A fund may enter into a forward contract,
for example, when it enters into a contract for the purchase or sale of a
security denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security. In addition, for example, when a fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency, or when a fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that foreign currency for a fixed dollar amount.
This second investment practice is generally referred to as "cross-hedging."
Because in connection with a fund's forward foreign currency transactions an
amount of the fund's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, a fund will always
have cash or liquid assets available sufficient to cover any commitments under
these contracts or to limit any potential risk. The segregated account will be
marked-to-market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission, it may in the future
assert authority to regulate forward contracts. In such event, a fund's ability
to utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a fund
than if it had not engaged in such contracts.

The funds may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a fund's position, the fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies written or purchased by a fund will be traded on U.S. and foreign
exchanges or over-the-counter.

The funds may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of a
fund's portfolio securities or adversely affect the prices of securities that a
fund intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the ability of a fund's Investment Manager to
forecast currency exchange rate movements correctly.

PAGE

Should exchange rates move in an unexpected manner, a fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.

CONVERTIBLE SECURITIES. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.

A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security,
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.

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

The funds may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred stock which
generally features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price. Most
PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after three years the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, each PERCS would convert to one share of common stock. If,
however, the issuer's common stock is trading at a price above that set by the
capital appreciation limit, the holder of the PERCS would receive less than one
full share of common stock. The amount of that fractional share of common stock
received by the PERCS holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price of the issuer's
common stock. PERCS can be called at any time prior to maturity, and hence do
not provide call protection. However if called early the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.

The funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.

PAGE

Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a fund may invest, consistent with its objectives and policies.

An investment in an enhanced convertible security or any other security may
involve additional risks to a fund. The funds may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a fund's ability to dispose of particular securities, when
necessary, to meet a fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for a fund to obtain market quotations based on actual trades
for purposes of valuing the fund's portfolio. Each fund, however, intends to
acquire liquid securities, though there can be no assurances that this will be
achieved.

WHAT ARE THE RISKS OF
INVESTING IN THE FUNDS?
- ---------------------------------------------------------

Each fund has the right to purchase securities in any foreign country, developed
or developing. Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments.

There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S., are likely to be higher. In
many foreign countries there is less government supervision and regulation of
stock exchanges, brokers and listed companies than in the U.S.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.

Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) the absence of
developed legal structures governing private or foreign investment or allowing
for judicial redress for injury to private property; (v) the absence, until
recently in certain Eastern European countries, of a capital market structure or
market-oriented economy; and (vi) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political, economic or social events in such countries.

In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such

PAGE

respects as growth of gross domestic product, rate of inflation, currency
depreciation, capital reinvestment, resources self-sufficiency and balance of
payments position.

Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, a fund could lose a substantial portion of any investments
it has made in the affected countries.

Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals. Although in most Eastern European countries the local
currencies have been allowed to fluctuate according to their market value,
various foreign exchange restrictions remain in effect, limiting the ability of
foreign investors to repatriate their profits. The conversion rates for certain
Eastern European currencies may be artificial to the actual market values of the
currencies and may be adverse to fund shareholders. Further, accounting
standards which exist in Eastern European countries may differ from U.S.
standards.

Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of a fund's assets
invested in such country. To the extent such governmental or quasi-governmental
authorities do not satisfy the requirements of the 1940 Act to act as foreign
custodians of the fund's cash and securities, the fund's investment in such
countries may be limited or may be required to be effected through
intermediaries. The risk of loss through governmental confiscation may be
increased in such countries.

Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on a fund's ability
to exchange local currencies for U.S. dollars; (g) the risk that the government
of Russia or other executive or legislative bodies may decide not to continue to
support the economic reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political and/or economic
policies to the detriment of investors, including non-market-oriented policies
such as the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many Russian
securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including large
amounts of inter-company debt which may create a payments crisis on a national
scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or, in
the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by a fund due to the
underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in certain
industries, thereby limiting the number of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors and the
Russian government, instead of

PAGE

bringing such disputes before an internationally-accepted third-country
arbitrator; and (p) the difficulty in obtaining information about the financial
condition of Russian issuers, in light of the different disclosure and
accounting standards applicable to Russian companies.

There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for a fund to lose its registration
through fraud, negligence or even mere oversight. While each fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for a fund to enforce any rights it may have against
the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent a fund from
investing in the securities of certain Russian companies deemed suitable by its
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a fund if a potential purchaser is deemed
unsuitable, which may expose the fund to potential loss on the investment.

Each fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) will be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent a fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political, economic
or social instability, or diplomatic developments which could affect investments
in securities of issuers in foreign nations.

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

Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on that fund. Through
the flexible policy of the funds, the Investment Managers endeavor to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where from time to time they place the investments of the
funds.

The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another.

PAGE

Some of these decisions may later prove profitable and others may not. No
assurance can be given that profits, if any, will exceed losses.

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

A fund's ability to reduce or eliminate its futures and related options
positions will depend upon the liquidity of the secondary markets for such
futures and options. The funds intend to purchase or sell futures and related
options only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use of stock index
futures and related options for hedging may involve risks because of imperfect
correlations between movements in the prices of the futures or related options
and movements in the prices of the securities being hedged. Successful use of
futures and related options by a fund for hedging purposes also depends upon the
ability of that fund's Investment Manager to predict correctly movements in the
direction of the market, as to which no assurance can be given.

INVESTMENT RESTRICTIONS
- ---------------------------------------------------------

Each fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the fund or (ii) 67%
or more of the shares of the fund present at a shareholder meeting if more than
50% of the outstanding shares of the fund are represented at the meeting in
person or by proxy, whichever is less.

Each fund MAY NOT:

1. Invest in real estate or mortgages on real estate (although a fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in other open-end investment companies except as
permitted by the 1940 Act; invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral exploration or
development programs; or purchase or sell commodity contracts (except
futures contracts as described in the prospectus).

