FRANKLIN STRATEGIC SERIES, 497, 1995-09-12

FRANKLIN STRATEGIC SERIES
497, 1995-09-12

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Franklin Strategic
Income Fund

Franklin Strategic Series

PROSPECTUS September 1, 1995

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

Franklin Strategic Income Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's primary investment objective is to obtain a high level of
current income, with capital appreciation over the long term as a secondary
objective. The Fund seeks to achieve its objectives by using an active asset
allocation process and a flexible policy of investing in: securities of the
United States ("U.S.") and foreign governments, their agencies, authorities and
instrumentalities; U.S. and foreign corporate high yield fixed-income
securities; various types of fixed or adjustable rate mortgage securities;
asset-backed securities; common stocks which pay dividends; preferred stocks;
and income producing securities which are convertible into common stocks.

The Fund may invest up to 100% of its portfolio in non-investment grade bonds
issued by both U.S. and foreign issuers, commonly known as "junk bonds," which
entail default and other risks greater than those associated with higher rated
securities. Investors should carefully assess the risks associated with an
investment in the Fund in light of the securities in which the Fund invests. See
"Risk Considerations - High Yielding, Fixed-Income Securities" and "Risk
Considerations - Foreign Securities."

Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.

This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.

A Statement of Additional Information ("SAI") concerning the Fund, dated
September 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.

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

This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.

Contents Page

Expense Table ...................................... 2
Financial Highlights.................................... 4
About the Fund.......................................... 4
Investment Objectives and Policies
of the Fund............................................ 4
Risk Considerations..................................... 14
Management of the Fund.................................. 20
Distributions to Shareholders........................... 21
Taxation of the Fund and
Its Shareholders....................................... 22
How to Buy Shares of the Fund........................... 23
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments...................... 29
Other Programs and Privileges
Available to Fund Shareholders......................... 29
Exchange Privilege...................................... 31
How to Sell Shares of the Fund.......................... 34
Telephone Transactions.................................. 38
Valuation of Fund Shares................................ 39
How to Get Information Regarding
an Investment in the Fund.............................. 40
Performance............................................. 40
General Information..................................... 41
Account Registrations................................... 43
Important Notice Regarding
Taxpayer IRS Certifications............................ 44
Portfolio Operations.................................... 44
Appendix................................................ 44

Expense Table

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
annualized operating expenses of the Fund, before fee waivers and expense
reductions, for the period May 24, 1994 (effective date of registration) to
April 30, 1995.

Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(as a percentage of offering price).............................................................................. 4.25%
Deferred Sales Charge............................................................................................. NONE*
Exchange Fee (per transaction)....................................................................................$5.00**
Annual Fund Operating Expenses+
(as a percentage of average net assets)
Management Fees...................................................................................................0.63%***
12b-1 Fees........................................................................................................0.02%++
Other Expenses:
Reports to Shareholders.............................................................................0.33%
Professional Fees.....................................................................................0.23%
Other.................................................................................................0.17%
Total Other Expenses..............................................................................................0.73%
Total Fund Operating Expenses.....................................................................................1.38%***

</TABLE>

*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month following such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."

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

***Represents the management fee before any fee waiver by the investment
manager. The investment manager has agreed in advance, however, to waive its
management fees and to make certain payments to reduce expenses. With this
waiver and expense reduction, the Fund paid no management fees and total
operating expenses represented 0.25% of the average net assets of the Fund.

+Annualized.

++The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.25%. See "Plan of Distribution" under "Management of the
Fund." Consistent with National Association of Securities Dealers, Inc.'s rules,
it is possible that the combination of front-end sales charges and Rule 12b-1
fees could cause long-term shareholders to pay more than the economic equivalent
of the maximum front-end sales charges permitted under those same rules.

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

Example

As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period:

One Year* Three Years Five Years Ten Years
$56 $84 $115 $201

*Assumes that a contingent deferred sales charge will not apply.

This example is based on the aggregate annualized operating expenses, before fee
waivers and expense reductions, shown above and should not be considered a
representation of past or future expenses, which may be more or less than those
shown. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.

Financial Highlights

Set forth below is a table containing the financial highlights for a share of
the Fund for the period May 24, 1994 (effective date of registration) to April
30, 1995. The information has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Trust's Annual Report to Shareholders dated April 30, 1995. See the
discussion "Reports to Shareholders" under "General Information."

<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data

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

Ratio

Net Net Total Distri- Distri- Net Net Ratio of of Net
Asset Net Realized & From butions bution Asset Assets ExpensesInvestment
Period Value at Invest- Unrealized Invest- From Net from Total Value at End to AverageIncome to Portfolio
Ended Beginning ment Gains on ment Investment Capital Distri- at End Total of Year Net Average Turnover
April 30 of Year Income SecuritiesOperations Income Gains butions of Year Return** (in 000's) Assets Net Assets Rate

*For the period May 24, 1994 (effective date) to April 30, 1995.

**Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge and assumes reinvestment of dividends and capital gains, if any, at net
asset value.

***During the period indicated, the investment manager agreed to waive in
advance its management fees and made payments of other expenses incurred by the
Fund. Had such action not been taken, the ratio of operating expenses to average
net assets would have been 1.38%+.

+Annualized.

About the Fund

The Trust is an open-end management investment company, commonly called a
"mutual fund." The Trust was organized as a Delaware business trust in January
1991 and registered with the SEC under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust currently consists of eight series, each of
which issues a separate series of the Trust's shares and maintains a totally
separate investment portfolio. This Prospectus relates only to the Franklin
Strategic Income Fund, a non-diversified series of the Trust.

The Board of Trustees may determine, at a future date, to offer shares of the
Fund in one or more "classes" to permit the Fund to take advantage of
alternative methods of selling Fund shares. "Classes" of shares represent
proportionate interests in the same portfolio of investment securities but with
different rights, privileges and attributes, as determined by the trustees.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"How to Buy Shares of the Fund," currently offer their shares in two classes,
designated "Class I" and "Class II." Because the Fund's sales charge structure
and plan of distribution are similar to those of Class I shares, shares of the
Fund may be considered Class I shares for redemption, exchange and other
purposes.

Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.25% of the offering price. See "How to Buy Shares of the Fund."

Investment Objectives
and Policies of the Fund

The Fund's primary investment objective is to obtain a high level of current
income, with capital appreciation over the long term as a secondary objective.
The Fund will seek to achieve these objectives by using an active asset
allocation process and a flexible policy of investing in securities of U.S. and
foreign governments, their agencies, authorities and instrumentalities; U.S. and
foreign corporate high yield fixed-income securities; various types of fixed or
adjustable rate mortgage securities; asset-backed securities; common stocks
which pay dividends; preferred stocks; and income producing securities which are
convertible into common stocks, generally with particular consideration to
current income but which may also be purchased for long-term capital
appreciation. The investment objectives are fundamental policies of the Fund and
may not be changed without shareholder approval. The policies used to achieve
these objectives are not fundamental policies and are subject to change without
shareholder approval. Because of the Fund's ability to invest in lower rated
U.S. and foreign corporate bonds, an investment in the Fund is subject to a
higher degree of risk than an investment in a more conservative type of income
fund. As with any other investment, there is no assurance that the Fund's
objectives will be achieved.

Under normal circumstances, at least 65% of the Fund's assets will be invested
in U.S. and foreign debt securities which include bonds, notes, mortgage-backed
securities and asset-backed securities, U.S. and foreign corporate high yield
securities, convertible securities, and preferred stock. The Fund may invest the
remainder of its assets, up to 35%, in common stocks, generally with particular
consideration to current income but which may also be purchased for potential
long-term capital appreciation. There are no restrictions, other than as set
forth above, as to the proportion of the Fund's assets which may be invested in
a particular type of security and such determination is entirely within the
investment manager's discretion.

The Fund will use an active asset allocation strategy in order to maximize both
income and capital appreciation, which means that the Fund will allocate its
assets among securities in various market sectors in anticipation of, and in
response to, varying economic, market, industry and issuer conditions. The
investment manager will use a two-sided analysis to take advantage of varying
sector reactions to economic events. The investment manager will use a
"top-down" macroeconomic analysis combined with a "bottom-up" fundamental
sector, industry and issuer analysis. Country risk, business cycles, yield
curves and values between and within markets will be evaluated.

Types of Securities the Fund May Purchase

High Yield Corporate Securities. The Fund may invest in securities rated in any
category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's"), two nationally recognized statistical rating organizations
("NRSROs"), including, without limitation, lower rated, fixed-income U.S. and
foreign corporate high yield securities and unrated securities of comparable
quality, commonly called "junk bonds." See "Risk Considerations - High Yielding,
Fixed-Income Securities" and "Risk Considerations - Foreign Securities." As an
operating policy, the Fund will generally invest in securities that are rated at
least Caa by Moody's or CCC by S&P, or in unrated securities of comparable
quality as determined by the investment manager. While unrated debt securities
are not necessarily of lower quality, they may not be as attractive of an
investment as rated securities to many buyers. (See "Appendix" for a description
of the ratings assigned by Moody's and S&P.) Regardless of ratings, all debt
securities considered for purchase (whether rated or unrated) will be carefully
analyzed by the investment manager to insure, to the extent possible, that the
planned investment is consistent with the Fund's investment objectives.

Foreign Securities. The Fund may invest in foreign government and corporate debt
securities and in American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. The Fund's investment
in ADRs may be sponsored and unsponsored. Further information about ADRs is
included in the SAI. The Fund may purchase foreign securities which are traded
in the U.S. and may purchase the securities of foreign issuers directly in
foreign markets. The Fund may also purchase securities of U.S. issuers which are
denominated in a foreign currency. See "Risk Considerations - Foreign
Securities."

Government Securities. The Fund may invest in Treasury bills and bonds, which
are obligations of, or guaranteed by, the U.S. government and are supported by
the full faith and credit of the U.S. Treasury. The Fund may also invest in U.S.
government agency securities, which are obligations of, or guaranteed by, U.S.
government agencies or instrumentalities, such as Federal Home Loan Banks, and
are supported by the right of the issuer to borrow from the Treasury. Securities
of other agencies, such as those issued or guaranteed by the Federal National
Mortgage Association, which are supported only by the credit of the
instrumentality, may also be purchased by the Fund. See the discussion of
mortgage securities below.

