FRANKLIN STRATEGIC SERIES, 497, 1995-03-03

FRANKLIN STRATEGIC SERIES
497, 1995-03-03

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80P
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN CALIFORNIA GROWTH FUND
FRANKLIN STRATEGIC SERIES
DATED SEPTEMBER 1, 1994, AS AMENDED NOVEMBER 11, 1994

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

1. EXPENSE TABLE

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

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

a) Add the following language as paragraph two:

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
Less than $100,000.................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000....................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000..................... 2.25% 2.30% 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: 1.00% on sales of $1 million but less than
$2 million, plus 0.80% on sales of $2 million but less than $3 million,
plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on
sales of $50 million but less than $100 million, plus 0.15% on sales of
$100 million or more. Dealer concession breakpoints are reset every
12 months for purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.

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

<PAGE>

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

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

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

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

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

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

<PAGE>

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

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

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.

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

Shares of the Fund may be purchased at net asset value or 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

<PAGE>

purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following such order.

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

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

a) Add the following paragraph under "Exchanges by Telephone":

The automatic TeleFACTS(R) system at 1-800/247-1753 is available for
processing exchanges (day or night.) During periods of drastic economic or
market changes, however, this option may not be available, in which event
the shareholder should follow other exchange procedures discussed in the
section.

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

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

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

The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.

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

<PAGE>
FRANKLIN
CALIFORNIA
GROWTH FUND

Franklin Strategic Series

PROSPECTUS SEPTEMBER 1, 1994
AS AMENDED NOVEMBER 11, 1994

[LOGO]

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

Franklin California Growth Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is to seek capital appreciation. The
Fund seeks to accomplish its objective by investing primarily in a
non-diversified portfolio of securities of companies headquartered in, or
conducting a majority of operations in, the state of California.

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.

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

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

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.

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.

<PAGE>

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table................................... 2
Financial Highlights............................ 4
About the Fund.................................. 4
Investment Objective
and Policies of the Fund....................... 4
Management of the Fund.......................... 11
Distributions to Shareholders................... 13
Taxation of the Fund
and Its Shareholders........................... 14
How to Buy Shares of the Fund................... 15
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments............. 21
Other Programs and Privileges
Available to Fund Shareholders................. 23
Exchange Privilege.............................. 24
How to Sell Shares of the Fund.................. 26
Telephone Transactions.......................... 29
Valuation of Fund Shares........................ 30
How to Get Information Regarding
an Investment in the Fund...................... 31
Performance..................................... 32
General Information............................. 32
Account Registrations........................... 33
Important Notice Regarding
Taxpayer IRS Certifications.................... 34
Portfolio Operations............................ 35
</TABLE>

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
operating expenses of the Fund (including fees set by contract) for the fiscal
year ended April 30, 1994.

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................................ 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends ........................... NONE
Deferred Sales Charge........................................................... NONE
Redemption Fees................................................................. NONE
Exchange Fee.................................................................... NONE
</TABLE>

<PAGE>

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fees................................................................... 0.55%*
12b-1 Fees........................................................................ 0.10%**
Other Expenses:
Registration............................................................. 0.35%
Professional Fees........................................................ 0.30%
Reports to Shareholders.................................................. 0.26%
Other.................................................................... 0.33%
-----
Total Other Expenses.............................................................. 1.24%
-----
Total Fund Operating Expenses..................................................... 1.89%
=====
</TABLE>

*Represents the amount that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager,
however, has voluntarily agreed to limit its management fees and assume
responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this reduction, the Fund paid no management
fees and total operating expenses represented 0.09% of the average net assets
of the Fund. This arrangement may be terminated by the investment manager at
any time. As stated below, on July 12, 1993, the Fund's investment objective,
certain investment policies and its name were changed and, consistent
therewith, the management fee paid to Advisers was changed. As a result, the
expense information in this Expense Table has been restated to reflect the
Fund's current management fee.

**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 initial sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period. As noted in the table above, the
Fund charges no redemption fees:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$63 $102 $143 $256
</TABLE>

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

<PAGE>

FINANCIAL HIGHLIGHTS

Set forth below is a table containing the financial highlights for a share of
the Fund from October 18, 1991 (the effective date of the registration
statement for the Fund) through April 30, 1992, and for the fiscal years ended
April 30, 1993 and 1994. The information for the three fiscal years in the
period ended April 30, 1994 has been audited by Coopers & Lybrand, independent
auditors, whose audit report appears in the financial statements in the Fund's
SAI. See the discussion "Reports to Shareholders" under "General Information."

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS NET ASSET
ENDED BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT FROM TOTAL VALUE AT TOTAL
APRIL 30 OF YEAR INCOME SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS END OF YEAR RETURN*
- -------- --------- ---------- -------------- ---------- ------------- ------------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992(1) $10.04 $0.07 $(0.168) $(0.098) $(0.072) $ -- $ -- $ 9.87 (1.77)%**
1993 9.87 0.12 0.340 0.460 (0.120) -- -- 10.21 4.72
1994 10.21 0.14 2.425 2.565 (0.145) (0.580) (0.725) 12.05 25.55

</TABLE>
<TABLE>
<CAPTION>
RATIO/SUPPLEMENTAL DATA
- --------------------------------------------------
RATIO OF NET
INVESTMENT
NET RATIO OF INCOME TO
ASSETS AT EXPENSES TO AVERAGE PORTFOLIO
END OF YEAR AVERAGE NET NET ASSETS INVESTMENT
(IN 000's) ASSETS*** (SEE NOTE 6) RATE
- ----------- ----------- ------------ ----------
<S> <C> <C> <C>
$3,091 --% 1.27% 13.73%
3,412 -- 1.23 38.28
4,646 0.09 1.16 135.12
</TABLE>

(1) For the period October 18, 1991 (effective date) to April 30, 1992.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum 4.5% initial sales charge and
assumes reinvestment of dividends and capital gains at net asset value.
**Annualized
***During the period indicated Franklin Advisers, Inc. reduced its
management fees and reimbursed other expenses incurred by the Fund. Had such
action not been taken, the ratios of expenses to average net assets would have
been as follows:

<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
1992(1)............................. 1.61%**
1993................................ 1.99
1994................................ 1.89
</TABLE>

ABOUT THE FUND

Franklin California Growth Fund is a non-diversified series of the Franklin
Strategic Series, an open-end management investment company, commonly called a
"mutual fund," registered with the SEC under the Investment Company Act of
1940, as amended (the "1940 Act"). Franklin Strategic Series is a Delaware
business trust organized on January 25, 1991 and is managed by Franklin
Advisers, Inc. (the "Manager" or "Advisers"). Prior to July 12, 1993, the
Fund's name had been Franklin California 250 Growth Fund. On that date, the
Fund's investment objective and various investment policies were changed and,
consistent therewith, its name was changed to the Franklin California Growth
Fund. 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
based upon a variable percentage (ranging from 4.50% to less than 1.00% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND

The Fund's investment objective is to seek capital appreciation. Under normal
market conditions, the Fund invests at least 65% of its assets in the securi-

<PAGE>

ties of companies either headquartered or conducting a majority of their
operations in the state of California, consisting of the common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by such companies. The securities in which the Fund invests
are traded primarily on the New York or American stock exchanges or
over-the-counter markets. The Fund's investment objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. As with
any investment, there is no assurance that the Fund's objective will be
achieved.

In attempting to achieve this objective, the preponderance of the companies in
which the Fund invests are expected to be small to mid-size capitalization
companies with market capitalizations of up to $2.5 billion at the time of the
Fund's investment. The Fund may also invest in relatively well known, larger
capitalization companies in mature industries which the Manager believes have
the potential for capital appreciation.

Although the Fund's assets are invested primarily in securities of
California-linked companies, the Fund may invest up to 35% of its investments
in the securities of companies headquartered or conducting a majority of their
operations outside the state of California, including the common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by such companies. In this way the Fund seeks to benefit from
its research into companies and industries within or beyond the Fund's primary
region.