2. Purchase or retain securities of any company in which directors or officers
of the Company or a fund's Investment Manager, individually owning more than
1/2 of 1% of the securities of such company, in the aggregate own more than
5% of the securities of such company.

3. Purchase any security (other than obligations of the U.S. government, its
agencies or instrumentalities) if, as a result, as to 75% of the fund's
total assets (i) more than 5% of the fund's total assets would then be
invested in securities of any single issuer, or (ii) the fund would then own
more than 10% of the voting securities of any single issuer; provided,
however, that this restriction does not apply to the Emerging Fixed Income
Markets Series.

4. Act as an underwriter; issue senior securities except as set forth in
investment restriction 6 below; or purchase on margin or sell short (but a
fund may make margin payments in connection with options on securities or
securities indices and foreign currencies; futures contracts and related
options; and forward contracts and related options).

5. Loan money apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although a fund may buy from a bank or broker-dealer U.S. government
obligations with a simultaneous agreement by the seller to repurchase them
within no more than seven days at the original purchase price plus accrued
interest and loan its portfolio securities. Emerging Fixed Income Markets
Series may invest in debt instruments of all types consistent with its
investment objectives and policies.

6. Borrow money, except that a fund may borrow money from banks in an amount
not exceeding

PAGE

33 1/3% of the value of its total assets (including the amount borrowed).

7. Invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years;
provided that this restriction does not apply to Emerging Fixed Income
Markets Series.

8. Invest more than 5% of its total assets in warrants, whether or not listed
on the NYSE or the American Stock Exchange, including no more than 2% of its
total assets which may be invested in warrants that are not listed on those
exchanges; provided that this restriction does not apply to Emerging Fixed
Income Markets Series. Warrants acquired by a fund in units or attached to
securities are not included in this restriction.

9. Invest more than 25% of its total assets in a single industry.(1)

10. Participate on a joint or a joint and several basis in any trading account
in securities; (See "What Are the Risks of Investing in the Funds?" and "How
Do the Funds Buy Securities for Their Portfolios?" above as to transactions
in the same securities for a fund and/or other mutual funds with the same or
affiliated advisers.)

(1) The SEC considers each foreign government to be a separate industry.

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

If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.

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

If a fund receives from an issuer of securities held by the fund subscription
rights to purchase securities of that issuer, and if the fund exercises such
subscription rights at a time when the fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth in Investment
Restrictions 3 or 9 above, it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after announcement of
such rights, the fund has sold at least as many securities of the same class and
value as it would receive on exercise of such rights.

OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------

The Board has the responsibility for the overall management of the Company,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Company who are responsible for
administering the funds' day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Company under the 1940 Act are indicated by an asterisk (*).