Mortgage Securities - General Characteristics. The Fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The Fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
Fund may invest.

A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. Mortgage securities from FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, and FHLMC guarantees timely payment of interest
and the ultimate collection of principal. Securities issued by FNMA are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by FHLMC are supported only by the
credit of the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Notwithstanding the foregoing, because
FNMA and FHLMC are instrumentalities of the U.S. government, these securities
are generally considered to be high quality investments having minimal credit
risks.

Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The Fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.

Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
Fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMs move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of such factors, the ability of the Fund to obtain a
high level of total return may be limited under varying market conditions.

Adjustable Rate Mortgage Securities. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
Fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. The rate of amortization of
principal, as well as interest payments, for certain types of ARMs change in
accordance with movements in a pre-specified, published interest rate index.
There are several categories of indices, including those based on U.S. Treasury
securities, those derived from a calculated measure, such as a cost of funds
index, or a moving average of mortgage rates and actual market rates. The amount
of interest due to an ARM security holder is calculated by adding a specified
additional amount, the "margin," to the index, subject to limitations or "caps"
on the maximum and minimum interest that is charged to the mortgagor during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. The interest rates paid on the ARMs in which the Fund may
invest are generally readjusted at intervals of one year or less, although
instruments with longer resets such as three years and five years are also
permissible investments.

The underlying mortgages which collateralize the ARMs in which the Fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the Fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause such
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.

Stripped Mortgage-Backed Securities. The Fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage securities in which the
Fund may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO and PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.

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

Collateralized Mortgage Obligations. CMOs are fixed-income securities which are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) of some of these pools is supported by various forms of
insurance or guarantees issued by private issuers, those who pool the mortgage
assets and, in some cases, by U.S. government agencies. The Fund may buy CMOs
which are rated in any category by the NRSROs without insurance or guarantee if,
in the opinion of the investment manager, the sponsor is creditworthy.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest rates decrease, will generally reduce the life of the mortgage pool,
thus impacting the CMO's yield. Under such circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.

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

To the extent any privately issued CMOs in which the Fund invests are considered
by the SEC to be an investment company, the Fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.

Asset-Backed Securities. The Fund may invest in various asset-backed securities
rated in any category by an NRSRO. The underlying assets may include, but are
not limited to, receivables on home equity and credit card loans, and
automobile, mobile home and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the Fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.

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

Options on Securities, Indices and Futures Contracts. The Fund may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities, securities indices or futures contracts that are traded on U. S. or
foreign exchanges or in the over-the-counter markets. An option on a security or
futures contract is a contract that grants the purchaser of the option, in
return for the premium paid, the right to buy a specified security or futures
contract (in the case of a call option) or to sell a specified security or
futures contract (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 grants 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. The Fund
may write a call or put option only if the option is "covered." This means that
so long as the Fund is obligated as the writer of a call option, it will own the
underlying securities or futures contracts subject to the call, or hold a call
at the same or lower exercise price, for the same exercise period, and on the
same securities or futures contracts as the written call. A put is covered if
the Fund maintains liquid assets with a value equal to the exercise price in a
segregated account, or holds a put on the same underlying securities or futures
contracts at an equal or greater exercise price. The Fund will not engage in any
stock options or stock index options if the option premiums paid on its open
option positions exceed 5% of the value of the Fund's total assets.

Options on Foreign Currencies. The Fund may purchase and write put and call
options on foreign currencies traded on U.S. and foreign exchanges or in the
over-the-counter markets. The Fund will purchase and write such options for
hedging purposes to protect against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities or other assets to be acquired.

Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts to attempt to minimize the risk to the Fund from adverse
changes in the relationship between currencies or to enhance income. A forward
currency exchange 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.

Futures Contracts. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts and foreign
currency futures contracts. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. The Fund may not commit more than 5% of its total
assets to initial margin deposits on futures contracts. See "The Fund's
Investment Objectives and Policies - Futures Contracts" in the SAI.

The Fund's investment in options, forward currency exchange contracts and
futures contracts, as described above, may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for qualification as a
regulated investment company and is subject to special tax rules that may affect
the amount, timing and character of distributions to shareholders. These
securities require the application of complex and special tax rules and
elections, a discussion of which is included in the SAI.

Inverse Floaters. The Fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed, to
short-term interest rates or interest rate indices.

Convertible Securities. The Fund may invest in convertible securities which
include preferred stock, bonds or debentures, stock purchase warrants and other
fixed-income securities which may be exchanged or converted into a prescribed
number of shares of the issuer's underlying common stock at a specific price
during a specified time period.

Until they mature or are converted or exchanged, convertible securities retain
investment characteristics similar to those of nonconvertible fixed-income
securities. Thus, the interest income and dividends from convertible bonds and
preferred stocks will generally provide a fixed stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities of
similar quality. Such convertible bonds and preferred stocks are generally
senior securities and, therefore, have a claim to assets of the corporation
prior to the holders of common stock in the case of liquidation. Convertible
securities, however, are generally subordinate in their claim on assets to
similar nonconvertible securities of the same company.

Since the Fund's portfolio may at any time consist of convertible and other
fixed-income securities, changes in the level of interest rates, among other
things, will likely affect the market value of the Fund's holdings and thus the
value of a shareholder's investment. As the level of interest rates increases,
the market value of convertible securities may decline and, conversely, as
interest rates decline, the market value of convertible securities may increase.
The unique investment characteristic of convertible securities, i.e., the right
to be exchanged for the issuer's common stock, generally causes the market value
of convertible securities to increase when the market value of the underlying
common stock increases. Since securities prices fluctuate, however, there can be
no assurance of capital appreciation and most convertible securities will not
reflect the same level of capital appreciation as their underlying common
stocks. When the underlying common stock is experiencing a decline, the value of
the convertible security tends to decline to a level approximating the
yield-to-maturity basis of straight nonconvertible debt of similar quality,
often called "investment value," and may not experience the same decline as the
underlying common stock.

Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to the
conversion privilege. If this appreciation potential is not realized, the
premium may not be recovered. Such securities tend to have a lesser income
element than other convertibles which trade closer to their investment value.

Other Strategies

When Issued and Delayed Delivery Transactions. The Fund may purchase U.S.
government obligations on a "when issued" or "delayed delivery" basis. These
transactions are arrangements under which the Fund purchases securities which
have been authorized but not yet issued with payment for and delivery of the
security scheduled for a future time, generally in 30 to 60 days. Purchases of
U.S. government securities on a when issued or delayed delivery basis are
subject to the risk that the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was entered
into. Although the Fund will generally purchase U.S. government securities on a
when issued basis with the intention of holding such securities, it may sell
such securities before the settlement date if it is deemed advisable. When the
Fund is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of the Fund's purchase commitments until
payment is made. To the extent the Fund engages in when issued and delayed
delivery transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Fund's investment objectives and policies, and
not for the purpose of investment leverage. In when issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the Fund to miss a price or yield considered
advantageous. Securities purchased on a when issued or delayed delivery basis do
not generally earn interest until their scheduled delivery date. Entering into a
when issued or delayed delivery transaction is a form of leverage that may
exacerbate changes in net asset value per share.

Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type, coupon
and maturity) securities on a specified future date. During the period between
the sale and repurchase, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the difference between
the current sale price and the lower price for the future purchase (often
referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The Fund could suffer a loss if the contracting party fails
to perform the future transaction in that the Fund may not be able to buy back
the mortgage-backed securities it initially sold. The Fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.

Interest Rate and Currency Swaps. Interest rate swaps involve an exchange
between the Fund and another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of the parties' respective rights
to make or receive payments in specified currencies. Since interest rate and
currency swaps are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate or currency swap positions.

The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the investment manager is
incorrect in its forecasts of market values, interest rates and currency
exchange rates, the investment performance of the Fund would be less favorable
than it would have been if this investment technique were not used.

Loan Participations and Defaulted Debt Securities. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. While loan participations generally trade at
par value, the Fund will acquire those which sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value. The investment manager
may acquire loan participations for the Fund when it believes, over the long
term, appreciation will occur. An investment in such securities, however,
carries substantially the same risks associated with an investment in defaulted
debt securities and may result in the loss of the Fund's entire investment. The
Fund will purchase defaulted debt securities if, in the opinion of the
investment manager, it appears the issuer may resume interest payments or other
advantageous developments appear likely in the near future. Loan participations
and defaulted debt securities may be considered illiquid and, if so, will be
included in the 10% limitation discussed under "Illiquid Investments." See also
"Risk Considerations - High Yielding, Fixed-Income Securities."

Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 331/3% of the value of the
Fund's total assets at the time of the most recent loan. It is the Fund's
current intention, however, not to exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 100%. Such collateral shall consist of
cash, securities issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund engages in security
loan arrangements with the primary objective of increasing the Fund's income
either through investing cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.

Borrowing. The Fund does not borrow money or mortgage or pledge any of its
assets, except that the Fund may borrow for temporary or emergency purposes, in
an amount not to exceed 5% of its total assets.

Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board of Trustees and will be held pursuant to a written agreement.

Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities, including illiquid equity securities, defaulted debt securities,
loan participations, repurchase agreements of more than seven days duration, and
other securities which are not readily marketable) may not constitute, at the
time of purchase, more than 10% of the value of the total net assets of the
Fund. Subject to this limitation, the Board of Trustees has authorized the Fund
to invest in restricted securities where such investments are consistent with
the Fund's investment objectives and has authorized such securities to be
considered liquid to the extent the investment manager determines on a daily
basis that there is a liquid institutional or other market for such securities.

Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to the terms of an
order of exemption from the SEC, the shares of affiliated money market funds
that invest primarily in short-term debt securities. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.

Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100%, but this rate should not be construed as a
limiting factor in the operation of the Fund's portfolio.