The Fund may also invest up to 35% of its total assets in debt securities
consisting of bonds, notes and debentures if the Manager deems the investment
to present a favorable investment opportunity, consistent with the Fund's
objective of capital appreciation. As noted below, up to 5% of the Fund's net
assets may be invested in fixed-income securities rated below investment grade.
The remainder of the Fund's fixed-income securities will be limited to at least
investment grade and will be rated no lower than BBB by Standard & Poor's
Corporation ("S&P") or Baa by Moody's Investors Service ("Moody's"). Investment
grade securities are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
some speculative characteristics. The Fund may seek capital appreciation by
investing in such debt securities which the Manager believes have the potential
for capital appreciation as a result of improvement in the creditworthiness of
the issuer. The prices of such securities generally increase when interest
rates decline while such prices generally decrease when interest rates rise.
The receipt of income from such debt securities will be incidental to the
Fund's investment objective of capital appreciation.

A portion of the Fund's assets may be invested in convertible debt and
preferred stock. A convertible security is a security which may be converted at
a stated price within a specified period of time into a certain quantity of the
common or preferred 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 securities. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock. As
with a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends

<PAGE>

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, whereas it tends to decrease as the market value of the
underlying stock declines. As a result of the Fund's investments in equity
securities, including convertible fixed-income securities, the value of the
Fund's shares and the dividends per share paid by the Fund may fluctuate.

The Fund is permitted to invest up to 5% of its assets in fixed-income
securities, including convertible debt and preferred stocks, bonds, notes and
debentures rated below investment grade. The remainder (up to 30% of total
assets) of such fixed income investments will be limited to investment grade
obligations. The 5% below investment grade portion includes securities that are
rated no lower than B by Moody's or S&P, or that are not rated but determined
by management to be of comparable quality.

Fixed-income securities within the top three categories (i.e., securities rated
AAA, AA and A by S&P or Aaa, Aa or A by Moody's) are generally known as
high-grade securities and are regarded as having a strong capacity to pay
interest or dividends, as the case may be. Medium-grade securities (i.e.,
securities rated BBB by S&P or Baa by Moody's) are regarded as having an
adequate capacity to pay interest or dividends but with greater vulnerability
to adverse economic conditions and some speculative characteristics. Lower
rated (below investment grade) securities, those rated BB or lower by S&P or Ba
or lower by Moody's, are considered by S&P and Moody's, on balance, to be
predominantly speculative with respect to capacity to pay stock obligations in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the higher rating categories. These lower rated
fixed-income securities are subject to credit risk considerations, and involve
higher risk, while typically offering relatively higher yield, and are commonly
referred to as "junk bonds." The SAI contains a discussion of the risks of
investing in lower rated securities and an Appendix which discusses these
ratings categories.

SPECIAL CONSIDERATIONS

To the extent that the Fund may invest in smaller capitalization companies or
other companies, the Fund may place greater emphasis upon investments in
relatively new or unseasoned companies which are in their early stages of
development, or in new and emerging industries where the opportunity for rapid
growth is expected to be above average. Securities of unseasoned companies
present greater risks than securities of larger, more established companies.
The companies in which the Fund may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Due to these and other factors, new or unseasoned
companies may suffer significant losses as well as realize substantial growth,
and investments in such companies tend to be volatile and are therefore
speculative. Any such investments, however, will be limited in the case of
issuers which have less than three years continuous operation, including the
operations of any predecessor companies, to no more than 5% of the Fund's total
assets.

<PAGE>

as amended (the "Code"), applicable to "regulated investment companies" so that
it will not be subject to U.S. federal income tax on income and capital gains.
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 would be the case if it
were more broadly diversified.

RISK FACTORS IN CALIFORNIA

The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in companies
currently headquartered or conducting a majority of their operations in
California. Such information constitutes only a brief discussion, does not
purport to be a complete description, and is based primarily upon information
derived from independent credit reports and historically reliable sources, but
has not been independently verified by the Fund. See the "Appendix" in the
Fund's SAI for additional information regarding the California economy.

Changes in California constitutional and other laws during the last several
years have raised questions about the ability of California state and municipal
issuers to obtain sufficient revenue to pay their bond obligations. In 1978,
California voters approved an amendment to the California Constitution known as
Proposition 13. Proposition 13 limits ad valorem taxes on real property and
restricts the ability of taxing entities to increase real property taxes.
Legislation passed subsequent to Proposition 13, however, provided for the
redistribution of California's General Fund surplus to local agencies, the
reallocation of revenues to local agencies and the assumption of certain local
obligations by the state so as to help California municipal issuers to raise
revenue to pay their bond obligations. It is unknown, however, whether
additional revenue redistribution legislation will be enacted in the future and
whether, if enacted, such legislation would provide sufficient revenue for such
California issuers to pay their obligations. The state is also subject to
another constitutional amendment, Article XIIIB, which may have an adverse
impact on California state and municipal issuers. Article XIIIB restricts the
state from spending certain appropriations in excess of an appropriations limit
imposed for each state and local government entity. If revenues exceed such
appropriations limit, such revenues must be returned either as revisions in the
tax rates or fee schedules. Because of the uncertain impact of the
aforementioned statutes the possible inconsistencies in the respective terms of
the statutes and the impossibility of predicting the level of future
appropriations and applicability of related statutes to such questions, it is
not currently possible to assess the impact of such legislation and policies on
the long-term ability of California state and municipal issuers to pay interest
or repay principal on their obligations.

California's economy is larger than most sovereign nations. During the 1980s,
California experienced growth rates well in excess of the rest of the nation.
The state's major employment sectors are services, trade, and manufacturing.
Industrial concentration is in electronics, aerospace, and non-electrical
equipment. Also significant are agriculture and oil production.

Key sectors of California's economy have been severely affected by the
recession. Since May of 1990, job losses total over 850,000. Declines in the
aerospace and high technology sectors have been especially severe. The
continuing drive in population

<PAGE>

and labor force growth has produced higher unemployment rates in the state.
Although total job loss has declined, weakness continues in key areas of
California's economy, including government, real estate and aerospace. Wealth
levels still remain high in the state, although the difference between state
and national levels continues to narrow.

In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California. These revisions reflect the state's heavy
reliance on the short-term note market to finance its cash imbalance and the
likelihood that this exposure will persist for at least another two years. For
more information on these ratings revisions and the state's current budget,
please refer to the Fund's SAI.

The Fund's policy of investing primarily in the securities of California
companies versus a less concentrated investment policy does involve certain
additional risks, including the risk that an economic, business, political,
regulatory or other development or change affecting one portfolio security or
industry, could affect other securities or industries.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Loans of Portfolio Securities. As 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 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 102%. Such collateral shall consist
of cash, securities issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The borrower deposits and
maintains 102% collateral for the benefit of the Fund. 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 the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund 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. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of the assets of the Fund, except that the Fund may borrow up to
10% of its total asset value to meet redemption requests and for other
temporary or emergency purposes. While borrowings exceed 5% of the Fund's total
assets, the Fund will not make any additional investments.

<PAGE>

vestment is consistent with the Fund's investment objective and has authorized
such securities to be considered liquid (and thus not subject to the foregoing
10% limitation), to the extent the Manager determines on a daily basis that
there is a liquid institutional or other market for such securities. The
Trust's Board of Trustees will review the Manager's determinations of
liquidity, retain ultimate responsibility for such determinations and will
consider appropriate action, consistent with the Fund's objective and policies,
if a security should become illiquid subsequent to its purchase. For additional
information, see "The Fund's Investment Objective and Restrictions" in the SAI.

Securities Industry Related Investments. To the extent consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including such companies that are securities brokers,
dealers, underwriters or investment advisers. Such companies are considered
part of the financial services industry sector.

Pursuant to Section 12 of the 1940 Act, the Fund may not acquire a security or
any interest in a securities related business, to the extent such acquisition
would exceed certain limitations. The Fund does not believe that these
limitations will impede the attainment of its investment objective.

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 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 redemption requirements or as a
temporary defensive measure.

Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options on securities and securities indices which
trade on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell financial futures and options on financial futures with
respect to securities indices. Additionally, the Fund may purchase and sell
financial futures and options to "close out" financial futures and options it
has previously entered into. The Fund will not enter into any financial futures
contract or related options (except for closing transactions) if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on open
contracts and options would exceed 5% of the Fund's total assets (taken at
current value). The Fund will not engage in any stock options or stock index
options if the option premiums paid regarding its open option positions exceed
5% of the value of the Fund's total assets. The Fund will not engage in
transactions in options or financial futures contracts or options related
thereto 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 and, to the extent consistent therewith, to accommodate
cash flows.

The Fund's option and futures investments involve certain risks. Such risks
include the risks that the effectiveness of an options and futures strategy
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. The Fund bears the risk that the prices of its portfolio securities
will not move in the same amount as the option or future it has purchased, or
that there may be a negative correlation

<PAGE>

which would result in a loss on both such securities and the option or future.

Positions in exchange traded options and financial futures may be closed out
only on an exchange which provides a secondary market. There may not always be
a liquid secondary market for a futures or option contract at a time when the
Fund seeks to "close out" its position. If the Fund were unable to "close out"
a futures position, and if prices moved adversely, the Fund would have to
continue to make daily cash payments to maintain its required margin and, if
the Fund had insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
options ("OTC" options) may not be closed out on an exchange and 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. There can be no assurance that a liquid secondary market will exist
for any particular option or financial futures contract at any specific time.
Thus, it may not be possible to close such an option or financial futures
position. The Fund will enter into an option or financial futures position only
if there appears to be a liquid secondary market for such option or financial
futures.

The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities. The Fund and Advisers disagree
with this position. Nevertheless, pending a change in the staff's position, the
Fund will treat OTC options as subject to its limitation on illiquid
securities. (See "Investment Objective and Policies Followed by the Fund -
Illiquid Investments" in this Prospectus.)

In addition, adverse market movements could cause the Fund to lose
up to its full investment in a call option contract and/or to experience
substantial losses on an investment in a financial futures contract which it
has purchased. There is also the risk of loss by the Fund of margin deposits in
the event of bankruptcy of a broker with whom the Fund has an open position in
a financial futures contract or option. (See "The Fund's Investment Objective
and Restrictions - Transactions in Options, Financial Futures and Options on
Financial Futures" in the SAI for a fuller discussion of the Fund's investments
in options and financial futures, including the risks associated with such
activity.)

The Fund's transactions in options and financial futures contracts may be
limited by the requirements of the Fund for qualification as a regulated
investment company. The Fund's investments in options and financial futures
contracts and certain security transactions (including loans of portfolio
securities) may also reduce the portion of the Fund's dividends which otherwise
would be eligible for the corporate dividends-received deduction. These
securities require the application of complex and special tax rules and
elections, more information about which is included in the SAI.

<PAGE>

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 and will be held pursuant to a written agreement.

The Fund's portfolio turnover rate was 38.28% for the fiscal year ended April
30, 1993 and 135.12% for the fiscal year ended April 30, 1994. The increase in
portfolio turnover was the result of the investment manager decreasing the
number of stocks held in the Fund following the mid-year change in investment
policies and objective of the Fund and commencing active management of the
Fund.

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

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

In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the
value of Fund shares will fluctuate with movements in the broader equity and
bond markets, as well. A decline in the market, expressed for example by a drop
in the Dow Jones Industrials or the Standard & Poor's 500 average or any other
equity based index, may also be reflected in declines in the Fund's share
price. History reflects both decreases and increases in the valuation of the
market, 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 Trust who are responsible for
administering its day-to-day operations.

Advisers serves as the Fund's investment manager. Advisers is a
wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly
owned holding company, the principal shareholders of which are Charles B.
Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann, who own approximately
20%, 16% and 10%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (111 separate series) with aggregate assets of
over $75 billion.

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

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

<PAGE>

under "The Fund's Policies Regarding Brokers Used on Portfolio Transactions" in
the SAI.

Under the management agreement dated July 12, 1993, the Fund is obligated to
pay the Manager a fee computed at the close of business on the last business
day of each month equal to an annual rate of 0.625 of 1% of the average daily
net assets of the Fund up to and including $100 million; 0.50 of 1% of the
value of the average daily net assets over $100 million up to and including
$250 million; 0.45 of 1% of the value of average daily net assets over $250
million up to and including $10 billion; 0.44 of 1% of the value of average
daily net assets over $10 billion up to and including $12.5 billion; 0.42 of 1%
of the value of average daily net assets over $12.5 billion up to and including
$15 billion; and 0.40 of 1% of the value of average daily net assets over $15
billion.

Advisers has not imposed any or has limited its management fees and has assumed
responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. This action by Advisers to limit its management
fees and assume responsibility for payment of expenses related to the
operations of the Fund may be terminated by Advisers at any time. 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. Currently, the most restrictive of such provisions limits
a fund's allowable expenses as a percentage of its average net assets for each
fiscal year to 2 1/2% of the first $30 million in assets, 2% of the next $70
million, and 1 1/2% of assets in excess of $100 million.

During the fiscal year ended April 30, 1994, fees totaling 0.55% of the average
daily net assets of the Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented 1.89% of the
average net assets of the Fund. Pursuant to an agreement by Advisers to limit
its fees, the Fund paid no management fees and operating expenses totaling
0.09% of the average daily net assets of the Fund.

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

<PAGE>

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.

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 gain in any year or adjust the timing of
these distributions for operational or other reasons.

DISTRIBUTION DATE

Although subject to change by the Trust's Board of Trustees, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends payable semiannually in June and December for shareholders of
record generally on the first business day preceding the 15th of the month,
payable on or about the last business day of such months. 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 Trust's Board of Trustees. Fund shares are
quoted ex-dividend on the first business day following the record date. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.

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

DIVIDEND REINVESTMENT

<PAGE>

asset value (without sales charge) on the dividend reinvestment date.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after the Fund has been notified. See the 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 Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. 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. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

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

The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to
qualify. By distributing all of its net investment income and net realized
short-term and net long-term capital gain for a fiscal year and by 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.

For corporate shareholders, 93.62% of the income dividends paid by the
Fund for the fiscal year ended April 30, 1994 qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.

<PAGE>

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

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

The Fund will inform shareholders of the source of their dividends and
distributions at the time they 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 on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received
from the Fund.

HOW TO BUY SHARES OF THE FUND

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

PURCHASE PRICE OF FUND SHARES

<PAGE>

companied by a negotiable check). The sales charge is a variable percentage of
the offering price depending upon the amount of the sale. On orders for 100,000
shares or more, the offering price will be calculated to four decimal places.
On orders for less than 100,000 shares, the offering price will be calculated
to two decimal places using standard rounding criteria. A description of the
method of calculating net asset value per share is included under the caption
"Valuation of Fund Shares."

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
----------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
</TABLE>

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

On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. Sales charges on purchases of $1,000,000 or more
are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.

The size of a transaction which determines the applicable sales charge
on the purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the many funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included
for these purposes are (a) the open-end investment companies in the Franklin
Group (except Franklin Valuemark Funds and Franklin Government Securities
Trust) (the "Franklin Group of Funds"), (b) other investment products in the
Franklin Group underwritten by Distributors or its affiliates (although certain
investments may not have the same schedule of sales charges and/or may not be
subject to reduction) (the products in subparagraphs (a) and (b) are referred
to as the "Franklin Group") and (c) the open-end U.S. registered investment
companies in the Templeton Group of Funds except Templeton American Trust,
Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund (the "Templeton Group").
Purchases pursuant to a Letter of Intent for more than $2,500,000 will be at a
1% sales charge until cumulative purchases reach $2,500,000 and at the
incremental sales charge on the excess over $2,500,000. Purchases pursuant to
the Rights of Accumulation will be at the applicable sales charge of 1% or more
until the additional purchase, plus the value of the account or the amount
previously invested, less redemptions, exceeds $2,500,000, in which event the
sales charge on the excess will be calculated as stated above. Sales charge
reductions based upon purchases in more than one of the funds in the Franklin
Group or

<PAGE>

Templeton Group (the "Franklin/Templeton Group") may be effective only after
notification to Distributors that the investment qualifies for a discount.