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* NICHOLAS F. BRADY Director Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC, Darby
102 East Dover Street Overseas Investments, Ltd. and Darby Emerging Markets
Easton, Maryland 21601 Investments LDC (investment firms) (1994-present);
Age 68 Chairman and Director, Templeton Central and Eastern
European Investment Company; Director, Templeton Global
Strategy Funds, Amerada Hess Corporation, Christiana
Companies, and the H.J. Heinz Company; director or
trustee, as the case may be, of 21 of the investment
companies in the Franklin Templeton Group of Funds; and
formerly, Secretary of the United States Department of
the Treasury (1988-1993) and Chairman of the Board,
Dillon, Read & Co., Inc. (investment banking) prior to
1988.
- ------------------------------------------------------------------------------------------------------------------
FRANK J. CROTHERS Director Chairman, Atlantic Equipment & Power Ltd.; Vice
P.O. Box N-3238 Chairman, Caribbean Utilities Co., Ltd.; President,
Nassau, Bahamas Provo Power Corporation; Director of various other
Age 53 business and non-profit organizations; and director or
trustee, as the case may be, of 5 of the investment
companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at director or trustee, as the case may be, of 52 of the
Morris County investment companies in the Franklin Templeton Group of
P.O. Box 1945 Funds; and formerly, Director, General Host Corporation
Morristown, New Jersey (nursery and craft centers).
07962-1945
Age 65
- ------------------------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH Director President, Galbraith Properties, Inc. (personal
360 Central Avenue investment company); Director, Gulf West Banks, Inc.
Suite 1300 (bank holding company) (1995-present); director or
St. Petersburg, Florida trustee, as the case may be, of 20 of the investment
33701 companies in the Franklin Templeton Group of Funds; and
Age 76 formerly, Director, Mercantile Bank (1991-1995), Vice
Chairman, Templeton, Galbraith & Hansberger Ltd.
(1986-1992) and Chairman, Templeton Funds Management,
Inc. (1974-1991).
- ------------------------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. Director Consultant for the Triangle Consulting Group; Exec-
150 Second Avenue N. utive-in-Residence of Eckerd College (1991-present);
St. Petersburg, Florida director or trustee, as the case may be, of 22 of the
33701 investment companies in the Franklin Templeton Group of
Age 75 Funds; and formerly, Director, Checkers Drive-In
Restaurant, Inc.; Chairman of the Board and Chief
Executive Officer, Florida Progress Corporation
(1982-1990) and Director of various of its subsidiaries.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EDITH E. HOLIDAY Director Director (1993-present), Amerada Hess Corporation and
3239 38th Street, N.W. Hercules Incorporated; Director, Beverly Enterprises,
Washington, DC 20016 Inc. (1995-present) and H.J. Heinz Company
Age 46 (1994-present); director or trustee, as the case may be,
of 25 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Chairman
(1995-1997) and Trustee (1993-1997) of National Child
Research Center; Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department
(1989-1990) and Counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison --
United States Treasury Department (1988-1989).
- ------------------------------------------------------------------------------------------------------------------
* CHARLES B. JOHNSON Director, President, Chief Executive Officer and Director,
777 Mariners Island Blvd. Chairman and Vice Franklin Resources, Inc.; Chairman of the Board and
San Mateo, California 94404 President Director, Franklin Advisers, Inc., Franklin Advisory
Age 65 Services, Inc., Franklin Investment Advisory Services,
Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and
Franklin Templeton Services, Inc.; officer and/or
director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 51
of the investment companies in the Franklin Templeton
Group of Funds; and, Director, General Host Corporation
(nursery and craft centers).
- ------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER Director Director or Trustee of various civic associations;
2201 Kentmere Parkway director or trustee, as the case may be, of 21 of the
Wilmington, Delaware 19806 investment companies in the Franklin Templeton Group of
Age 68 Funds; and formerly, Economic Analyst, U.S. government.
- ------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Director Chairman, White River Corporation (financial ser-
8212 Burning Tree Road vices); Director, Fund American Enterprises Holdings,
Bethesda, Maryland 20817 Inc., MCI Communications Corporation, CCC Information
Age 69 Services Group, Inc. (information services), MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee,
as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; and formerly,
Chairman, Hambrecht and Quist Group, Director, H & Q
Healthcare Investors, and Lockheed Martin Corporation
and President, National Association of Securities
Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRED R. MILLSAPS Director Manager of personal investments (1978-present); Director
2665 N.E. 37th Drive of various business and nonprofit organizations;
Fort Lauderdale, Florida director or trustee, as the case may be, of 22 of the
33308 investment companies in the Franklin Templeton Group of
Age 69 Funds; and formerly, Chairman and Chief Executive
Officer of Landmark Banking Corporation (1969-1978),
Financial Vice President of Florida Power and Light
(1965-1969) and Vice President of the Federal Reserve
Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------
CONSTANTINE DEAN Director Physician, Lyford Cay Hospital (1987-present); Director
TSERETOPOULOS of various nonprofit organizations; director or trustee,
Lyford Cay Hospital as the case may be, of 5 of the investment companies in
P.O. Box N-7776 the Franklin Templeton Group of Funds; and formerly,
Nassau, Bahamas Cardiology Fellow, University of Maryland (1985-1987)
Age 44 and Internal Medicine Intern, Greater Baltimore Medical
Center (1982-1985).
- ------------------------------------------------------------------------------------------------------------------
DONALD F. REED President Executive Vice President, Templeton Worldwide, Inc.;
1 Adelaide Street East, President, Templeton Investment Counsel, Inc.; President
Suite 2101 and Chief Executive Officer, Templeton Management
Toronto, Ontario Limited; Co-founder and Director of International
Canada M5C 3B8 Society of Financial Analysts; Chairman of the Canadian
Age 53 Council of Financial Analysts; and formerly, President
and Director of Reed Monahan Nicholishen Investment
Counsel (1982-1989).
- ------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director,
San Mateo, California 94404 Franklin Templeton Distributors, Inc. and Franklin
Age 53 Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 54 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc. and Franklin Templeton Distributors,
San Mateo, California 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Age 57 Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory
Services, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 54 of the investment
companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBORAH R. GATZEK Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin
San Mateo, California 94404 Templeton Services, Inc. and Franklin Templeton
Age 49 Distributors, Inc.; Vice President, Franklin Advisers,
Inc. and Franklin Advisory Services, Inc.; Vice Pres-
ident, Chief Legal Officer and Chief Operating Officer,
Franklin Investment Advisory Services, Inc.; and officer
of 54 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON Vice President Senior Vice President and Director, Franklin Resources,
500 East Broward Blvd. Inc.; Senior Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; President and Director, Templeton
33394-3091 Worldwide, Inc.; President, Chief Executive Officer,
Age 41 Chief Investment Officer and Director, Franklin
Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice
President, Franklin Advisers, Inc.; officer and/or
director of some of the subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee,
as the case may be, of 35 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO Vice President President and Chief Investment Officer, Templeton Global
Lyford Cay Advisors Limited; Executive Vice President and Director,
Nassau, Bahamas Templeton Worldwide, Inc.; officer of 21 of the
Age 38 investment companies in the Franklin Templeton Group of
Funds; and formerly, Investment Administrator with
RoyWest Trust Corporation (Bahamas) Limited (1984-1985).
- ------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, California 94404 Director, Templeton Worldwide, Inc.; Executive Vice
Age 37 President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Senior Vice
President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer
and Chief Financial Officer, Franklin Investment
Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of 54 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------
J. MARK MOBIUS Vice President Portfolio Manager of various Templeton advisory
Two Exchange Square affiliates; Managing Director of Templeton Asset
Suite 908 Management Ltd.; officer of 8 of the investment
Hong Kong companies in the Franklin Templeton Group of Funds; and
Age 61 formerly, President of International Investment Trust
Company Limited (investment manager of Taiwan R.O.C.
Fund) (1986-1987) and Director, Vickers da Costa, Hong
Kong (1983-1986).
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