Other Policies

The Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of the Fund's assets that may be invested in the securities of any
one issuer. The Fund, however, intends to comply with the diversification and
other requirements of the Code applicable to regulated investment companies,
such as the Fund, so that it will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders. Accordingly, the Fund
will not purchase securities if, as a result, more than 25% of its total assets
would be invested in the securities of a single issuer, or with respect to 50%
of its total assets, more than 5% of such assets would be invested in the
securities of a single issuer. To the extent the Fund is not fully diversified,
it may be more susceptible to adverse economic, political or regulatory
developments affecting a single issuer than if it were more fully diversified.

In addition, it is the present policy of the Fund (which may be changed without
the approval of shareholders) not to invest more than 5% of its total assets in
companies which have a record of less than three years continuous operation,
including predecessors, nor to engage in joint or joint and several trading
accounts in securities, except that an order to purchase or sell may be combined
with orders from other persons to obtain lower brokerage commissions. These
investments, together with any illiquid securities, may not exceed 10% of the
Fund's net assets.

The Fund will not invest more than 25% of its total assets in any one industry.
To the extent required by and in conformance with an interpretive position taken
by the SEC, securities issued by a foreign government, its agencies or
instrumentalities are deemed to constitute an "industry" for purposes of this
limitation.

As long as percentage restrictions are observed by the Fund at the time of
purchase, changes in the value of particular Fund assets, or the assets of the
Fund as a whole, will not cause a violation of any of the foregoing
restrictions.

The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.

Risk Considerations

High Yielding, Fixed-Income Securities

Because of the Fund's policy of investing in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than an investment in higher rated, lower yielding securities. Accordingly, an
investment in the Fund should not be considered a complete investment program,
and should be carefully evaluated for its appropriateness in light of the
investor's overall investment needs and goals. Persons on fixed incomes, such as
retired persons, should also consider the increased risk of loss to principal
which is present with an investment in higher risk securities, such as those in
which the Fund invests.

The market values of lower rated, fixed-income securities and unrated securities
of comparable quality (commonly known as "junk bonds") tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. Bonds rated BB or below by S&P
or Ba or below by Moody's are considered, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating categories. Even
bonds rated BBB by S&P or Baa by Moody's, ratings which are considered
investment grade, possess some speculative characteristics.

Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. In general, securities
which default lose much of their value in the time period prior to the actual
default so that the Fund's assets are impacted prior to the default. The Fund
may retain an issue which has defaulted because such issue may present an
opportunity for subsequent price recovery. As of April 30, 1995, no issues in
the Fund's portfolio were in default.

High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called securities with lower yielding securities, thus decreasing the net
investment income to the Fund and the dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. The Fund may be required under the Code and U.S.
Treasury regulations to accrue income for income tax purposes on defaulted
obligations and to distribute such income to the Fund's shareholders even though
the Fund is not currently receiving interest or principal payments on such
obligations. In order to generate cash to satisfy any or all of these
distribution requirements, the 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.

Purchasers of lower rated, fixed-income securities are predominantly dealers and
other institutional buyers, rather than individuals. The market for such
securities therefore tends to be more concentrated than the market for higher
rated securities which trade in a broader secondary retail market. To the extent
the secondary trading market for a particular high yielding, fixed-income
security does exist, it is generally not as liquid as the secondary market for
higher rated securities. Reduced liquidity in the secondary market may have an
adverse impact on the market price and the Fund's ability to dispose of
particular securities, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
Current values for such high yield securities are obtained from pricing services
and/or a limited number of dealers and may be based upon factors other than
actual sales. (See "Valuation of Fund Shares.")

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

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

The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yield securities and adversely affected the value of outstanding
securities and the ability of issuers of such securities to meet their
obligations. Those adverse effects may continue even as the economy recovers.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower-rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some issuers of high yield securities, and
concerns regarding a sluggish economy which continued in 1993, depressed the
prices for many such securities. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on any of its portfolio holdings. The Fund will
rely on the investment manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the investment manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.

Asset Composition Table

Ratings published by rating services, such as S&P, will be considered in
connection with the Fund's investment in bonds, although such ratings will not
be determinative. The table below shows the percentage of the Fund's assets
invested in securities rated in each of the S&P rating categories and those that
are not rated but deemed by the investment manager to be of comparable quality.
The information was prepared using a dollar weighted average of the Fund's
portfolio composition based on month-end assets for the period July 1, 1994
through April 30, 1995. The Appendix to this Prospectus includes a description
of each rating category.

Average Weighted
S&P Rating Percentage of Assets

AAA........................................ 46.90%*
AA+........................................ 0.28%
AA......................................... 3.52%
A+......................................... 1.75%
A.......................................... 0.14%
BBB+....................................... 0.21%
BBB........................................ 0.19%
BB+........................................ 2.63%
BB......................................... 4.49%
BB-........................................ 5.46%
B+......................................... 9.78%
B.......................................... 20.04%**
B-......................................... 4.61%

*23.27% of these securities are unrated by rating services.

**7.48% of these securities are unrated by rating services.

Foreign Securities

Investments in the securities of companies organized outside the U.S. or whose
securities are principally traded outside the U.S. ("foreign issuers") or
investments in securities denominated or quoted in a foreign currency
("non-dollar securities") may offer potential benefits not available from
investments solely in securities of U.S. issuers or U.S. dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the investment manager, to offer more
potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S. and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.

Investments in non-dollar securities or in the securities of foreign issuers
involve significant risks that are not typically associated with investments in
U.S. dollar denominated securities or in securities of U.S. issuers. These
risks, which may involve possible losses, include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could result in investment losses for the Fund. In addition, public
information may not be as available for a foreign company as it is for a U.S.
domiciled company, foreign companies are generally not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. companies, and there is usually less government regulation of
securities exchanges, brokers and listed companies. Confiscatory taxation or
diplomatic developments could also affect these investments.

Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or developing countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.

Foreign securities may be subject to greater fluctuations in price than U.S.
corporate debt or U.S. government securities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. debt securities and are certainly less
liquid than U.S. government securities. Finally, in the event of a default of
any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuer of such security.

Securities which may be acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.

The Fund may purchase securities in any foreign country, developed or
developing. Investors should consider carefully the substantial risks involved
in investing in securities issued by companies and governments of foreign
countries, risks that are often heightened for investments in developing
markets. For example, the small size, inexperience and limited volume of trading
of securities markets in certain developing countries may make the Fund's
investments in developing countries illiquid and more volatile than investments
in more developed countries, and the Fund may be required to establish special
custody or other arrangements before making certain investments in such
countries. The laws of some foreign countries may also limit the ability of the
Fund to invest in securities of certain issuers located in those countries.

Mortgage Securities

Mortgage securities differ from conventional bonds in that principal is paid
back over the life of the mortgage security rather than at maturity. As a
result, the holder of a mortgage security (i.e., the Fund) receives scheduled
monthly payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of principal
it receives, it may receive a rate of interest which is lower than the rate on
the existing mortgage security. For this reason, mortgage securities may be less
effective than other types of U.S. government securities as a means of "locking
in" long-term interest rates.

The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. Mortgage
securities may have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
mortgage securities are purchased at a premium, unscheduled principal
prepayments, including prepayments resulting from mortgage foreclosures, may
result in some loss of the holder's principal investment to the extent of the
premium paid. On the other hand, if mortgage securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to shareholders, will be taxable
as ordinary income.

Options and Futures Contracts

The purchase and sale of futures contracts and options thereon, as well as the
purchase and writing of options on securities and securities indices and
currencies, involve risks different from those involved with direct investments
in securities. A liquid secondary market for a futures or options contract may
not be available when a futures or options position is sought to be closed and
the inability to close a position may have an adverse impact on the Fund's
ability to effectively hedge securities or foreign currency exposure. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the investment
manager's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. In addition, by writing covered call options, the Fund gives up the
opportunity to profit from any price increase in the underlying security above
the option exercise price, while the option is in effect.

How Shareholders Participate in
the Results of the Fund's Activities

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

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets.

To the extent the Fund's investments consist of debt securities, changes in
interest rates will affect the value of the Fund's portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. To the
extent of the Fund's investment in foreign securities, changes in the prevailing
rates of interest in any of the countries in which the Fund is invested will
likely affect the value of the Fund's holdings and thus the value of Fund
shares. In addition, changes in currency valuations or a decline in the stock
market of any country in which the Fund is invested will impact the price of
Fund shares. History reflects both increases and decreases in the prevailing
rate of interest, in foreign currency valuations and in the valuation of stock
markets in both the U.S. and in foreign countries, and these may reoccur
unpredictably in the future.

Management of the Fund

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

Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (113 separate series) with aggregate assets of over $74 billion.

Templeton Investment Counsel, Inc. ("TICI" or the "Sub-Adviser") is employed by
Advisers to act as sub-adviser to the Fund. TICI is an indirect subsidiary of
Templeton Worldwide, Inc., which, operating through its subsidiaries, is a major
investment management organization with approximately $41.8 billion of assets
currently under management and a long history of global investing.

Pursuant to the management and sub-advisory agreements, Advisers and TICI
supervise and implement the Fund's investment activities and provide certain
administrative services and facilities which are necessary to conduct the Fund's
business.

During the period from May 24, 1994 (effective date of registration) to April
30, 1995, management fees, before any advance waiver, totaled 0.63% of the
average daily net assets of the Fund. Total operating expenses, including
management fees before any advance waiver, totaled 1.38% of the average daily
net assets of the Fund. Pursuant to an agreement by Advisers to limit its fees,
the Fund paid no management fees and paid operating expenses totaling 0.25% of
the average daily net assets of the Fund. This arrangement may be terminated by
the investment manager at any time.

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

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

Plan of Distribution

The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or
others for all expenses incurred by Distributors or others in the promotion and
distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.25% per annum
of the average daily net assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.25% per annum will be
borne by Distributors, or others who have incurred them, without reimbursement
from the Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund. For more information, please
see the SAI.

Distributions to Shareholders

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

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

2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.