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

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

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

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

<PAGE>

after notification to Distributors that the investment qualifies for a
discount. The shareholder's holdings in the Franklin/Templeton Group acquired
more than 90 days before the Letter of Intent is filed will be counted towards
completion of the Letter of Intent but will not be entitled to a retroactive
downward adjustment of sales charge. Any redemptions made by the shareholder
during the 13-month period will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge as specified below,
depending upon the amount actually purchased (less redemptions) during the
period. An investor 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 at
the lower of (i) the new sales charge structure; or (ii) the sales charge
structure in effect at the time the Letter was filed with the Fund.

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

<PAGE>

with the requirements of Rule 22d-1 under the 1940 Act. The investor or the
investor's securities dealer must inform Investor Services or Distributors that
this Letter is in effect each time a purchase is made.

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by 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 3.75%. 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 at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee savings plans and employee benefit plans not
qualified under Section 401 of the Code may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for qualified
groups previously described under Group Purchases which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 1.00% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust depart-

<PAGE>

ments for funds over which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency, advisory, custodial or
similar capacity. Such purchases are subject to minimum requirements with
respect to amount of purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested or to be invested
during the subsequent 13-month period in this Fund or any other company in the
Franklin/Templeton Group must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on the
next business day following such order. If an investment by a trust company or
bank trust department at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such dealer in an
amount not to exceed 1.00% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The 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 may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in a registered management
investment company which charges a contingent deferred sales charge, and which
has investment objectives similar to those of the Fund.

Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund, or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors
and affiliates of such companies, if they have been such for at least 90 days,
and by their spouses and family members, (2) registered securities dealers and
their affiliates, for their investment account only, and (3) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer. Such sales are made upon the written assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be transferred or resold except through redemption or
repurchase by or on behalf of the Fund. Employees of securities dealers must
obtain a special applica-

<PAGE>

tion from their employers or from Franklin's Sales Department in order to
qualify.

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

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

GENERAL

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

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

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

FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and Internal Revenue Service ("IRS") requirements. Please note that
separate applications, other than the one contained in this prospectus, must be
used to establish a Franklin/Templeton Trust Company retirement account. To
obtain a retirement plan brochure or application, call toll-free 1-800/DIAL BEN
(1-800/342-5236).

<PAGE>

pants") may be restricted in the amount they may claim as an IRA deduction on
their returns. The IRA deduction is gradually reduced to the extent that a
taxpayer's adjusted gross income exceeds certain specified limits.

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

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

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

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

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

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

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

<PAGE>

OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS

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

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

SHARE CERTIFICATES

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

CONFIRMATIONS

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

AUTOMATIC INVESTMENT PLAN

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

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

SYSTEMATIC WITHDRAWAL PLAN

<PAGE>

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 fund in the Franklin Group of Funds(R) or the Templeton
Group, to another person, or directly to a checking account. If the bank at
which the account is maintained is a member of the Automated Clearing House,
the payments may be made automatically by electronic funds transfer. If this
last option is requested, the shareholder should allow at least 15 days for
initial processing. Withdrawals which may be paid in the interim will be sent
to the address of record. Liquidation of shares may reduce or possibly exhaust
the shares in the shareholder's account, to the extent withdrawals exceed
shares earned through dividends and distributions, particularly in the event of
a market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance 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. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified 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's Institutional Services Department at 1-800/321-8563.

EXCHANGE PRIVILEGE

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

<PAGE>

the exchange privilege, for example, minimum holding periods or applicable
sales charges. 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. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.

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

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least 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 and
capital gain dividends 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.

<PAGE>

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

If a substantial portion of 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 objective 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.

Until further notice, the Board of Trustees has decided that the Fund will not
accept investments from market timing programs. This does not restrict
individual investors from taking advantage of the exchange privilege as
outlined above.

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

RETIREMENT ACCOUNTS

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

HOW TO SELL SHARES OF THE FUND

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

REDEMPTIONS BY MAIL

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

REDEMPTIONS BY TELEPHONE

Shareholders who complete a Franklin/Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus,

<PAGE>

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 a 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 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 Franklin's Institutional Services Department by telephoning
1-800/321-8563.

REDEEMING SHARES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of

<PAGE>

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 ACCOUNTS

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

OTHER

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: (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, and (iv)
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 by sending a
confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction will not be
executed, and neither the Fund nor Investor Services will be liable for any
losses which may occur because of a delay in implementing a transaction.

RESTRICTED ACCOUNTS

Telephone redemptions and dividend option changes may not be accepted on FTTC
or Templeton Funds Trust Company retirement accounts. To assure compliance with
all applicable regulations, special forms

<PAGE>

are required for any distribution, redemption, or dividend payment. Changes to
dividend options must also be made in writing. While the telephone exchange
privilege is extended to Franklin/Templeton IRA and 403(b) retirement accounts;
certain restrictions may apply to other types of retirement plans. Changes to
dividend options must also be made in writing.

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

GENERAL

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

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

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

VALUATION OF FUND SHARES

The net asset value per share of the Fund is determined as of 1:00 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 sales charge of the Fund).

<PAGE>

Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets for
which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board of Trustees. All money
market instruments with a maturity of more than 60 days are valued at current
market, as discussed above. All money market instruments with a maturity of 60
days or less are valued at their amortized cost, which the Board of Trustees
has determined in good faith constitutes fair value for purposes of complying
with the 1940 Act. This valuation method will continue to be used until such
time as the trustees determine that it does not constitute fair value for such
purposes. With the approval of trustees, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.

HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

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

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

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

<PAGE>

PERFORMANCE

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

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

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

Yield, which is calculated according to a formula prescribed by the SEC (see
the 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 auditor's report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus.

<PAGE>

ORGANIZATION

The Fund is a series of Franklin Strategic Series (the "Trust"), a Delaware
business trust organized on January 25, 1991. The Trust is authorized to issue
an unlimited number of shares of beneficial interest, with a par value of $.01
per share in various series. Each series, in effect, represents a separate
mutual fund with its own investment objective and policies. All shares have one
vote and, when issued, are fully paid, non-assessable, and redeemable. The
Trust issues shares in six other series: the Franklin Small Cap Growth Fund,
the Franklin Institutional MidCap Growth Fund, the Franklin MidCap Growth Fund,
the Franklin Global Health Care Fund, the Franklin Strategic Income Fund and
the Franklin Global Utilities Fund. Additional series may be added in the
future by the Board of Trustees. All shares of the Fund have equal voting,
dividend and liquidation rights.

VOTING RIGHTS

The Trust's shareholders will vote together to elect trustees and on other
matters affecting the entire Trust, but will vote separately on matters
affecting separate series. The shares have non-cumulative voting rights, which
means that holders of more than 50% of the shares voting for the election of
trustees can elect 100% of the trustees if they choose to do so. The Fund does
not intend to hold annual meetings; it may, however, hold special shareholder
meetings for such purposes as changing fundamental investment restrictions,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
a majority of the Board of Trustees or by shareholders holding at least 10% of
the shares entitled to vote at the meeting. Shareholders may receive assistance
in communicating with other shareholders in connection with the election or
removal of trustees such as that provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $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.

OTHER INFORMATION

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

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

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

ACCOUNT REGISTRATIONS

An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to

<PAGE>

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 dealer 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, or which are anticipated to be made available in the near
future, 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

<PAGE>

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 have been primarily responsible for the day-to-day
management of the Fund's portfolio since its inception. Their business history
for at least the last five years and positions with the Manager are also
provided:

Frank Fellicelli, Portfolio Manager -- Mr. Fellicelli joined Advisers in 1989
and has a bachelor of arts degree in economics from the University of Illinois
and a masters degree in business administration and finance from Golden Gate
University. He is a Chartered Financial Analyst and a member of
industry-related associations.