PAGE

<TABLE>
<CAPTION>
Positions and Offices
Name, Address and Age with the Company Principal Occupation During the Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOHN R. KAY Vice President Vice President and Treasurer, Templeton Worldwide, Inc.;
500 East Broward Blvd. Assistant Vice President, Franklin Templeton
Fort Lauderdale, Florida Distributors, Inc.; officer of 25 of the investment
33394-3091 companies in the Franklin Templeton Group of Funds; and
Age 57 formerly, Vice President and Controller, Keystone Group,
Inc.
- ------------------------------------------------------------------------------------------------------------------
THOMAS LATTA Vice President Vice President, Templeton Global Bond Managers, a
500 East Broward Blvd. division of Templeton Investment Counsel, Inc.; and
Fort Lauderdale, Florida formerly, Portfolio Manager at Forester & Hairston
33394-3091 (1988-1990) and Investment advisor at Merrill Lynch
Age 37 Capital Markets (1981-1988).
- ------------------------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK Vice President- General Counsel, Secretary and a Senior Vice President,
500 East Broward Blvd. Compliance Templeton Investment Counsel, Inc.; Senior Vice
Fort Lauderdale, Florida President, Templeton Global Investors, Inc.; officer of
33394-3091 21 of the investment companies in the Franklin Templeton
Age 43 Group of Funds; and formerly, Vice President and
Associate General Counsel, Kidder Peabody & Co. Inc.
(1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General
Counsel, Shearson Lehman Hutton Inc. (1988), Vice
President and Assistant General Counsel, E.F. Hutton &
Co. Inc. (1986-1988), and Special Counsel of the
Division of Investment Management of the U.S. Securities
and Exchange Commission (1984-1986).
- ------------------------------------------------------------------------------------------------------------------
JAMES R. BAIO Treasurer Certified Public Accountant; Treasurer, Franklin Mutual
500 East Broward Blvd. Advisers, Inc.; Senior Vice President, Templeton
Fort Lauderdale, Florida Worldwide, Inc., Templeton Global Investors, Inc. and
33394-3091 Templeton Funds Trust Company; officer of 22 of the
Age 44 investment companies in the Franklin Templeton Group of
Funds; and formerly, Senior Tax Manager for Ernst &
Young (certified public accountants) (1977-1989).
- ------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN Secretary Senior Vice President, Templeton Worldwide, Inc.; Senior
500 East Broward Blvd. Vice President, Templeton Global Investors, Inc.;
Fort Lauderdale, Florida officer of 21 of the investment companies in the
33394-3091 Franklin Templeton Group of Funds; and formerly, Deputy
Age 50 Director of the Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman,
Counselor to the Chairman, Special Counsel and Attorney
Fellow, U.S. Securities and Exchange Commission
(1986-1995), Attorney, Rogers & Wells, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
</TABLE>

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

* Nicholas F. Brady and Charles B. Johnson are "interested persons" as defined
by the Investment Company under the 1940 Act. The 1940 Act limits the percentage
of interested persons that can comprise a fund's board of directors. Charles B.
Johnson is an interested person due to his ownership interest in Resources. Mr.
Brady's status as an interested person results from his business affiliations
with Resources and Templeton Global Advisors Limited. Mr. Brady and Resources
are both limited partners of Darby Overseas Partners, L.P. ("Darby Overseas").
Mr. Brady is Chairman and shareholder of Darby Emerging Markets Investments LDC,
which is the corporate general partner of Darby Overseas. In addition, Darby
Overseas and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P. The remaining Board members of the Company are not
interested persons.

The table above shows the officers and Board members who are affiliated with
Distributors and the Investment Managers. Nonaffiliated members of the Board and
Mr. Brady are currently paid an annual retainer and/or fees for attendance at
Board

PAGE

and committee meetings. Currently, the Company pays the nonaffiliated Board
members and Mr. Brady an annual retainer of $10,000, a fee of $800 per Board
meeting, and its portion of a flat fee of $2,000 for each audit committee
meeting and/or nominating and compensation committee meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members and Mr. Brady by the Company
and by other funds in the Franklin Templeton Group of Funds.

<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE COMPANY* GROUP OF FUNDS** WHICH EACH SERVES***
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton...................... $13,200 $344,642 50
Nicholas F. Brady..................... 13,200 119,675 21
Frank J. Crothers..................... 15,280 35,300 5
S. Joseph Fortunato................... 13,200 361,562 52
John Wm. Galbraith.................... 13,200 117,675 20
Andrew H. Hines, Jr. ................. 13,200 144,175 22
Edith E. Holiday...................... 13,200 72,875 25
Betty P. Krahmer...................... 13,200 119,675 21
Gordon S. Macklin..................... 13,200 337,292 50
Fred R. Millsaps...................... 14,056 144,175 22
Constantine D. Tseretopoulos.......... 14,240 33,775 5
</TABLE>

* For the fiscal year ended December 31, 1997.
** For the calendar year ended December 31, 1997.
*** We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S. based
funds or series.

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

As of April 17, 1998, the officers and Board members did not own of record or
beneficially any shares of the funds. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.

INVESTMENT MANAGEMENT AND
OTHER SERVICES
- ---------------------------------------------------------

INVESTMENT MANAGER AND SERVICES PROVIDED. The Investment Manager of Growth
Series and Foreign Equity Series is Templeton Investment Counsel, Inc.,
("Investment Counsel"). The Investment Manager of Emerging Markets Series is
Templeton Asset Management Ltd. -- Hong Kong branch ("Asset Management Hong
Kong"). Asset Management Hong Kong renders its services to Emerging Markets
Series from outside the U.S. The Investment Manager of Emerging Fixed Income
Markets Series is Investment Counsel, through its Global Bond Managers division
(collectively, the "Investment Managers"). The Investment Managers provide
investment research and portfolio management services, including the selection
of securities for the respective funds to buy, hold or sell and the selection of
brokers through whom the funds' portfolio transactions are executed. The
Investment Managers' activities are subject to the review and supervision of the
Board to whom the Investment Managers render periodic reports of the respective
fund's investment activities. The Investment Managers and their officers,
directors and employees are covered by fidelity insurance for the protection of
the funds.

The Investment Managers and their affiliates act as investment managers to
numerous other investment companies and accounts. An Investment Manager may give
advice and take action with respect to any of the other funds it manages, or for

PAGE

its own account, that may differ from action taken by the Investment Manager on
behalf of a fund. Similarly, with respect to the funds, the Investment Managers
are not obligated to recommend, buy or sell, or to refrain from recommending,
buying or selling any security that an Investment Manager and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other funds. The Investment Managers are not obligated to
refrain from investing in securities held by the funds or other funds they
manage. Of course, any transactions for the accounts of the Investment Managers
and other access persons will be made in compliance with the funds' Code of
Ethics. Please see "Miscellaneous Information -- Summary of Code of Ethics."