Distribution Date

Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends monthly for shareholders of record on the last business day of the
month, payable on or about the 15th day of the following month. The amount of
income dividend payments by the Fund is dependent upon the amount of net income
received by the Fund from its portfolio holdings, is not guaranteed and is
subject to the discretion of the Board of Trustees. Fund shares are quoted
ex-dividend on the first business day following the record date. The Fund does
not pay "interest" or guarantee any fixed rate of return on an investment in its
shares.

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

Dividend Reinvestment

Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds, as defined under "How to
Buy Shares of the Fund." Shareholders have the right to change their election
with respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the SAI for
more information.

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

Distributions in Cash

A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Funds, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department. See "Purchases at Net
Asset Value" under "How to Buy Shares of the Fund."

Taxation of the Fund and Its Shareholders

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

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

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

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

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

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.

For corporate investors, it is anticipated that only a small portion of the
Fund's dividends will qualify for the corporate dividends-received deduction
because of the Fund's principal investment in debt securities. To the extent
that the Fund pays dividends which qualify for this deduction, the availability
of the deduction is subject to certain holding period and debt financing
restrictions imposed under the Code on the corporation claiming the deduction.

The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.

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

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

How to Buy Shares of the Fund

Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares.

Purchase Price of Fund Shares

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

Set forth below is a table of total front-end sales charges or underwriting
commissions and dealer concessions.

Total Sales Charge

As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***

<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more NONE NONE (see below)**

</TABLE>

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

**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.

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

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

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

Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 0.75% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by non-designated retirement plans, and up to 1% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers), certain trust companies and trust departments
of banks and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more. See "Description of Special Net
Asset Value Purchases" and the SAI.

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

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

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

Quantity Discounts in Sales Charges

Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.

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

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

2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.

An investor (except for certain employee benefit plans which are listed under
"Description of Special Net Asset Value Purchases") acknowledges and agrees to
the following provisions by completing the Letter of Intent section of the
Shareholder Application: Five percent (5%) of the amount of the total intended
purchase will be reserved in shares of the Fund, registered in the investor's
name, to assure that the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will be included in the
total shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information, see "Additional Information Regarding Purchases" in the SAI.

Although the sales charge on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining the sales charge to be paid on Class I shares pursuant to the Letter
of Intent and Rights of Accumulation programs.

Group Purchases

An individual who is a member of a "qualified group," as defined below, may also
purchase shares of the Fund at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.50%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.

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

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

Purchases at Net Asset Value

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

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or Class I
shares of another of the Franklin Templeton Funds which were purchased with a
front-end sales charge or assessed a contingent deferred sales charge on
redemption. If a different class of shares is purchased, the full front-end
sales charge must be paid at the time of purchase of the new shares. An investor
may reinvest an amount not exceeding the redemption proceeds. While credit will
be given for any contingent deferred sales charge paid on the shares redeemed
and subsequently repurchased, a new contingency period will begin. Shares
redeemed in connection with an exchange into another of the Franklin Templeton
Funds (see "Exchange Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 365 days after the redemption. The 365 days, however, do
not begin to run on redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may charge the shareholder
a fee for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and the
tax basis of the shares reinvested. If there has been a loss on the redemption,
the loss may be disallowed if a reinvestment in the same fund is made within a
30-day period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.

Shares of the Fund or Class I shares of another of the Franklin Templeton Funds
may be purchased at net asset value and without a contingent deferred sales
charge by persons who have received dividends and capital gains distributions in
cash from investments in the Fund within 365 days of the payment date of such
distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may be
obtained from Shareholder Services at 1-800/632-2301. See "Distributions in
Cash" under "Distributions to Shareholders."

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge, and which has investment objectives
similar to those of the Fund.

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

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton Profit
Sharing 401(k) plan), to the extent of such distribution. In order to exercise
this privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 365 days after the plan distribution.

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

Description of Special Net Asset Value Purchases

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

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently those criteria require that the amount invested or to be
invested during the subsequent 13-month period in the Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check, or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.

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

Refer to the SAI for further information regarding net asset value purchases.

General

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

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

Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or Franklin Templeton Trust Company
(the "Trust Company") may provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.

The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for the Trust Company plans contain
important information regarding eligibility, contribution and deferral limits
and distribution requirements. Please note that an application other than the
one contained in this Prospectus must be used to establish a retirement plan
account with the Trust Company. To obtain a retirement plan brochure or
application, call 1-800/DIAL BEN (1-800/342-5236).

Please see "How to Sell Shares of the Fund" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.

Individuals and plan sponsors should consult with a legal, tax or benefits and
pension plan consultant before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.

Other Programs and Privileges
Available to Fund Shareholders

Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).

Share Certificates

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

Confirmations

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

Automatic Investment Plan

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

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

Systematic Withdrawal Plan

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Payments which may be paid in the interim
will be sent to the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.

The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of shares may be subject
to a contingent deferred sales charge if the shares are redeemed within 12
months of the calendar month following purchase. The shareholder should
ordinarily not make additional investments of less than $5,000 or three times
the annual withdrawals under the plan during the time such a plan is in effect.
The applicable contingent deferred sales charge is waived for share redemptions
of up to 1% monthly of an account's net asset value (12% annually, 6%
semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge; any amount over that $120,000 would
be assessed a 1% contingent deferred sales charge. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.

Institutional Accounts

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

Exchange Privilege

The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, Fund shares may be
exchanged for Class I shares of other Franklin Templeton Funds which are
eligible for sale in the shareholder's state of residence and in conformity with
such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectus of the fund they wish
to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges. No exchanges between
different classes of shares are allowed and, therefore, shares of the Fund may
not be exchanged for Class II shares of other Franklin Templeton Funds.
Shareholders may choose to redeem shares of the Fund and purchase Class II
shares of other Franklin Templeton Funds but such purchase will be subject to
that fund's Class II front-end and contingent deferred sales charges for the
contingency period of 18 months.

Exchanges may be made in any of the following ways:

Exchanges by Mail

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

Exchanges by Telephone

Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.

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

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

Exchanges Through Securities Dealers

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

Additional Information Regarding Exchanges

If an account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. See also "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid originated from a fund on which the investor paid
or was subject to a front-end or contingent deferred sales charge. Exchanges of
shares of the Fund which were purchased with a lower sales charge to a fund
which has a higher sales charge will be charged the difference, unless the
shares were held in the Fund for at least six months prior to executing the
exchange. When an investor requests the exchange of the total value of the Fund
account, declared but unpaid income dividends and capital gain distributions
will be transferred to the fund being exchanged into and will be invested at net
asset value. Because the exchange is considered a redemption and purchase of
shares, the shareholder may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the SAI.

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

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

Retirement Plan Accounts

Franklin Templeton IRA and 403(b) retirement plan accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."

Timing Accounts

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

Restrictions on Exchanges

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

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

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

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

How to Sell Shares of the Fund

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

Redemptions by Mail

Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated i.e., at the
scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time each day the Exchange is open for business,
will receive the price calculated on the following business day. Shareholders
are requested to provide a telephone number where they may be reached during
business hours, or in the evening if preferred. Investor Services' ability to
contact a shareholder promptly when necessary will speed the processing of the
redemption.

To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Redemptions by Telephone

Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the restricted account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."

For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled closing of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement, which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.

Redeeming Shares Through Securities Dealers

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

Contingent Deferred Sales Charge

In order to recover commissions paid to securities dealers, investments of $1
million or more redeemed within the contingency period of 12 months of the
calendar month following their purchase will be assessed a contingent deferred
sales charge, unless one of the exceptions described below applies. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.

In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; (iii) other shares held longer than the contingency period;
and (iv) followed by any shares held less than the contingency period, on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.

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

All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.

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

Additional Information Regarding Redemptions

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

Retirement Plan Accounts

Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.

Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.

Other

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

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

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

Telephone Transactions

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

All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) request the issuance of
certificates, to be sent to the address of record only, and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.

Verification Procedures

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

Restricted Accounts

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

To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.

General

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

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

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

Valuation of Fund Shares

The net asset value per share of the Fund is determined as of the scheduled
closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).

The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities is deducted from the aggregate gross value of
all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts,
interest is recorded as accrued and dividends are recorded on the ex-dividend
date. Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such reported
sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last sale price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices, if such valuation is
believed to fairly reflect the contract's market value. Other securities for
which market quotations are readily available are valued at the current market
price, which may be obtained from a pricing service, based on a variety of
factors, including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.

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 scheduled close of trading
on the Exchange, if that is earlier, and that value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask price is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events materially affecting
the value of the foreign securities or exchange rates occur during such period,
then the foreign security will be valued in accordance with procedures
established by the Board of Trustees.

How to Get Information Regarding an Investment in the Fund

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

From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.

By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.

Fund information may be accessed by entering Fund Code 194 followed by the #
sign. The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.

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

Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.

</TABLE>

In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton's
service departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.

Performance

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

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

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

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

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

General Information

Reports to Shareholders

The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services, when legally permissible, will
attempt to identify related shareholders within a household, and send only one
copy of the report. Additional copies may be obtained by investors or
shareholders, without charge, upon request to the Fund at the telephone number
or address set forth on the cover page of this Prospectus.

Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.

Organization and Voting Rights

The Trust was organized as a Delaware business trust on January 25, 1991. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest, with a par value of
$.01 per share, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. The Trust reserves the
right to issue additional classes of shares of the Fund, or to add additional
series.

Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative so that, in any election of trustees,
the holders of more than 50% of the shares voting can elect all of the trustees,
if they choose to do so, and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions for the series, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees,
in their discretion, or by shareholders holding at least ten percent of the
outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees, such as that provided in Section 16(c) of the 1940 Act.

Redemptions by the Fund

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.

Conversion to Master/Feeder Fund Structure

Currently, in seeking to accomplish its objectives, the Fund invests directly in
a portfolio of securities, as described in "Investment Objectives and Policies
of the Fund." Certain funds administered by the Manager participate as feeder
funds in a master/feeder fund structure. Under a master/feeder structure, one or
more feeder funds invests its assets in a master fund, which, in turn, invests
its assets directly in securities. The Fund reserves the right to convert to a
master/feeder fund structure at a future date.