Conrad B. Herrmann, Portfolio Manager -- Mr. Herrmann joined Advisers in 1989.
He received a bachelor of arts degree from Brown University and a masters
degree in business administration from Harvard University. Mr. Herrmann is a
Chartered Financial Analyst, and is a member of the Security Analysts of San
Francisco and the Association for Investment Management and Research.

Nick Moore, Portfolio Manager -- Mr. Moore joined Advisers in 1986 and has a
bachelor of science in business administration with a focus in accounting and
finance from Menlo College.

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN CALIFORNIA GROWTH FUND
DATED SEPTEMBER 1, 1994

a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

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

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

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

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

<PAGE>

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.

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

REINVESTMENT DATE

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

<PAGE>
FRANKLIN
CALIFORNIA
GROWTH FUND
[Logo]
STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
SEPTEMBER 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Fund (See also the Prospectus
"About the Fund,"
"General Information").......................... 2
The Fund's Investment Objective and
Restrictions (See also the Prospectus
"Investment Objective and Policies
Followed by the Fund").......................... 2
Officers and Trustees............................ 10
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")................................... 13
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions.......... 14
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")..................... 15
Additional Information
Regarding Taxation.............................. 17
The Fund's Underwriter........................... 19
General Information.............................. 20
Appendices....................................... 24
Financial Statements............................. 27
</TABLE>

Franklin California Growth Fund ("the Fund") is a non-diversified series of
Franklin Strategic Series ("the Trust"), an open-end management investment
company. The Fund's investment objective is to seek capital appreciation. The
Fund seeks to accomplish its objective by investing primarily in a
non-diversified portfolio of securities of companies headquartered in, or
conducting a majority of operations in the state of California.

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

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

<PAGE>

ABOUT THE FUND

Franklin California Growth Fund is a non-diversified series of the Trust, an
open-end management investment company, commonly called a "mutual fund," which
is registered as such under the Investment Company Act of 1940 ("1940 Act").
The Trust was organized as a Delaware business trust on January 25, 1991 and is
managed by Franklin Advisers, Inc. ("Advisers" or the "Manager"). Prior to July
12, 1993, the Fund's name had been Franklin California 250 Growth Fund. On that
date, the Fund's investment objective and various investment policies were
changed, and, consistent therewith, its name was changed to the Franklin
California Growth Fund.

THE FUND'S INVESTMENT
OBJECTIVE AND RESTRICTIONS

As noted in the Prospectus, the Fund's investment objective is to seek capital
appreciation. This objective is a fundamental policy changeable only by
shareholders. The Fund seeks to accomplish its objective by investing primarily
in a non-diversified portfolio of securities of companies headquartered in, or
conducting a majority of operations in the state of California.

As stated in the Fund's prospectus, 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 assets that may be invested at any time
in the securities of any one issuer. The Fund, however, intends to comply with
the diversification and other requirements of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to "regulated investment companies"
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 would be the case if it were more broadly diversified.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Repurchase Transactions. The Fund may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. This is an agreement in which the
seller of a security agrees to repurchase the security sold at a mutually
agreed upon time and price. It may also be viewed as the loan of money by the
Fund to the seller. The resale price is normally in excess of the purchase
price, reflecting an agreed upon interest rate. The interest rate is effective
for the period of time in which the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements of more than one year
duration. The securities which are subject to repurchase agreements, however,
may have maturity dates in excess of one year from the effective date of the
repurchase agreements. The transaction requires the initial collateralization
of the seller's obligation by securities with a market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the Fund,
with the value marked to market daily to maintain 100% coverage. 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 will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of its custodian bank. The Fund may not enter
into a repurchase agreement with more than seven days duration if, as a result,
more than 10% of the market value of the Fund's total assets would be invested
in such repurchase agreements.

Short-term Investments. As stated in the Prospectus, the Fund may invest cash
temporarily in short-term debt instruments. Subject to approval by the
Securities and Exchange Commission ("SEC") of an application for exemptive
relief from certain provisions of the 1940 Act, the Fund may invest its short
term cash in shares of the Franklin Money Fund, a money fund, the assets of
which are managed by the Fund's investment adviser under a master/feeder
structure. Such temporary investments may be made either for liquidity
purposes, to meet redemption requirements or as a temporary defensive measure.

The Fund will not invest more than 10% of its net assets in illiquid
securities. Subject to this limitation, the Trust's Board of Trustees has
authorized the Fund to invest in restricted securities where such investment is
consistent with the Fund's investment objective and has authorized such
securities to be considered to be liquid to the extent the Manager determines
that there is a liquid insti-

<PAGE>

tutional or other market for such securities - for example, 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 any determination by the Manager to treat a restricted security as a
liquid security on an ongoing basis, including the Manager'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 Manager 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 in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.

TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES

Call and Put Options on Securities. The Fund may 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 bank. 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. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent 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.

<PAGE>

mium 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.

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. A put option gives the purchaser of the option the right
to sell, and the writer (seller) the obligation to buy, the underlying security
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 Manager wishes to purchase the
underlying security for the Fund's portfolio at a price lower than the current
market price of the security. 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 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 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 ("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. 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 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 when the Manager deems it
desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
short-term capital gain otherwise available for distribution when the security
is eventually sold.

The Fund may also purchase put options at a time when the Fund does not own the
underlying security. By purchasing put options on a security it does not own,
the Fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if the
market price of the underlying security 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 must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.

Over-the-Counter Options ("OTC" options). The Fund 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
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

<PAGE>

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.

Futures Contracts. The Fund may enter into contracts for the purchase or sale
of futures contracts based upon financial indices ("financial futures").
Financial futures contracts are commodity contracts that obligate the long or
short holder to take or make delivery of a specified quantity of a financial
instrument, such as a security, or, as in the case of the Fund, 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 such cash value called for by the contract on a specified date. A
"purchase" of a futures contract means the acquisition of a contractual
obligation to take delivery of the cash value called for by the contract at a
specified date. Futures contracts have been designed by exchanges 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.

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

<PAGE>

financial futures contracts 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.

To the extent the Fund enters into a futures contract, it will maintain with
its custodian, to the extent required by the rules of the SEC, 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 marketside 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 may also purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options. See "Risk
Factors and Considerations Regarding Options, Futures and Options on Futures,"
for a discussion of the risks regarding the Fund's transactions in financial
futures.

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, as well as
various structured equities such as Preference Equity Redemption Cumulative
Stock, Yield Enhanced Stock, Mandatory Conversion Premium Dividend Preferred
Stock, Common Linked Higher Income Participating Debt Security, Equity Linked
Debt Security, Enhanced Yield Equity

<PAGE>

Security, and Yield Enhanced Equity Linked Debt Security, 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.

RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS,
FUTURES AND OPTIONS ON FUTURES

The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indexes, stock index futures and
related options depends on the degree to which price movements in the
underlying index or underlying securities correlate with price movements in the
relevant portion of the Fund's securities. Inasmuch as such securities will not
duplicate the components of any index or such underlying 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 Manager's 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 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.

The CFTC 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 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 nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions 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.

<PAGE>

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 and, to the extent consistent therewith, to
accommodate cash flows. 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.

RISK FACTORS RELATING TO THE FUND'S INVESTMENTS IN LOWER-RATED SECURITIES

As indicated in the Fund's Prospectus, the Fund may invest up to 5% of its
assets in lower-rated fixed income securities and unrated securities of
comparable quality (referred to herein as "lower-rated" securities). Such
securities have credit characteristics similar to lower-rated bonds, commonly
known as "junk bonds." The market values of such securities tend to reflect
individual corporate developments to a greater extent than do higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such lower-rated securities also tend to be more sensitive to
economic conditions than higher-rated securities. These lower-rated securities
are considered by Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's"), on balance, to be predominantly speculative with
respect to the issuer's capacity to pay dividends in accordance with the terms
of the obligation and will generally involve more credit risk than securities
in the higher rating categories. Even securities rated BBB or Baa by S&P and
Moody's, respectively, ratings which are considered investment grade, possess
some speculative characteristics.