MANAGEMENT FEES. Under its management agreement, each fund pays its Investment
Manager a management fee at the end of each calendar month. Growth Series and
Foreign Equity Series each pay Investment Counsel a monthly fee equal on an
annual basis to 0.70% of its average daily net assets during the year. For the
fiscal years ended December 31, 1997, 1996 and 1995, Investment Counsel received
from Growth Series fees of $1,946,728, $1,656,913, and $1,469,015, respectively.
For the fiscal years ended December 31, 1997, 1996 and 1995, Investment Counsel
received from Foreign Equity Series fees of $23,912,568, $16,525,094 and
$9,916,869, respectively. Emerging Markets Series pays Asset Management Hong
Kong a monthly fee equal on an annual basis to 1.25% of its average daily net
assets during the year. For the fiscal years ended December 31, 1997, 1996 and
1995, Asset Management Hong Kong received from Emerging Markets Series fees of
$25,766,850, $15,676,692, and $8,488,442, respectively.

Emerging Fixed Income Markets Series pays Investment Counsel a monthly fee equal
on an annual basis to 0.70% of its average daily net assets during the year. For
the fiscal period ended December 31, 1997, Emerging Fixed Income Markets Series'
management fees, before any advance waiver, totaled $8,484. Under an agreement
by Investment Counsel to waive its fees, Emerging Fixed Income Markets Series
paid no management fees.

MANAGEMENT AGREEMENTS. The management agreements between the Company, on behalf
of each fund, and the Investment Managers are in effect until April 30, 1999.
Each management agreement may continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the relevant fund's
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to the management agreement or interested
persons of any such party (other than as members of the Board), cast in person
at a meeting called for that purpose. A management agreement may be terminated
without penalty at any time by the Board or by a vote of the holders of a
majority of the respective fund's outstanding voting securities on 60 days'
written notice to Investment Manager, or by the Investment Manager on 60 days'
written notice to the fund, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.

ADMINISTRATIVE SERVICES. Since October 1, 1996, FT Services has provided certain
administrative services and facilities for the funds. Prior to that date,
Templeton Global Investors, Inc. provided the same services to the funds. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.

Under its administration agreement, the Company pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the funds' average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is allocated between the funds according to their respective average
daily net assets. For the fiscal years ended December 31, 1997, 1996 and 1995,
Growth Series paid administration fees totaling $236,356, $211,998 and $208,881,
respectively. For the fiscal years ended December 31, 1997, 1996 and 1995,
Foreign Equity Series paid administration fees totaling $2,903,341, $2,117,449
and $1,412,755, respectively. For the fiscal years ended December 31, 1997, 1996
and 1995, Emerging Markets Series paid administration fees totaling $1,751,904,
$1,127,833 and $681,225, respectively.

For the fiscal period ended December 31, 1997, Emerging Fixed Income Markets
Series' administration fees, before any advance waiver, totaled $1,030. Under an
agreement by FT Services to waive its fees, Emerging Fixed Income Markets Series
paid no administration fees.

SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'

PAGE

transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The funds may also reimburse Investor
Services for certain out-of-pocket expenses.

CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of each fund's assets. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.

AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017,
are the funds' independent auditors. During the fiscal year ended December 31,
1997, their auditing services consisted of rendering an opinion on the financial
statements of each fund which are included in the respective fund's Annual
Report to Shareholders for the fiscal year ended December 31, 1997, and review
of the funds' filings with the SEC.

HOW DO THE FUNDS BUY SECURITIES
FOR THEIR PORTFOLIOS?
- ---------------------------------------------------------

The Investment Managers selects brokers and dealers to execute the funds'
portfolio transactions in accordance with criteria set forth in the management
agreements and any directions that the Board may give.

When placing a portfolio transaction, the Investment Managers seeks to obtain
prompt execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by a fund
is negotiated between the Investment Manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. The
Investment Managers will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of an Investment 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.

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

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

Because Distributors is a member of the NASD, it may sometimes receive certain
fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of a 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 payment
to that fund's Investment Manager will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.

PAGE

If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by an Investment Manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the Investment Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the security
so far as a fund is concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the fund.

Sale or purchase of securities, without payment of brokerage commissions, fees
(except customary transfer fees) or other remuneration in connection therewith,
may be effected between any of these funds, or between funds and private
clients, under procedures adopted by the Company's Board pursuant to Rule 17a-7
under the 1940 Act.

During the fiscal years ended December 31, 1997, 1996 and 1995, Growth Series
paid brokerage commissions totaling $391,067, $173,658 and $302,096,
respectively. During the fiscal years ended December 31, 1997, 1996 and 1995,
Foreign Equity Series paid brokerage commissions totaling $2,666,430, $2,138,850
and $2,779,325, respectively. During the fiscal years ended December 31, 1997,
1996 and 1995, Emerging Markets Series paid brokerage commissions totaling
$6,813,142, $3,832,003 and $1,949,885, respectively. During the fiscal period
ended December 31, 1997, Emerging Fixed Income Markets Series paid no brokerage
commissions.

As of December 31, 1997, no fund owned securities of its regular broker-dealers.

HOW DO I BUY, SELL AND EXCHANGE SHARES?
- ---------------------------------------------------------

ADDITIONAL INFORMATION ON BUYING SHARES

The funds continuously offer their shares through Securities Dealers who have an
agreement with Distributors.

Banks and financial institutions that sell shares of the funds may be required
by state law to register as Securities Dealers.

When you buy shares, if you submit a check or a draft that is returned unpaid to
the funds we may impose a $10 charge against your account for each returned
item.

Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.

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 the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.

ADDITIONAL INFORMATION ON EXCHANGING SHARES

If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.