Various state governments have adopted the North American Securities
Administrators Association Guidelines for registration of master/feeder funds.
If required by those guidelines, as then in effect, the Fund will seek
shareholder approval prior to converting the Fund to a master/feeder structure,
subject to there not being adopted a superseding contrary provision or ruling
under federal law. If it is determined by the requisite regulatory authorities
that such approval is not required, shareholders will be deemed to have
consented to such conversion by their purchase of Fund shares and no further
shareholder approval will be sought or needed. Shareholders will, however, be
informed in writing in advance of the conversion. The determination to convert
the Fund to a master/feeder fund structure will not result in an increase in the
fees or expenses paid by the Fund or its shareholders. The investment objectives
and other fundamental policies of the Fund, which can be changed only with
shareholder approval, are structured so as to permit the Fund to invest directly
in securities or indirectly in securities through a master/feeder fund
structure.

Account Registrations

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

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

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

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

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

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

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

Important Notice Regarding
Taxpayer IRS Certifications

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

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

Portfolio Operations

The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Mr. Molumphy since the Fund's inception and Mr. Dickson
since June 1995.

Chris Molumphy
Portfolio Manager
Franklin Advisers, Inc.

Mr. Molumphy is a Chartered Financial Analyst and holds a Master's of Business
Administration degree in finance from the University of Chicago. He earned his
Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a
member of several securities industry associations. He joined Franklin in 1988.

Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.

Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. He joined Franklin in 1992 and moved to
Templeton in 1994.

Appendix

Description of Moody's corporate bond ratings

Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

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

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

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

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

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

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

Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Description of S&P corporate bond ratings

AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.

AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
these bonds differ from AAA issues only in small degree.

A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.

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

D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

Commercial Paper Ratings

Moody's

Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:

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

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

S&P

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

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

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

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

FRANKLIN
STRATEGIC
INCOME FUND

STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 SEPTEMBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN

Contents Page

About the Trust (See also the Prospectus
"About the Fund")................................ 2
The Fund's Investment Objectives
and Policies (See also the Prospectus
"Investment Objectives and Policies
of the Fund")..................................... 2
Officers and Trustees............................. 13
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")..................................... 16
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions................... 17
Additional Information Regarding Fund
Shares (See also the Prospectus "How to
Buy Shares of the Fund"; "How to Sell
Shares of the Fund"; and
"Valuation of Fund Shares")....................... 19
Additional Information Regarding Taxation
(See also the Prospectus "Taxation of the
Fund and Its Shareholders")....................... 22
The Fund's Underwriter............................ 25
General Information............................... 27
Financial Statements.............................. 30

Franklin Strategic Income Fund (the "Fund") is a non-diversified series of the
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's primary investment objective is to obtain a high level of
current income with capital appreciation over the long-term as a secondary
objective. The Fund seeks to achieve its objectives by using an active asset
allocation process and through a flexible policy of investing primarily in:
securities of foreign governments, their agencies and instrumentalities; United
States ("U.S.") and foreign corporate high yield fixed-income securities;
securities of the U.S. government, its agencies, authorities or
instrumentalities; as well as preferred stock, common stocks which pay
dividends, and income producing securities which are convertible into common
stocks of such companies.

A Prospectus for the Fund, dated September 1, 1995, as may be amended from time
to time, provides the basic information an investor should know before investing
in the Fund and may be obtained without charge from the Fund or from its
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors") at
the address shown above.

This Statement of Additional Information (the "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 investors with additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Fund's Prospectus.

About the Trust

Franklin Strategic Series (the "Trust"), a Delaware business Trust organized on
January 25, 1991, is an open-end management investment company, commonly called
a "mutual fund," and has registered under the Investment Company Act of 1940
(the "1940 Act"). Franklin Strategic Income Fund (the "Fund") is a
non-diversified series of the Trust. The Fund's investment manager is Franklin
Advisers, Inc. ("Advisers"). Templeton Investment Counsel, Inc. ("TICI") is
employed by Advisers to act as subadviser to the Fund. Advisers and TICI may be
referred to as the "Manager" or "Managers". The Managers are direct or indirect
wholly owned subsidiaries of Franklin Resources, Inc. ("Resources"), a publicly
owned holding company.

The Fund's Investment
Objectives and Policies

As noted in the prospectus, the Fund primarily seeks a high level of current
income with capital appreciation over the long term as a secondary
consideration. The investment objectives are fundamental policies which may not
be changed without shareholder approval.

The following information supplements and should be read in conjunction with the
section in the Fund's Prospectus entitled "Investment Objectives and Policies of
the Fund."

Further Information on Some of the Fund's
Investment Policies and Techniques

Loans of Portfolio Securities

The Fund may make loans of its portfolio securities, up to 331/3% of its assets,
in accordance with guidelines adopted by the Trust's Board of Trustees. The
lending of securities is a common practice in the securities industry. The Fund
will engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the collateral in
short-term, interest bearing obligations or by receiving loan premiums from the
borrower. The Fund will continue to be entitled to all dividends or interest on
any loaned securities. As with any extension of credit, there are risks of delay
in recovery and loss of rights in the collateral should the borrower of the
security fail financially. The Fund will not lend its portfolio securities if
such loans are not permitted by the laws or regulations of any state in which
its shares are qualified for sale. Loans will be subject to termination by the
Fund in the normal settlement time, currently three business days after notice,
or by the borrower on one day's notice. Borrowed securities must be returned
when the loan is terminated. Any gain or loss in the market price of the
borrowed securities which occurs during the term of the loan inures to the Fund
and its shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of its securities.

The Fund will not lend securities if doing so will cause the Fund to lose the
tax treatment available to regulated investment companies. It is the current
intention of the Fund to limit loans to no more than 10% of the net assets of
the Fund. The Fund may pay reasonable finder's, borrower's, administrative and
custodial fees in connection with a loan of its securities.

Borrowing

The Fund may borrow for temporary or emergency purposes, and to increase its
holdings of portfolio securities, up to 5% of its total assets. Under the 1940
Act, the Fund is required to maintain continuous asset coverage of at least 300%
with respect to such borrowings. Should the value of the Fund's assets decline
to below 300% of borrowings, the Fund may be required to sell portfolio
securities within three business days to reduce the Fund's debt and restore 300%
asset coverage.

Government National Mortgage
Association Certificates ("GNMAs")

GNMAs are mortgage backed securities representing part ownership of a pool of
mortgage loans. GNMA Certificates differ from bonds in that principal is
scheduled to be paid back by the borrower over the length of the loan rather
than returned in a lump sum at maturity. The Fund may purchase GNMA Certificates
for which principal and interest are guaranteed. The Fund may also purchase
"variable rate" GNMA Certificates and may purchase other types which may be
issued with GNMA's guarantee.

The GNMA guarantee of principal and interest on GNMA Certificates is backed by
the full faith and credit of the U.S. government. However, such securities do
involve certain risks. For example, when mortgages in the pool underlying a GNMA
Certificate are prepaid, such principal payments are passed through to the
Certificate holders (such as the Fund). Scheduled and unscheduled prepayments of
principal may greatly change realized yields. In a period of declining interest
rates it is more likely that mortgages contained in GNMA pools will be prepaid
thus reducing the effective yield. Moreover, any premium paid on the purchase of
a GNMA Certificate will be lost if the obligation is prepaid. In periods of
falling interest rates, this potential for pre-payment may reduce the general
upward price increase of GNMA Certificates which might otherwise occur. As with
other debt instruments, the price of GNMA Certificates is likely to decrease in
times of rising interest rates. Price changes of the GNMA Certificates held by
the Fund have a direct impact on the net asset value per share of the Fund.

Collateralized Mortgage Obligations ("CMOs"), Real Estate Mortgage Investment
Conduits ("REMICs") and Multi-Class Pass-Throughs

The Fund may also invest in certain debt obligations which are collateralized by
mortgage loans or mortgage pass-through securities. Such obligations may be
issued or guaranteed by U.S. government agencies or issued by certain financial
institutions and other mortgage lenders. CMOs and REMICs are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other mortgage-backed securities. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on underlying collateral provides
the funds to pay debt service on the CMO or REMIC or make scheduled
distributions on the multi-class pass-through securities. CMOs, REMICs and
multi-class pass-through securities (collectively CMOs unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the U.S.
government or by private organizations.

As noted in the Prospectus, in a CMO, a series of bonds or certificates is
issued in multiple classes or "tranches" issued at a specified coupon rate or
adjustable rate tranche (as discussed below) with a stated maturity or final
distribution date.

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

Yields on privately-issued CMOs as described above have been historically higher
than the yields on CMOs issued or guaranteed by U.S. government agencies.
However, the risk of loss due to default on such instruments is higher since
they are not guaranteed by the U.S. government. The trustees of the Fund believe
that accepting the risk of loss relating to privately issued CMOs that the Fund
acquires is justified by the higher yield the Fund will earn in light of the
historic loss experience on such instruments.

Convertible Securities

A portion of the Fund's assets may be invested in convertible securities. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure, but are usually subordinated to similar nonconvertible debt
securities. Convertible securities provide a fixed income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in the convertible security's
underlying common stock. As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security is also influenced by the market value of the security's underlying
common stock and tends to increase as the market value of the underlying stock
rises and decrease as the market value of the underlying stock declines.

American Depository Receipts ("ADRs")

ADRs represent the right to receive securities of foreign issuers deposited in a
domestic bank or a foreign correspondent bank. Prices of ADRs are quoted in U.S.
dollars, and ADRs are traded in the U.S. on exchanges or over-the-counter and
are sponsored and issued by domestic banks. ADRs do not eliminate all the risk
inherent in investing in the securities of foreign issuers. To the extent that
the Fund acquires ADRs through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the ADR to issue
and service such ADRs, there may be an increased possibility that the Fund would
not become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments. To the extent the Fund invests in ADRs rather than directly
in the stock of foreign issuers, it will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
the NASDAQ National Market System. The information available for ADRs is subject
to the accounting, auditing and financial reporting standards of the domestic
market or exchange on which they are traded, which standards are more uniform
and more exacting than those to which many foreign issuers may be subject.