Companies that issue lower-rated 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 lower-rated securities may experience financial stress.
During these periods, such issuers may not have sufficient earnings to meet
their preferred stock payment obligations. The issuer's ability to service its
preferred stock obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. An economic
downturn may disrupt the market for high yield securities and adversely affect
the value of outstanding preferred stock and the ability of issuers of such
securities to pay dividends.

The Fund may have difficulty disposing of certain lower-rated securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated securities generally tends to be
concentrated among a smaller number of dealers than is the case for securities
which trade in a broader secondary retail market. Generally, purchasers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent a secondary trading market for
lower-rated securities 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 market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as 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 value for these high yield issues 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" in
the Fund's Prospectus.)

The Fund is authorized to acquire lower-rated, securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. Many recently issued lower-rated securities have been sold with
registration rights,

<PAGE>

covenants and penalty provisions for delayed registration. If the Fund is
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities as defined in
the Securities Act of 1933, which entails special responsibilities and
liabilities. The Fund may incur special costs in disposing of such securities;
however, the Fund will generally incur no costs when the issuer is responsible
for registering the securities.

The Fund may acquire lower-rated 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 Fund will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the 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.

For example, adverse publicity regarding lower-rated securities which appeared
during 1989 and 1990 along with highly publicized defaults of some high yield
issuers, and concerns regarding a sluggish economy which continued in 1993,
depressed the prices for many such securities.

INVESTMENT 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
Fund's shareholders. In order to change any of these restrictions (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented
at that meeting or (ii) more than 50% of the outstanding voting securities of
the Fund, whichever is less, must vote to make the change.

The Fund may not:

1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are 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.

2. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (but not investment) purposes, in an amount up to
10% of the value of the Fund's total assets (including the amount borrowed)
based on the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed 5%
of the Fund's total assets, the Fund will not make any additional investments.

3. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry.

4. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the
federal securities laws) or which are not readily marketable, or which have a
record of less than three years continuous operation, including the operations
of any predecessor companies, if more than 5% of the Fund's total assets would
be invested in such companies.

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

6. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interest issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof.

7. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). Although the Fund may engage
in short sales if it owns securities equivalent in kind and amount to the
securities sold short, the Fund does not currently intend to employ this
investment technique.

8. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; the Fund may, however,
invest in marketable securities issued by real estate investment trusts.

<PAGE>

9. 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, and
except where the Fund would not own, immediately after the acquisition,
securities of other investment companies which exceed in the aggregate i) more
than 3% of the issuer's outstanding voting stock, ii) more than 5% of the
Fund's total assets and iii) together with the securities of all other
investment companies held by the Fund, exceed, in the aggregate, more than 10%
of the Fund's total assets. 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 Franklin Advisers, Inc. or its affiliates.

10. 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
Trust, one or more of the officers or trustees of the Trust, 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.

In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to pledge,
mortgage or hypothecate the Fund's assets as security for loans, nor to engage
in joint or joint and several trading accounts in securities, except that it
may participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and any
conditions therein, issued by the SEC permitting such investments), or combine
orders to purchase or sell with orders from other persons to obtain lower
brokerage commissions. The Fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2% of
its net assets in warrants not listed on either the New York or American Stock
Exchange. It is also the policy of the Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and the
rules adopted thereunder, in securities or other obligations issued by
companies engaged in securities related businesses, including such companies
that are securities brokers, dealers, underwriters or investment advisers.

OFFICERS AND TRUSTEES

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

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott Corporation (an investment
1045 Sansome St. company); Director, Vacu-Dry Co. (a food processing company)
San Francisco, CA 94111 and Mother Lode Gold Mines Consolidated; and director,
trustee or managing general partner, as the case may be, of
most of the investment companies in the Franklin Group of
Funds.

Harris J. Ashton Trustee President, Chief Executive Officer and Chairman of the Board,
General Host Corporation General Host Corporation (nursery and craft centers);
Metro Center, 1 Station Place Director, RBC Holdings, Inc. (a bank holding company), Bar-S
Stanford, CT 06904-2045 Foods, and Sunbelt Nursery Group; director of certain of the
investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
<S> <C> <C>
*Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin
777 Mariners Island Blvd. and Trustee Resources, Inc.; Executive Vice President and Director,
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin
Administrative Services, Inc.; director of certain of the
investment companies in the Templeton Group of Funds; officer
and/or director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or
trustee of all the investment companies in the Franklin Group
of Funds.

S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County Director of General Host Corporation; director of certain of
P. O. Box 1945 the investment companies in the Templeton Group of Funds; and
Morristown, NJ 07962-1945 director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.

David W. Garbellano Trustee Private Investor; Assistant Secretary/Treasurer and Director,
111 New Montgomery St., #402 Berkeley Science Corporation (a venture capital company); and
San Francisco, CA 94105 director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.

*Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Board and Trustee Franklin/Templeton Distributors, Inc.; Chairman of the Board
San Mateo, CA 94404 and Director, Franklin Advisers, Inc.; Director, Franklin
Administrative Services, Inc. and General Host Corporation;
director of certain of the investment companies in the
Templeton Group of Funds; and officer and/or director,
trustee or managing general partner, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of
most of the investment companies in the Franklin Group of
Funds.

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

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
<S> <C> <C>
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and Miller & LaHaye,
20833 Stevens Creek Blvd. which are General Partners of Peregrine Ventures and
Suite 102 Peregrine Ventures II (venture capital firms); Chairman of
Cupertino, CA 95014 the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or
trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.

Gordon S. Macklin Trustee Chairman, White River Corporation (information services);
8212 Burning Tree Road Director, Fundamerican Enterprises Holdings, Inc., Martin
Bethesda, MD 20817 Marietta Corporation, MCI Communications Corporation,
Medimmune, Inc. (biotechnology), and Infovest Corporation
(information services); director of certain of the investment
companies in the Templeton Group of Funds; and director,
trustee or managing general partner, as the case may be, of
most of the investment companies in the Franklin Group of
Funds; formerly, Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National
Association of Securities Dealers, Inc.

Charles E. Johnson Vice President Senior Vice President, Franklin Resources, Inc. and
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; President and
San Mateo CA 94404 Director, Templeton Worldwide, Inc.; President, Franklin
Institutional Services Corporation; director of certain of
the investment companies in the Templeton Group of Funds;
officer and/or director, as the case may be, for some of the
subsidiaries of Franklin Resources, Inc.; and vice president
and/or trustee, as the case may be, of some of the investment
companies in the Franklin Group of Funds.

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

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

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

<PAGE>

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager may be, but are not currently, paid fees or expenses
incurred in connection with attending meetings. As of June 7, 1994, the
trustees and officers, as a group, owned of record and beneficially
approximately 3,096.960 shares or less than 1% of the total outstanding shares
of the Trust. 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. 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, a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly-owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange") provides management investment services for the Fund.
Resources owns several other subsidiaries which are involved in investment
management and shareholder services. The Manager and other subsidiary companies
of Resources currently manage over $113 billion in assets for over 3.5 million
shareholders. The preceding table indicates those officers and trustees who are
also affiliated persons of Distributors and Advisers.

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

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to an annual rate of 0.625% of 1% of the average daily net assets of the
Fund up to and including $100 million; 0.50 of 1% of the value of the average
daily net assets over $100 million up to and including $250 million; 0.45 of 1%
of the value of average daily net assets over $250 million up to and including
$10 billion; 0.44 of 1% of the value of average daily net assets over $10
billion up to and including $12.5 billion; 0.42 of 1% of the value of average
daily net assets over $12.5 billion up to and including $15 billion; and 0.40
of 1% of the value of average daily net assets over $15 billion.