If a substantial number of shareholders should, within a short period, sell
their shares of a fund under the exchange privilege, that fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the funds' general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with a fund's particular investment
objective exist immediately. This money will then be withdrawn from the
short-term, money

PAGE

market instruments and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.

The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.

ADDITIONAL INFORMATION ON SELLING SHARES

SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.

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

A fund may discontinue a systematic withdrawal plan by notifying you in writing
and will automatically discontinue a systematic withdrawal plan if all shares in
your account are withdrawn or if the fund receives notification of the
shareholder's death or incapacity.

THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the funds in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.

REDEMPTIONS IN KIND. The funds have committed themselves 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 funds' net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case of
redemption requests in excess of these amounts, the Board reserves the right to
make payments in whole or in part in securities or other assets of the funds, in
case of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the funds. In these circumstances,
the securities distributed would be valued at the price used to compute the
pertinent fund's net assets and you may incur brokerage fees in converting the
securities to cash. The funds do not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.

SUBSTANTIAL REDEMPTIONS. A number of fund shareholders are institutions with
significant shareholdings that may be redeemed at any time. If a substantial
number or amount of redemptions should occur within a relatively short period of
time, a fund may have to sell portfolio securities it would otherwise hold and
incur the additional transactions costs. The sale of portfolio securities may
result in the recognition of capital gains, which will be distributed annually
and generally will be taxable to shareholders as ordinary income or capital
gains. Shareholders are notified annually regarding the federal tax status of
distributions they receive (see "Taxes").

GENERAL INFORMATION

If dividend checks are returned to a fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.

Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. A fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.

In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.

All checks, drafts, wires and other payment mediums used to buy or sell shares
of the funds must be denominated in U.S. dollars. We may, in our sole

PAGE

discretion, either (a) reject any order to buy or sell shares denominated in any
other currency or (b) honor the transaction or make adjustments to your account
for the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.

HOW ARE FUND SHARES VALUED?

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

We calculate the Net Asset Value per share as of the close of the NYSE, normally
4:00 p.m. Eastern time, each day that the NYSE is open for trading. As of the
date of this SAI, the Company is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

For the purpose of determining the aggregate net assets of each fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities that are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by a fund's Investment
Manager.

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

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

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which a fund's Net Asset Value is not calculated. Thus, the calculation of a
fund's Net Asset Value does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.

Generally, trading in U.S. corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of the funds' shares is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the close of the NYSE that will not be reflected
in the computation of the funds' Net Asset Value. If events materially affecting
the values of these securities occur during this period, the securities will be
valued at their fair value as determined in good faith by the Board.

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

PAGE

ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
- ---------------------------------------------------------
DISTRIBUTIONS

DISTRIBUTIONS OF NET INVESTMENT INCOME. A fund receives income generally in the
form of dividends, interest, original issue, market and acquisition discount,
and other income derived from its investments. This income, less expenses
incurred in the operation of the fund, constitutes its net investment income
from which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.

DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by a fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.

Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:

"28% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.

"20% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
at a maximum rate of 20% for individual investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.

The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.

A fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.

CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. A fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.

EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
instruments are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce the fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce the fund's ordinary income
distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.

FOREIGN TAX CREDITS INCLUDED IN DISTRIBUTIONS. A fund may be subject to foreign
withholding taxes on income from certain of its foreign securities. If more than
50% of the total assets of the fund at the end of its fiscal year are invested
in securities of foreign corporations, the fund may elect to pass-through to you
your pro rata share of foreign taxes paid by the

PAGE

fund. If this election is made, you will be (i) required to include in your
gross income your pro rata share of foreign source income (including any foreign
taxes paid by the fund), and (ii) entitled to either deduct your share of such
foreign taxes in computing your taxable income or to claim a credit for such
taxes against your U.S. income tax, subject to certain limitations under the
Code. If the fund elects to pass through to you the foreign income taxes that it
has paid, you will be informed at the end of the calendar year of the amount of
foreign taxes paid and foreign source income that must be included on your
federal income tax return. If the fund invests 50% or less of its total assets
in securities of foreign corporations, it will not be entitled to pass-through
to you your pro-rata share of the foreign taxes paid by the fund. In this case,
these taxes will be taken as a deduction by the fund, and the income reported to
you will be the net amount after these deductions.

The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. You should note that this simplified procedure will not be available
until calendar year 1998.

INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. A fund will inform you of the
amount and character of your distributions at the time they are paid, and will
advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.

TAXES

ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The funds have elected
to be treated as regulated investment companies under Subchapter M of the Code,
have qualified as such for their most recent fiscal year, and intend to so
qualify during the current fiscal year. The Board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to you. In such case, a fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's available earnings and profits.

In order to qualify as a regulated investment company for tax purposes, a fund
must meet certain specific requirements, including:

- The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other than
cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the fund's total assets;

- - The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and

- - The fund must distribute to its shareholders at least 90% of its net
investment company taxable income and net tax-exempt income for each of its
fiscal years.

EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute at
least 98% of its taxable ordinary income earned during the calendar year and 98%
of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The funds
intend to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but do not guarantee and can give no
assurances that their distributions will be sufficient to eliminate all such
taxes.

REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be a capital gain or loss,

PAGE

and will be long-term for federal income tax purposes if you have held your
shares for more than one year at the time of redemption or exchange. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by a fund on those shares. The holding periods
and categories of capital gain that apply under the 1997 Act are described above
in the "Distributions" section.

All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.

U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by a
fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
a fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.

DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that only a small percentage of the dividends paid by Growth Series
for the most recent calendar year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to pay
on these dividends. The dividends-received deduction will be available only with
respect to dividends designated by a fund as eligible for such treatment.
Dividends so designated by a fund must be attributable to dividends earned by
the fund from U.S. corporations that were not debt financed.

Under the 1997 Act, the amount that a fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the fund were debt financed or held by the
fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your fund
shares are debt financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.