Transactions in Options, Futures and
Options on Financial Futures

Call and Put Options on Securities

As noted in the Prospectus, the Fund intends to write covered put and call
options and purchase put and call options which trade on securities exchanges
and in the over-the-counter market.

Writing Call Options

Call options written by the Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price; put options written by the
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. A call option written by the Fund is "covered" if the
Fund owns the underlying security which is subject to the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash and high grade debt securities
in a segregated account with its custodian. The premium paid by the purchaser of
an option will reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.

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

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

Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.

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

Options on Foreign Currencies

As in the case of other kinds of options, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and the 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
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, the Fund may forfeit the entire amount of the premium
plus related transaction costs.

Forward Currency Exchange Contracts

The Fund usually effects Forward Currency Exchange Contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the Fund converts assets from one currency to another.

Purchasing Call Options

The Fund may purchase call options on securities which it intends to purchase in
order to limit the risk of a substantial increase in the market price of such
security. The Fund may also purchase call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.

Writing Put Options

Although the Fund has no current intention of writing covered put options in the
foreseeable future, the Fund reserves the right to do so.

A put option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any time
prior to its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.

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

Purchasing Put Options

The Fund may purchase put options. As the holder of a put option, the Fund has
the right to sell the underlying security or currency at the exercise price at
any time during the option period. The Fund may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire.

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

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

The Fund will commit no more than 5% of its assets to premiums when purchasing
put options. The premium paid by the Fund when purchasing a put option will be
recorded as an asset in the Fund's statement of assets and liabilities. This
asset will be adjusted daily to the options' current market value, which will be
the latest sale price at the time at which the net asset value per share of the
Fund is computed [close of trading on the New York Stock Exchange (the
"Exchange")], or, in the absence of such sale, the latest bid price. The asset
will be extinguished upon expiration of the option, the writing of an identical
option in a closing transaction, or the delivery of the underlying security or
currency upon the exercise of the option.

Over-the-Counter options ("OTC" options)

The Fund intends to write covered put and call options and purchase put and call
options which trade in the over-the-counter market to the same extent that it
will engage in exchange traded options. Just as with exchange traded options,
OTC call options give the option holder the right to buy an underlying security
from an option writer at a stated exercise price; OTC put options give the
holder the right to sell an underlying security to an option writer at a stated
exercise price. However, OTC options differ from exchange traded options in
certain material respects.

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

There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.

Options on Stock Indices

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

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

Interest Rate Swaps

An interest rate swap is the transfer between two counterparties of interest
rate obligations, one of which has an interest rate fixed to maturity while the
other has an interest rate that changes in accordance with changes in a
designated benchmark (e.g., LIBOR, prime, commercial paper, or other
benchmarks). The obligations to make repayment of principal on the underlying
securities are not exchanged. Such transactions generally require the
participation of an intermediary, frequently a bank. The entity holding the
fixed-rate obligation will transfer the obligation to the intermediary, and such
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity
which has a floating-rate obligation which substantially mirrors the obligation
desired by the first party. In return for assuming a fixed obligation, the
second entity will pay the intermediary all sums that the intermediary pays on
behalf of the first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire such obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed-rate obligation the opportunity to acquire such a fixed-rate
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover the
cost involved.

The Fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the Fund's risk of
loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.

Futures Contracts

The Fund may enter into contracts for the purchase or sale for future delivery
of securities and in such contracts based upon financial indices ("financial
futures"). Financial futures contracts are commodity contracts that obligate the
long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
the securities called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. Futures contracts have been designed by exchanges
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC") and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market.

At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit" or "initial margin")
as a partial guarantee of its performance under the contract. Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value. In addition, when the Fund enters
into a futures contract, it will segregate assets or "cover" its position in
accordance with the 1940 Act.

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

The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one-third of
the Fund's net assets would be represented by futures contracts or related
options. In addition, the Fund may not purchase or sell futures contracts or
purchase or sell related options if, immediately thereafter, the sum of the
amount of margin deposits on its existing futures and related options positions
and premiums paid for related options would exceed 5% of the market value of the
Fund's total assets. In instances involving the purchase of futures contracts or
related call options, money market instruments equal to the market value of the
futures contract or related option will be deposited in a segregated account
with the custodian to collateralize such long positions.

The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into a futures contract, it will maintain with its custodian bank, to the
extent required by SEC rules, assets in a segregated account to cover its
obligations with respect to such contract which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such futures
contract and the aggregate value of the initial and variation margin payments
made by the Fund with respect to such futures contracts.

Stock Index Futures and
Options on Stock Index Futures

The Fund may purchase and sell stock index futures contracts and options on
stock index futures contracts.

Stock Index Futures

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

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

Options on Stock Index Futures

The Fund may purchase and sell call and put options on stock index futures to
hedge against risks of market-side price movements. The need to hedge against
such risks will depend on the extent of diversification of the Fund's common
stock portfolio and the sensitivity of such investments to factors influencing
the stock market as a whole.

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

Bond Index Futures and Options
on such Contracts

The Fund may purchase and sell futures contracts based on an index of debt
securities and options on such futures contracts to the extent they currently
exist and, in the future, may be developed. The Fund reserves the right to
conduct futures and options transactions based on an index which may be
developed in the future to correlate with price movements in certain categories
of debt securities. The Fund's investment strategy in employing futures
contracts based on an index of debt securities will be similar to that used by
it in other financial futures transactions.

The Fund also may purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options.

Future Developments

The Fund may take advantage of opportunities in the area of options and futures
contracts and options on futures contracts and any other derivative investments
which are not presently contemplated for use by the Fund or which are not
currently available but which may be developed, to the extent such opportunities
are both consistent with the Fund's investment objective and legally permissible
for the Fund. Prior to investing in any such investment vehicle, the Fund will
supplement its prospectus, if appropriate.

Forward Currency Exchange Contracts

The Fund may enter into forward currency exchange contracts ("Forward
Contract(s)") to attempt to minimize the risk to the Fund from adverse changes
in the relationship between currencies or to enhance income. 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.

The Fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.

For example, an Italian lira-denominated position could be constructed by
purchasing a German mark-denominated debt security and simultaneously entering
into a Forward Contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the Fund
may be able to receive a return that is substantially similar from a yield and
currency perspective to a direct investment in lira debt securities while
achieving other benefits from holding the underlying security. The Fund may
experience slightly different results from its use of such combined investment
positions as compared to its purchase of a debt security denominated in the
particular currency subject to the Forward Contract. Such difference may be
enhanced or offset by premiums which may be available in connection with the
Forward Contract.

The Fund may also 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 that security.
Additionally, for example, when the 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 the 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.

To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt securities
equal to the amount of the purchase will be held aside or segregated in the
Fund's custodian bank to be used to pay for the commitment, or the Fund will
cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked to market on a daily basis. The ability of the
Fund to enter into Forward Contracts is limited only to the extent such Forward
Contracts would, in the opinion of the investment manager, impede portfolio
management or the ability of the Fund to honor redemption requests.

Risk Factors and Considerations Regarding
Options, Futures, Options on Futures and
Forward Exchange Contracts

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

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

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

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

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

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

The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course it will purchase securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.

As noted above, the Fund may enter into forward currency contracts, in part, in
order to limit the risk from adverse changes in the relationship between
currencies. However, Forward Contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies or
between foreign currencies. Unanticipated changes in currency exchange rates
also may result in poorer overall performance for the Fund than if it had not
entered into such contracts.

Restricted Securities

A restricted security is a security which has been purchased through a private
offering and cannot be sold without prior registration under the Securities Act
of 1933 unless such sale is pursuant to an exemption therefrom. Notwithstanding
the restriction on the sale of such securities, a secondary market exists for
many of these securities. As with other securities in the Fund's portfolio, if
there are readily available market quotations for a restricted security, it will
be valued, for purposes of determining the Fund's net asset value, between the
range of the bid and ask prices. To the extent that no such quotations are
available, the securities will be valued at fair value in accordance with
procedures adopted by the Board of Trustees. The Fund's purchases of restricted
securities can result in the receipt of commitment fees. For example, the
transaction may involve an individually negotiated purchase of short-term
increasing rate notes. Maturities for this type of security typically range from
one to five years. Such notes are usually issued as temporary or "bridge"
financing to be replaced ultimately with permanent financing for the project or
transaction which the issuer seeks to finance. Typically, at the time of
commitment, the Fund receives the security and sometimes a cash commitment fee.
Because the transaction could possibly involve a delay between the time the Fund
commits to purchase the security and the Fund's payment for and receipt of that
security, the Fund will maintain, in a segregated account with its custodian,
cash or high-grade marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will not
purchase restricted securities in order to generate commitment fees, although
the receipt of such fees will assist the Fund in achieving its principal
objective of earning a high level of current income.

Notwithstanding the determinations in regard to the liquidity of restricted
securities, the Board of Trustees remains responsible for such determinations
and will consider appropriate action to maximize the Fund's liquidity and its
ability to meet redemption demands if a security should become illiquid
subsequent to its purchase. To the extent the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the Fund
may be increased if qualified institutional buyers become uninterested in
purchasing these securities or the market for these securities contracts.

Illiquid Securities

As noted in the Prospectus, it is the policy of the Fund that illiquid
securities (including illiquid equity securities, defaulted debt securities,
loan participations, securities with legal or contractual restrictions on
resale, repurchase agreements of more than seven days duration and other
securities which are not readily marketable) may not constitute, at the time of
purchase or at any time, more than 10% of the value of the total net assets of
the Fund. Generally an "illiquid security" is any security that cannot be
disposed of promptly and in the ordinary course of business at approximately the
amount at which the Fund has valued the instrument. Subject to this limitation,
the Board of Trustees has authorized the Fund to invest in restricted securities
where such investment is consistent with the Fund's investment objectives and
has authorized such securities to be considered liquid to the extent the
Managers determine that there is a liquid institutional or other market for such
securities such as, restricted securities which may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended, and for which a liquid institutional market has developed. The
Board of Trustees will review on a monthly basis any determination by the
Managers to treat a restricted security as liquid, including the investment
adviser's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the Fund's investment adviser and the
Board of Trustees will take into account the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (iii) dealer undertakings to make a market in the security; and (iv)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer). To the extent the Fund invests in restricted securities
that are deemed liquid, the general level of illiquidity may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.