The Manager has not imposed its management fees and has assumed responsibility
for making payments of all or a portion of the operating expenses otherwise
payable by the Fund. This action by the Manager to limit its management fees
and to assume responsibility for payment of the expenses related to the
operations of the Fund may be terminated by the Manager at any time. The
management agreement specifies that the management fee will be reduced to the
extent necessary to comply with the most stringent limits on the expenses which
may be borne by the Fund as prescribed by any state in which the Fund's shares
are offered for sale. The most stringent current limit requires the Manager to
reduce or eliminate its fee to the extent that aggregate operating expenses of
the Fund (excluding interest, taxes, brokerage commissions and extraordinary
expenses such as litigation costs) would otherwise exceed in any fiscal year
2.5% of the first $30 million of average net assets of the Fund, 2% of the next
$70 million of average net assets of the Fund and 1.5% of average net assets of
the Fund in excess of $100 million. Expense reductions have not been necessary
based on state limitation requirements. For the fiscal years ended April 30,
1993 and 1994, the Fund was contractually obligated to pay the Manager fees of
$20,340 and $22,724, respectively, none of which was paid by the Fund.

<PAGE>

of the Trust's trustees who are not parties to the management agreement or
interested persons of any such party (other than as trustees 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 the Manager on
30 days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.

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

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

Coopers & Lybrand, 333 Market Street., San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended April 30, 1994 their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this Statement of
Additional Information.

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

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

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

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

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

<PAGE>

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

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

If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the Manager are considered at or
about the same time, transactions in such securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by the Manager, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. It is a 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.

For fiscal years ended April 30, 1993 and 1994, the Fund paid $2,304 and
$16,457, respectively, in brokerage commissions. As of fiscal year ended April
30, 1994, the Fund did not own the 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.

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 funds into which the Fund 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.

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

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

Under agreements with certain banks in 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

<PAGE>

Securities Investment Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of the Fund will be offered with the following
schedule of sales charges:

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- ---------------- ------
<S> <C>
Up to U.S. $100,000........................... 3%
U.S. $100,000 to U.S. $1,000,000.............. 2%
Over U.S. $1,000,000.......................... 1%
</TABLE>

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

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

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

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with Distributors, Distributors or its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested, (1% for certain 401(k) or similar category of investor as
stated in the Prospectus) paid pro rata on a quarterly basis on average
quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the Trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. 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

<PAGE>

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

REINVESTMENT DATE

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

SPECIAL SERVICES

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

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"), qualified as such for the fiscal year ended April 30,
1994 and intends to so qualify during the current fiscal year. The trustees
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
the shareholders. In such case, the Fund will be subject to federal and
possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be ordinary dividend income to the extent of
the Fund's available earnings and profits.

Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
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 a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed
by a Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment
in Fund shares. The entire dividend, including the portion which is treated as
a deduction, is includable in the tax base on which the alternative minimum tax
is computed and may also result in a reduction in the shareholder's tax basis
in its Fund shares, under certain circumstances, if the shares have been held
for less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.

<PAGE>

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 realized from the transaction, 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. 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 any of such shares sold within 90 days of their
purchase (for the purpose of determining gain or loss upon the sale of such
shares) if the sales proceeds are reinvested in the Fund or in another fund in
the Franklin/Templeton Group and a sales charge that would otherwise apply to
the reinvestment is reduced or eliminated because the sales proceeds were
reinvested within the Franklin/Templeton Group. The portion of the sales charge
so excluded from the tax basis of the shares sold will equal the amount by
which the sales load that would otherwise be applicable upon the reinvestment
is reduced. Of course, 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.

The Fund's investment in options and futures contracts, including stock
options, stock index options, stock index futures and options on stock index
futures 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 contracts and certain foreign currency contracts 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

<PAGE>

affect the amount, character and timing 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.

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

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

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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

The underwriting agreement will continue in effect for successive annual
periods provided that its continuance is specifically approved at least
annually by a vote of the 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 underwriting agreement or interested persons of any such party (other than
as trustees of the Trust), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event of its
assignment and may be terminated by either party on 90 days' written notice.

Distributors allows a portion of the underwriting commission on the sale of
Fund shares to the securities dealer of record, if any, on an account.

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1993 and 1994 were $17,898 and
$22,259, respectively. After allowances to dealers, Distributors retained
$2,088 and $2,595, during the respective periods. 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 its 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 preparation and distribution of sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, 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 Manager

<PAGE>

or Distributors or other parties on behalf of the Fund, the Manager 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.

The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. 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 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 effective through
April 30, 1995 and renewable annually 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 the Manager 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.

GENERAL INFORMATION

PERFORMANCE

As noted in the Prospectus, the Fund may from time to time quote various
performance figures to

<PAGE>

illustrate the Fund's past performance. It may occasionally cite statistics to
reflect its volatility or risk.

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

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods, or
fractional portion thereof, that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes the maximum
sales charge is deducted from the initial $1,000 purchase order and that income
dividends and capital gains are reinvested at net asset value on the
reinvestment dates during the period. 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. If a change is made on the sales
charge structure, historical performance information will be restated to
reflect the maximum sales charge in effect currently.

In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation is a one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge the longer an
investor retains the investment in the Fund. The average annual compounded rate
of return for the Fund for the one-year period ended April 30, 1994 was 19.91%
and for the period from the Fund's inception on October 31, 1991 to April 30,
1994 it was 9.36%.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-,
five-, or ten-year periods (or fractional portion thereof)

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five-, or ten-year periods (or
fractional portion thereof). The rate of total return for the Fund for the
one-year period ended April 30, 1994 was 19.91% and for the period from the
Fund's inception on October 31, 1991 to April 30, 1994 it was 25.13%.

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 the Fund for the 30-day period ended on the date of the financial
statements included herein was 1.00%.

This figure was obtained using the following SEC formula:

Yield = 2[(a-b + 1)6 -1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period

CURRENT DISTRIBUTION RATE

Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the

<PAGE>

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 S&P's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk undertaken in
achieving performance.

OTHER PERFORMANCE QUOTATIONS

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

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

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

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 might satisfy
their investment objective, advertisements and other materials regarding the
Fund 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) S&P's 500 Composite Stock Price 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 Exchange composite or component indices - unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
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 - measure of total return and average current yield for
the mutual fund industry. 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)

<PAGE>

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) Valueline Index - an unmanaged index which follows the stock of
approximately 1,700 companies.

i) Bateman Eichler Hill Richards Western Stock Index - A managed index
representing 215 stocks of companies within the Western United States.
Seventy-five percent of the stocks are Californian companies, the remaining 25%
represent companies in: Arizona, Hawaii, Nevada, Oregon and Washington.

j) 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.

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

l) Financial publications such as the Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines which
rate fund performance over specified time periods.

m) Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market. The
average market capitalization (as of May 29, 1992) is $1.24 billion.

n) Russell 2000 Small Stock Index - consists of the smallest 2,000 companies in
the Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization. The average market capitalization (as of May 29, 1992)
is $155 million.

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

p) Franklin California 250 Growth Index - consists of the 250 largest
California based companies on an equal weighted basis in order to approximately
diversify and correlate with the business segment weightings of the actual
economy (as provided by the Gross State Product). By doing so, the Index will
have an orientation towards small cap growth companies, mainly high tech and
services related firms. The Index is equally weighted as opposed to market
weighted, meaning each company represents 0.4% of the total index.

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
costs 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,

<PAGE>

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 U.S., and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $113 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 103 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 of
36 mutual fund groups in service quality for 1993. One other fund group was
also ranked number one. Franklin has been ranked number one in service quality
by Dalbar for five of the past six years.

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. As of June 7, 1994,
Resources owned 217,022.040 shares of beneficial interest of the Fund, or 53.4%
of the total shares outstanding.

OWNERSHIP AND AUTHORITY DISPUTES

In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (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 Internal Revenue Service in response
to a Notice of Levy.

APPENDIX A

As indicated in the Prospectus, the following information and the discussion in
the Prospectus captioned "Risk Factors in California" are presented herein in
view of the Fund's policy of investing primarily in companies with primary
business operations in California. Such information constitutes only a brief
discussion, does not purport to be a complete description, and is based
primarily upon information derived from independent credit reports and
historically reliable sources, but has not been independently verified by the
Fund.