INVESTMENT IN COMPLEX SECURITIES. A fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. 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. Certain other
options, futures and forward contracts entered into by a fund are generally
governed by Section 1256 of the Code. These "Section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.

Absent a tax election to the contrary, each such Section 1256 position held by a
fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. Even though marked-to-market,
gains and losses realized on foreign currency and foreign security investments
will generally be treated as ordinary income. The effect of Section 1256 mark-

PAGE

to-market rules may be to accelerate income or to convert what otherwise would
have been long-term capital gains into short-term capital gains or short-term
capital losses into long-term capital losses within a fund. The acceleration of
income on Section 1256 positions may require a fund to accrue taxable income
without the corresponding receipt of cash. In order to generate cash to satisfy
the distribution requirements of the Code, a fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of fund shares. In these ways,
any or all of these rules may affect the amount, character and timing of income
distributed to you by a fund.

When a 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, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. A fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one Section 1256 position and
at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.

The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.

Distributions paid to you by a fund of ordinary income and short-term capital
gains arising from the fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. A
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.

INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The funds are
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:

Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, and forward contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a fund's
net investment company taxable income, which, in turn, will affect the amount of
income to be distributed to you by the fund.

If a fund's Section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, the fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your fund shares will be treated as capital gain to you.

INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. A fund may invest
in shares of foreign corporations which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.

If a fund receives an "excess distribution" with respect to PFIC stock, the fund
itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during

PAGE

which the fund held the PFIC shares. The fund itself will be subject to tax on
the portion, if any, of an excess distribution that is so allocated to prior
fund taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the fund.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain. This may have
the effect of increasing fund distributions to you that are treated as ordinary
dividends rather than long-term capital gain dividends.

A fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from PFIC during such period. If this election were made, the special
rules, discussed above, relating to the taxation of excess distributions, would
not apply. In addition, the 1997 Act provides for another election that would
involve marking-to-market a fund's PFIC shares at the end of each taxable year
(and on certain other dates as prescribed in the Code), with the result that
unrealized gains would be treated as though they were realized. The fund would
also be allowed an ordinary deduction for the excess, if any, of the adjusted
basis of its investment in the PFIC stock over its fair market value at the end
of the taxable year. This deduction would be limited to the amount of any net
mark-to-market gains previously included with respect to that particular PFIC
security. If a fund were to make this second PFIC election, tax at the fund
level under the PFIC rules would generally be eliminated.

The application of the PFIC rules may affect, among other things, the amount of
tax payable by a fund (if any), the amounts distributable to you by a fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.

You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a fund acquires shares in that corporation. While a fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.

CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of a 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 the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.

STRIPPED PREFERRED STOCK. Occasionally, a fund may purchase "stripped preferred
stock" that is subject to special tax treatment. Stripped preferred stock is
defined as certain preferred stock issues where ownership of the stock has been
separated from the right to receive dividends that have not yet become payable.
The stock must have a fixed redemption price, must not participate substantially
in the growth of the issuer, and must be limited and preferred as to dividends.
The difference between the redemption price and purchase price is taken into
fund income over the term of the instrument as if it were original issue
discount. The amount that must be included in each period generally depends on
the original yield to maturity, adjusted for any prepayments of principal.

PAGE

INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. A
fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. A fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by a fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, a fund may elect to accrue
market discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If a fund does not elect to accrue market
discount into income currently, gain recognized on sale will be recharacterized
as ordinary income instead of capital gain to the extent of any accumulated
market discount on the obligation.

DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of fund shares.

THE FUNDS' UNDERWRITER
- ---------------------------------------------------------

Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each fund's shares. The
underwriting agreement with respect to a fund will continue in effect for
successive annual periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
that fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the underwriting agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 60 days' written notice.

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

HOW DO THE FUNDS MEASURE PERFORMANCE?
- ---------------------------------------------------------

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
funds to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.

TOTAL RETURN

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

PAGE

The average annual total return of Growth Series for the one-year period ended
December 31, 1997 and for the period from commencement of operations on May 3,
1993 through December 31, 1997 was 12.3%, and 15.0%, respectively. The average
annual total return of Foreign Equity Series for the one- and five-year periods
ended December 31, 1997 and for the period from commencement of operations on
October 18, 1990 through December 31, 1997 was 11.4%, 15.5% and 12.9%,
respectively. The average annual total return of Emerging Markets Series for the
one-year period ended December 31, 1997 and for the period from commencement of
operations on May 3, 1993 through December 31, 1997 was -11.3%, and 4.5%,
respectively. The average annual total return of Emerging Fixed Income Markets
Series for the period from commencement of operations on June 4, 1997 through
December 31, 1997 was 12.4%.

These figures were calculated according to the SEC formula:
P (1+T)(n) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period

CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on each fund's actual return for a specified period rather than on the average
return over the periods indicated above. The cumulative total return of Growth
Series for the one-year period ended December 31, 1997 and for the period from
commencement of operations on May 3, 1993 through December 31, 1997 was 12.3%,
and 91.7%, respectively. The cumulative total return of Foreign Equity Series
for the one- and five-year periods ended December 31, 1997 and for the period
from commencement of operations on October 18, 1990 through December 31, 1997
was 11.4%, 105.7% and 139.4%, respectively. The cumulative total return of
Emerging Markets Series for the one-year period ended December 31, 1997 and for
the period from commencement of operations on May 3, 1993 through December 31,
1997 was -11.3%, and 22.6%, respectively. The cumulative total return of
Emerging Fixed Income Markets Series for the period from commencement of
operations on June 4, 1997 through December 31, 1997 was 12.4%.

VOLATILITY

Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a fund's Net Asset
Value or performance to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.

OTHER PERFORMANCE QUOTATIONS

The funds may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.