Securities Transactions of the Fund

Normally, the Fund will purchase securities with the intention of holding them
for the long-term; however, it may on occasion purchase securities with the
expectation of selling within a short period of time. Changes in particular
portfolio holdings may be made whenever it is considered that a security no
longer is suitable for the Fund's portfolio or that another security appears to
offer a relatively greater opportunity, and will be made without regard to the
length of time a security has been held. The Fund anticipates that its annual
portfolio turnover rate generally will not exceed 100% but this rate should not
be construed as a limiting factor. The portfolio turnover rate for the period
May 24, 1994 (the Fund's effective date) to April 30, 1995 was 68.43%.

Investment Restrictions and Policies

Restrictions. The Fund has adopted the following restrictions as fundamental
policies, which means that they may not be changed without the approval of a
majority of the outstanding voting securities of the Fund. Under the 1940 Act, a
"vote of a majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund, or (2) 67% or more of the shares of the Fund present at a
shareholders' meeting if more than 50% of the outstanding shares of the Fund are
represented at the meeting in person or by proxy. The Fund may not:

(1) Invest more than 25% of the value of the Fund's total assets in one
particular industry; except that, to the extent this restriction is applicable,
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund;

(2) Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter in connection with the disposition of
securities in its portfolio; except that all or substantially all of the assets
of the Fund may be invested in another registered investment company having the
same investment objectives and policies as the Fund;

(3) Make loans to other persons except on a temporary basis in connection with
the delivery or receipt of portfolio securities which have been bought or sold,
or by the purchase of bonds, debentures or similar obligations which have been
publicly distributed or of a character usually acquired by institutional
investors or through loans of the Fund's portfolio securities, or to the extent
the entry into a repurchase agreement may be deemed a loan;

(4) Borrow money in excess of 5% of the value of the Fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes;

(5) Sell securities short or buy on margin nor pledge or hypothecate any of the
Fund's assets; except that the Fund may enter into financial futures and options
on financial futures as discussed;

(6) Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts; except that the Fund may invest in
financial futures and related options on futures with respect to securities,
securities indices and currencies;

(7) Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition; provided that
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund. To the extent permitted by exemptions granted under the 1940 Act,
the Fund may invest in shares of one or more money market funds managed by
Managers or their affiliates;

(8) Invest in securities for the purpose of exercising management or control of
the issuer, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund; and

(9) Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Fund,
one or more of the officers or trustees of the Fund, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund, or except as permitted under investment restriction Number 7
regarding the purchase of shares of money market funds managed by the Managers
or their affiliates.

In addition to the Fund's fundamental policies, it is the present policy of the
Fund to not invest in real estate limited partnerships or in interests (other
than publicly traded equity securities) in oil, gas, or other mineral leases,
exploration or development. As stated in the Prospectus, the Fund will also not
invest more than 5% of its total assets in companies which have a record of less
than three years continuous operation, including predecessors; nor engage in
joint or joint and several trading accounts in securities, except that an order
to purchase or sell may be combined with orders from other persons to obtain
lower brokerage commissions. In addition, as a condition to maintain a permit to
sell securities in the state of Texas, pursuant to Texas Regulation 123.2(8),
the Fund's direct investment in warrants, valued at the lower of cost or market,
will not exceed 5.0% of the value of the fund's net assets. Included within that
amount, but not to exceed 2.0% of the value of the fund's net assets, may be
warrants which are not listed on the New York or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities will be deemed
to be without value, as stated by the Texas Regulation.

Officers and Trustees

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

Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111

President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.

Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045

President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.

*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404

Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.

S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945

Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.

David W. Garbellano (80) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105

Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.

*Charles B. Johnson (62) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee

President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.

*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404

Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.

Frank W. T. LaHaye (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014

General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.

Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817

Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group,
Director, H & Q Healthcare Investors, and President, National Association of
Securities Dealers, Inc.

Kenneth V. Domingues (62) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards

Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.

Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial
Officer

Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.

Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404

Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.

Charles E. Johnson (39) Vice President
777 Mariners Island Blvd.
San Mateo CA 94404

Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 24 of the investment companies in the Franklin Templeton Group of Funds.

Diomedes Loo-Tam (56) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting
Officer

Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.

Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404

Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.

The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and Advisers.

Trustees not affiliated with the investment manager ("nonaffiliated trustees")
may be, but are not currently, paid fees or expenses incurred in connection with
attending meetings. As indicated above, certain of the Trust's nonaffiliated
trustees also serve as directors, trustees or managing general partners of other
investment companies in the Franklin Group of Funds(R) and the Templeton Group
of Funds (the "Franklin Templeton Group of Funds") from which they may receive
fees for their services. The following table indicates the total fees paid to
the Trust's nonaffiliated trustees by other funds in the Franklin Templeton
Group of Funds.

Number of Boards
Total Fees Received in the Franklin
from the Franklin Templeton Group
Templeton Group of Funds on Which
Name of Funds* Each Serves**

<S> <C> <C>
Mr. Abbott ........................... $176,870 31
Mr. Ashton ........................... $319,925 56
Mr. Fortunato ........................ $336,065 58
Mr. Garbellano ....................... $153,300 30
Mr. LaHaye ........................... $150,817 26
Mr. Macklin .......................... $303,685 53

</TABLE>

* For the calendar year ended December 31, 1994.

** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
trustees are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of 162 U.S. based mutual
funds or series.

Nonafilliated trustees 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, trustee or managing general
partner. Certain officers or trustees who are shareholders of Franklin
Resources, Inc. may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning trustee compensation and expenses, please see
the Trust's Annual Report to Shareholders.

As of June 5, 1995, the trustees and officers did not own any shares of the
Fund. Many of the Trust's trustees own shares in various of the other funds in
the Franklin Templeton Group of Funds. Charles E. Johnson is the son and nephew,
respectively, of Charles B. Johnson and Rupert H. Johnson, Jr., who are
brothers.

Investment Advisory and Other Services

Advisers serves as the Fund's investment manager under a management agreement
which provides for the management of the Fund's portfolio and for the
performance of various administrative functions as noted below. TICI is employed
by Advisers to act as subadviser under a subadvisory agreement between Advisers
and TICI. The Managers and other subsidiary companies of Resources currently
manage over $125 billion in assets worldwide for more than 3.8 million
shareholders, in addition to foundations and endowments, employee benefit plans,
and individuals.

Pursuant to the management agreement between the Fund and Advisers and the
sub-advisory agreement between Advisers and TICI, the Managers provide
investment research and portfolio management services, including the selection
of securities for the Fund to purchase, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. The
Manager's activities are subject to the review and supervision of the Fund's
Board of Trustees and, in the case of TICI, to Advisers, to whom the Managers
render periodic reports of the Fund's investment activities. Under the terms of
the management agreement, Advisers, at its own expense, furnishes the Fund with
office space and office furnishings, facilities and equipment required for
managing the business affairs of the Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Managers are covered by
fidelity insurance on their officers, directors and employees for the protection
of the Fund. The Fund bears all of its expenses not assumed by Advisers. See the
Statement of Operations in the financial statements included in the Trust's
Annual Report to Shareholders dated April 30, 1995.

Under the management agreement, the Fund is obligated to pay Advisers a monthly
fee equal to an annual rate of 0.625 of 1% of the value of its average daily net
assets up to and including $100 million; 0.50 of 1% of the value of its average
daily net assets over $100 million up to and including $250 million; and 0.45 of
1% of the value of its average daily net assets over $250 million.

Advisers is obligated to pay TICI a monthly fee equal to an annual rate of
0.3125 of 1% of the Fund's average daily net assets up to and including $100
million; 0.25 of 1% of the value of the Fund's average daily net assets over
$100 million up to and including $250 million; and 0.225 of 1% of the value of
the Fund's average daily net assets over $250 million. This fee is not a
separate expense of the Fund but is paid from the investment advisory fees
received by Advisers under its management agreement. TICI will pay all expenses
incurred by it in connection with its activities under the subadvisory agreement
with Advisers, other than the cost of securities purchased for the Fund and
brokerage commissions in connection with such purchases.

Under advance agreement, Advisers may elect not to impose or to limit management
fees and may, in addition, make payments to offset certain operating expenses
otherwise payable by the Fund. This action by Advisers to limit fees and assume
responsibility for payment of expenses related to the operations of the Fund may
be terminated by Advisers at any time. The management agreement specifies that
the management fee will be reduced to the extent necessary to comply with the
most stringent limits on the expenses which may be borne by the Fund as
prescribed by any state in which the Fund's shares are offered for sale. The
most stringent current limit requires the Manager to reduce or eliminate its fee
to the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 21/2% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 11/2% of average net assets of the Fund in excess of $100
million.

For the period May 24, 1994 (inception date) to April 30, 1995, Advisers waived
its management fees and assumed responsibility for making payments to offset
certain operating expenses otherwise payable by the Fund. For that period,
although the Fund was contractually obligated to pay Advisers management fees of
$32,160, the Fund actually paid none.

The management agreement with Advisers and the subadvisory agreement between
Advisers and TICI are in effect until February 29, 1996. Thereafter, they may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Trust's
trustees who are not parties to the management or sub-advisory agreements or
interested persons of any such parties (other than as trustee of the Trust),
cast in person at a meeting called for that purpose. The management agreement
may be terminated without penalty at any time by the Fund or by Advisers on 30
days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.

Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.

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

Coopers & Lybrand, L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the period ended April 30, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Trust's Annual Report to Shareholders
dated April 30, 1995.