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

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

COMPARISONS

To help you better evaluate how an investment in a fund may satisfy your
investment goal, advertisements and other materials about the funds may discuss
certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other invest-

PAGE

ments, indices, and averages. These comparisons may include, but are not limited
to, the following examples:

(i) unmanaged indices so that you may compare a fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in a fund. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.

From time to time, the funds and the Investment Managers may also refer to the
following information:

(a) an Investment Manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic Insight
or a similar statistical organization.

(b) The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a
similar financial organization.

(c) The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.

(d) The geographic and industry distribution of each fund's portfolio and the
fund's top ten holdings.

(e) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.

(f) To assist investors in understanding the different returns and risk
characteristics of various investments, the funds may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE -- Index).

(g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.

(h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.

(i) Allegorical stories illustrating the importance of persistent long-term
investing.

(j) The funds' portfolio turnover rates and their rankings relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.

(k) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type of
stocks or other securities.

(l) The number of shareholders in the funds or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets
under management.

(m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.

(n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing, including
the following:

- "Never follow the crowd. Superior performance is possible only if you
invest differently from the crowd."

- "Diversify by company, by industry and by country."

- "Always maintain a long-term perspective."

- "Invest for maximum total real return."

- "Invest -- don't trade or speculate."

- "Remain flexible and open-minded about types of investment."

- "Buy low."

- "When buying stocks, search for bargains among quality stocks."

- "Buy value, not market trends or the economic outlook."

- "Diversify. In stocks and bonds, as in much else, there is safety in
numbers."

- "Do your homework or hire wise experts to help you."

- "Aggressively monitor your investments."

-------------
* Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.

PAGE

- "Don't panic."

- "Learn from your mistakes."

- "Outperforming the market is a difficult task."

- "An investor who has all the answers doesn't even understand all the
questions."

- "There's no free lunch."

- "And now the last principle: Do not be fearful or negative too often."

From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.

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

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

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

The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
funds cannot guarantee that these goals will be met.

The Company is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years and
now services more than 3 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $232 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. Each fund may identify itself by its NASDAQ
symbol or CUSIP number.

Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike. As
noted in the Prospectus, shares of the fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.

PAGE

As of April 17, 1998, the principal shareholders of the funds, beneficial or of
record, were as follows:

<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ---------------- ------------ ----------
<S> <C> <C>
GROWTH SERIES
T. Rowe Price, Trustee...................................... 2,956,149 33.06%
FBO Honeywell
10090 Red Run Blvd.
Owings Mills, MD 21117

Peter Norton, Trustee....................................... 2,738,094 30.62%
Norton Family CRU Trust
225 Arizona Avenue
2nd Floor West
Santa Monica, CA 90401-1210

Peter Norton, Trustee....................................... 947,857 10.60%
Norton Family Foundation Trust
225 Arizona Avenue
2nd Floor West
Santa Monica, CA 90401-1210

National City Bank, Custodian............................... 705,758 7.89%
FBO Mt. Union College
P.O. Box 94984
Cleveland, OH 44101-4984

Northern Trust Company, Custodian........................... 539,055 6.03%
FBO Peter Norton Living Trust
P.O. Box 92956
Chicago, IL 60675-2956

Hal Lashlee, Trustee........................................ 502,731 5.62%
Hal Lashlee Living Trust
P.O. Box 812079
Boca Raton, FL 33481-2079
EMERGING MARKETS SERIES
New York State Common Retirement Fund....................... 39,164,658 18.76%
Alfred E. Smith State Office Building
6th Floor
Albany, NY 12236
EMERGING FIXED INCOME MARKETS SERIES
Templeton Global Investors, Inc............................. 218,947 100%
Corporate Treasury
1850 Gateway Drive-6th Floor
San Mateo, CA 94404
</TABLE>

From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.

In the event of disputes involving multiple claims of ownership or authority to
control your account, a fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.

SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance

PAGE

officer and must be completed by the close of the business day following the day
clearance is granted; (ii) copies of all brokerage confirmations and statements
must be sent to a compliance officer; (iii) all brokerage accounts must be
disclosed on an annual basis; and (iv) access persons involved in preparing and
making investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security that
is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.

FINANCIAL STATEMENTS
- ---------------------------------------------------------

The audited financial statements contained in the Annual Report to Shareholders
of Growth Series, Foreign Equity Series, Emerging Markets and Emerging Fixed
Income Markets Series for the fiscal year ended December 31, 1997, including the
auditors' report, are incorporated herein by reference.

USEFUL TERMS AND DEFINITIONS
- ---------------------------------------------------------

1940 Act - Investment Company Act of 1940, as amended

BOARD - The Board of Directors of the Company

CD - Certificate of deposit

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

CODE - Internal Revenue Code of 1986, as amended

COMPANY - Templeton Institutional Funds, Inc., an open-end management investment
company, currently consisting of four separate series: Growth Series, Foreign
Equity Series, Emerging Markets Series and Emerging Fixed Income Markets Series

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

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

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

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

FT SERVICES - Franklin Templeton Services, Inc., the funds' administrator

INVESTMENT MANAGERS - A fund's investment manager; Templeton Investment Counsel,
Inc. ("Investment Counsel") for Growth Series and Foreign Equity Series;
Templeton Asset Management Ltd. -- Hong Kong Branch ("Asset Management Hong
Kong") for Emerging Markets Series; and Investment Counsel through its Global
Bond Managers division, for Emerging Fixed Income Markets Series

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

IRS - Internal Revenue Service

LETTER - Letter of Intent

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

NASD - National Association of Securities Dealers, Inc.

NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.

NYSE - New York Stock Exchange

PROSPECTUS - The prospectus for the funds dated May 1, 1998, as may be amended
from time to time

RESOURCES - Franklin Resources, Inc.

SAI - Statement of Additional Information

S&P - Standard & Poor's Corporation

SEC - U.S. Securities and Exchange Commission

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

U.S. - United States

WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the fund(s) and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.