The Fund's Policies Regarding
Brokers Used on Portfolio Transactions

The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by the Managers in accordance with criteria set forth in the
management and sub-advisory agreements and any directions which the Board of
Trustees may give.

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

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

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

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

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.

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

In connection with exchanges (see Prospectus "Exchange Privilege"), it should be
noted that since the proceeds from the sale of shares of an investment company
generally are not available until the fifth business day following the
redemption, the fund into which the Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
for shares of any of the investment companies will be effected at the close of
business on the day the request for exchange is received in proper form at the
net asset value then effective.

During the period May 24, 1994 to April 30, 1995, the Fund paid total brokerage
commissions of $757. As of April 30, 1995, the Fund did not own securities of
its regular broker-dealers.

Additional Information
Regarding Fund Shares

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

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

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

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

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

Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:

Sales
Size of Purchase - In U.S. dollars Charge
Up to $100,000 .............................. 3%
$100,000 to $1,000,000 ...................... 2%
Over $1,000,000 ............................. 1%

Purchases and Redemptions through
Securities Dealers

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

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

Special Net Asset Value Purchases

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

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

Letter of Intent

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

As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of Intent and is an
amount which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to the investor.

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

Redemptions in Kind

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission ("SEC"). In the
case of requests for redemption in excess of such amounts, the trustees reserve
the right to make payments in whole or in part in securities or other assets of
the Fund from which the shareholder is redeeming, in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind;
however, should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.

Redemptions by the Fund

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

Calculation of Net Asset Value

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

As stated in the Prospectus, the net asset value per share for the Fund is
determined in the following manner: The aggregate of all liabilities, including,
without limitation, the current market value of any outstanding options written
by the Fund, accrued expenses and taxes and any necessary reserves is deducted
from the aggregate gross value of all assets, and the difference is divided by
the number of shares of the Fund outstanding at the time. For the purpose of
determining the aggregate net assets of the Fund, cash and receivables are
valued at their realizable amounts. Interest is recorded as accrued and
dividends are recorded on the ex-dividend date.

Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Over-the-counter
portfolio securities for which market quotations are readily available are
valued within the range of the most recent bid and ask prices as obtained from
one or more dealers that make markets in the securities. Portfolio securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market as determined by
the Manager. Portfolio securities underlying actively traded call options are
valued at their market price as determined above. The current market value of
any option held by the Fund is its last sale price on the relevant exchange
prior to the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, the options are valued within
the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. Other securities for
which market quotations are readily available are valued at the current market
price, which may be obtained from a pricing service, based on a variety of
factors, including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.

The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded or as of the
scheduled close of trading on the Exchange, if that is earlier, and that value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at noon, Eastern time, on the day the value of the foreign security is
determined. Occasionally, events which affect the values of foreign securities
and foreign exchange rates may occur between the times at which they are
determined and the close of the exchange and will, therefore, not be reflected
in the computation of the Fund's net asset value, unless material. If events
which materially affect the value of these foreign securities occur during such
period, then these securities will be valued at fair value as determined by
management and approved in good faith by the Board of Trustees.

Reinvestment Date

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

Reports to Shareholders

The Trust sends annual and semi-annual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at
1-800/DIAL-BEN.

Special Services

The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund. The
cost of these services is not borne by the Fund.

Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.

Additional Information Regarding Taxation

As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). The trustees reserve the right not to maintain the
qualification of the Fund as a regulated investment company if they determine
such course of action to be beneficial to the shareholders. In such case, the
Fund will be subject to federal and possibly state corporate taxes on its
taxable income and gains, and distributions to shareholders will be taxable to
the extent of the Fund's available earnings and profits.

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

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

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

The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12-month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to shareholders by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare such dividends, if any, in December and to pay
these dividends in December or January to avoid the imposition of this tax, but
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.

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

All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.

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

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

All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Funds and a sales charge which
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of such sales charge excluded from the tax basis of the shares sold will be
added to the tax basis of the shares acquired in the reinvestment. Shareholders
should consult with their tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.

The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales, foreign exchange
gains or losses and structured products are subject to many complex and special
tax rules. For example, over-the-counter options on debt securities and equity
options, including options on stock and on narrow-based stock indexes, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse, or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered into
by the Fund is 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 contacts and certain foreign currency contacts and
options thereon.

Absent a tax election to the contrary, each such Section 1256 position held by
the 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 all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign 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. The effect of Section 1256
mark-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 the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the 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 both the
amount, character and timing of income distributed to shareholders by the Fund.

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

Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn its distributions to shareholders.

In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Foreign exchange gains derived by a Fund with respect to the Fund's
business of investing in stock or securities or options or futures with respect
to such stock or securities is qualifying income for purposes of this 90%
limitation.

Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
nondirectly-related gains arising from foreign currency positions or instruments
held for less than three months are treated as derived from the disposition of
securities held less than three months in determining the Fund's compliance with
the 30% limitation. The Fund will limit its activities involving foreign
exchange gains to the extent necessary to comply with these requirements.

The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.

If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income tax on a portion of any "excess distribution" it receives from the PFIC
or any gain it derives from the disposition of such shares, even if such income
is distributed as a taxable dividend by the Fund to its U.S. shareholders. The
Fund may also be subject to additional interest charges in respect of deferred
taxes arising from such distributions or gains. Any federal income tax paid by
the Fund as a result of its ownership of shares of a PFIC will not give rise to
a deduction or credit to the Fund or to any shareholder. A PFIC means any
foreign corporation if, for the taxable year involved, either (i) it derives at
least 75 percent of its income from "passive income" (including, but not limited
to, interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income."

On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.

The Fund's Underwriter

Pursuant to an underwriting agreement in effect until February 29, 1996,
Distributors acts as principal underwriter in a continuous public offering of
the Fund's shares.

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

The underwriting agreement will continue in effect for successive annual periods
provided that its continuance is specifically approved at least annually by a
vote of the Fund's Board of Trustees, or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Fund's trustees who are not parties to the underwriting agreement or
interested persons of any such party (other than as trustee of the Fund), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the period ended April 30, 1995 were $35,219. After allowances
to dealers, Distributors retained $987. Distributors may be entitled to
reimbursement under the distribution plan of the Fund as discussed below. Except
as noted, Distributors received no other compensation from the Fund for acting
as underwriter.

Distribution Plan

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of
its average daily net assets for expenses incurred in the promotion and
distribution of its shares.

Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred in
the distribution and promotion of the Fund's shares, including, but not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.

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

In no event shall the aggregate asset-based sales charges which include payments
made under the Plan, plus any other payments deemed to be made pursuant to the
Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.

The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. No interested person or trustee of the
Trust has a direct or indirect financial interest in the Plan. The Plan does not
permit unreimbursed expenses incurred in a particular year to be carried over to
or reimbursed in subsequent years.

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

The Board of Trustees has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities of portfolio securities without having to
make unwarranted liquidations of other portfolio securities. The Board of
Trustees, therefore, felt that it would benefit the Fund to have monies
available for the direct distribution activities of Distributors or others in
promoting the sale of its shares. The Board of Trustees, including the
non-interested trustees, concluded that, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.

The Plan has been approved in accordance with the provisions of Rule 12b-1 by
Resources, the initial shareholder of the Trust, and by the trustees of the
Trust, including those trustees who are not interested persons, as defined in
the 1940 Act. The Plan is in effect until February 29, 1996 and renewable
annually thereafter by a vote of the Trust's Board of Trustees, including a
majority vote of the trustees who are non-interested persons of the Trust and
who have no direct or indirect financial interest in the operation of the Plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such trustees be done by the non-interested
trustees. The Plan and any related agreement may be terminated at any time,
without any penalty, by vote of a majority of the non-interested trustees on not
more than 60 days' written notice, by Distributors on not more than 60 days'
written notice, by any act that constitutes an assignment of the management
agreement with Advisers or the underwriting agreement with Distributors, or by
vote of a majority of the Fund's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.

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

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

For the period ended April 30, 1995, the total amount paid by the Fund pursuant
to the Plan was $939, all of which was used as payments to broker or dealers.

General Information

Performance

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

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

Total Return

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

In considering the quotations of total return by the Fund investors should
remember that the 4.25% maximum front-end sales charge reflected in each
quotation is a one time fee (charged on all direct purchases) which will have
its greatest impact during the early stages of an investor's investment in the
Fund. The actual performance of an investment will be affected less by this
charge the longer an investor retains the investment in the Fund.

These figures will be calculated according to the following SEC formula:

n
P(1+T) = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten year periods. The
Fund's total rate of return for the period May 24, 1994 (inception date) to
April 30, 1995 was 4.35%.

Yield

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

Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for a share of the Fund for the 30-day period ended April 30, 1995 was
8.30%.

This figure was obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period

Current Distribution Rate

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

Volatility

Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market as represented by the
Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility
greater than the market, and a beta of less than 1.00 indicates volatility less
than the market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or total
return around an average, over a specified period of time. The premise is that
greater volatility connotes greater risk undertaken in achieving performance.

Other Performance Quotations

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

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

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

The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.

Comparisons

To help investors better evaluate how an investment in the Fund(s) might satisfy
their investment objective, advertisements and other materials regarding the
Fund(s) may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:

a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.

b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.

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

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

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

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

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

h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.

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

j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.

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

l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill, Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg LP.

m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.

From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.

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

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

Other Features and Benefits

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

Miscellaneous Information

The Fund is a member of the Franklin Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 47 years and now services
more than 2.5 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin Templeton Group has over $125 billion in
assets under management for more than 3.8 million shareholder accounts in
addition to foundations and endowments, employee benefit plans and individuals,
and offers 115 U.S.-based mutual funds.
The Fund may identify itself by its NASDAQ or CUSIP number.

The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.

Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also 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.

General

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, the only entity holding beneficially or of record
more than 5% of the Fund's outstanding shares is Resources, which provided the
initial capital of the Fund.

Ownership and Authority Disputes

In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (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, prior
to 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.

Financial Statements

The financial statements, including any schedules thereto and reports thereon
contained in the Annual Report to Shareholders of the Trust dated April 30, 1995
are incorporated herein by reference.