On June 6, 1978, California voters approved Proposition 13, which added Article
XIIIA to the California Constitution. The principal thrust of Article XIIIA is
to limit the amount of ad valorem taxes on real property to one percent of the
full cash value as determined by the county assessor. The assessed valuation of
all real property may be increased, but not in excess of two percent per year,
or decreased to reflect the rate of inflation or deflation as shown by the
consumer price index. Article XIIIA requires a vote of two thirds of the
qualified electorate to impose special taxes, and completely prohibits the
imposition of any additional ad valorem, sales or transaction tax on real
property (other than ad valorem taxes to repay general obligation bonds issued
to acquire or improve real property), and requires the approval of two-thirds
of all members of the State Legislature to change any state tax laws resulting
in increased tax revenues.

On November 6, 1979, California voters approved the initiative seeking to amend
the California Constitution entitled "Limitation of Government Appropriations"
which added Article XIIIB to the California Constitution. Under Article XIIIB
state and local governmental entities have an annual appropriations limit and
may not spend certain monies which are called appropriations subject to
limitations (consisting of tax revenues, state subventions and certain other
funds) in an amount higher than the appropriations limit. Generally, the
appropriations limit is to be based on certain 1978-79 expenditures, and is to
be adjusted annually to reflect changes in consumer prices, population and
services provided by these entities.

Decreases in state and local revenues in future fiscal years as a consequence
of these initiatives may continue to result in reductions in allocations of
state revenues to California municipal issuers or reduce the ability of such
California issuers to pay their obligations.

<PAGE>

With the apparent onset of recovery in California's economy, revenue growth
over the next few years could recommence at levels that would enable California
to restore fiscal stability. The political environment, however, combined with
pressures on the state's financial flexibility, may frustrate its ability to
reach this goal. Strong interests in long-established state programs ranging
from low-cost public higher education access to lofty welfare and health
benefits join with the more recently emerging pressure for expanded prison
construction and a heightened awareness and concern over the state's business
climate.

Adopted on July 8, 1994, the fiscal 1995 budget is designed to address
California's accumulated deficit over a 22-month period. In order to balance
the budget and generate sufficient cash to retire the $4 billion deficit
Revenue Anticipation Warrant and a $3 billion Revenue Anticipation Note to be
issued in July 1995, the state's fiscal plan relies upon aggressive assumptions
of federal aid, projected at about $760 million in fiscal year 1995 and $2.8
billion in fiscal year 1996, to compensate the state for its costs of providing
services to illegal immigrants. These assumptions, combined with fiscal year
1996 constitutionally mandated increases in spending for K-14 education, and
continued growth in social services and corrections expenditures, are risky. To
offset this risk, the state has enacted a Budget Adjustment Law, known as the
"trigger" legislation, which establishes a set of backup budget adjustment
mechanisms to address potential shortfalls in cash. The trigger mechanism will
be in effect for both fiscal years 1995 and 1996.

In July of 1994, S&P and Moody's lowered the state's general obligation bond
rating. The rating agencies explained their actions by citing the state's
continuing deferral of substantial portions of its estimated $3.8 billion
accumulated deficit; continuing structural budgetary constraints including a
funding guarantee for K-14 education; overly optimistic expectation of federal
aid to balance fiscal year 1995's budget and fiscal year 1996's cash flow
projections; and reliance upon a trigger mechanism to reduce spending if the
plan's federal aid assumptions prove to be inflated.

APPENDIX B

DESCRIPTION OF S&P'S PREFERRED STOCKS RATINGS:

AAA: This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

AA: A preferred stock issue rated AA also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.

A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.

BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.

BB: Preferred stock rated BB, B, and CCC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation and
CCC the highest degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C: A preferred stock rated C is a non-paying issue.

D: A preferred stock rated D is a non-paying issue with the issuer in default
on debt instruments.

NR - Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

Plus (+) or Minus (-) - To provide more detailed indications of preferred stock
quality, the ratings from AA" to CCC" may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.

DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:

AAA - This is the highest rating assigned by Standard & Poor's 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,
they 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

<PAGE>

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.

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 by an 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; 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.

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Trustees
of Franklin Strategic Series

We have audited the accompanying statements of assets and liabilities of the
various funds comprising the Franklin Strategic Series, including each Fund's
statements of investments in securities and net assets, as of April 30, 1994
and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights included under the caption "Financial
Highlights." for each of the periods indicated in Note 10. These financial
statements and financial highlights are the responsibility of the Series'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
April 30, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
various funds comprising the Franklin Strategic Series as of April 30, 1994, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated in Note 10, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND

San Francisco, California
June 3, 1994

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
------ ------------------------------- --------
<S> <C> <C>
COMMON STOCKS 89.2%
CONSUMER SERVICES 5.3%
2,000 Disney (Walt) Co. .................................................................. $ 84,750
3,000 McClatchy Newspapers, Inc., Series A ............................................... 70,125
2,000 (a)United Television, Inc. ............................................................ 90,500
--------
245,375
--------
ELECTRONIC TECHNOLOGY 11.2%
2,000 (a)Cisco Systems, Inc. ................................................................ 60,625
1,500 (a)Computer Sciences Corp. ............................................................ 57,000
3,612 ECI Telecommunications, Ltd. ....................................................... 74,497
3,000 Logicon, Inc. ...................................................................... 86,250
900 Northrop Corp. ..................................................................... 34,425
500 Rockwell International Corp. ....................................................... 19,500
1,000 (a)Silicon Graphics, Inc. ............................................................. 25,125
5,000 (a)Sunward Technologies, Inc. ......................................................... 47,500
3,800 (a)SynOptics Communications, Inc. ..................................................... 76,000
10,000 (a)Trinzic Corp. ...................................................................... 46,250
--------
527,172
--------
ENERGY MINERALS 4.3%
1,000 Chevron Corp. ...................................................................... 89,000
1,900 (a)HS Resources, Inc. ................................................................. 37,525
1,400 Ultramar Corp. ..................................................................... 37,450
800 (a)Western Atlas, Inc. ................................................................ 34,400
--------
198,375
--------
FINANCE 6.9%
5,000 Ahmanson (H. F.) & Co. ............................................................. 91,250
3,000 Bay View Capital Corp. ............................................................. 60,000
6,000 (a)Coast Savings Financial, Inc. ...................................................... 81,750
1,500 Mercury General Corp. .............................................................. 39,375
4,000 ValliCorp Holdings, Inc. ........................................................... 50,000
--------
322,375
--------
(a)HEALTH SERVICES 7.2%
1,800 Abbey Healthcare Group, Inc. ....................................................... 35,100
4,000 GranCare, Inc. ..................................................................... 82,500
1,000 Homedco Group, Inc. ................................................................ 32,874
2,500 PacifiCare Health Systems, Class A ................................................. 126,875
3,500 Regency Health Services, Inc. ...................................................... 55,562
--------
332,911
--------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
------ ------------------------------- --------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)HEALTH TECHNOLOGY 3.1%
1,000 Amgen, Inc. ........................................................................ $ 40,500
600 Chiron Corp. ....................................................................... 38,925
3,000 Circon, Inc. ....................................................................... 31,500
700 Genentech, Inc. .................................................................... 34,913
--------
145,838
--------
NON-ENERGY MINERALS 1.5%
3,600 Homestake Mining Corp. ............................................................. 68,400
OTHER --------
198 (a,b)Lynx Therapeutics, Inc. ............................................................ --
--------
PRODUCER/MANUFACTURING 1.5%
1,700 (a)Lear Seating Corp. ................................................................. 32,938
800 (a)Litton Industries, Inc. ............................................................ 24,700
450 Superior Industries International, Inc. ............................................ 13,950
--------
71,588
--------
REAL ESTATE 5.6%
1,800 Health Care Property Investors, Inc. ............................................... 54,224
6,000 Kaufman & Broad Home Corp. ......................................................... 108,750
3,000 LTC Properties, Inc. ............................................................... 39,750
1,400 Nationwide Health Property, Inc. ................................................... 55,300
--------
258,024
--------
RETAIL TRADE 5.5%
5,500 (a)Carter Hawley Hale Stores, Inc. .................................................... 62,563
2,343 (a)Price/Costco, Inc. ................................................................. 35,438
4,000 Smart & Final, Inc. ................................................................ 64,000
2,000 (a)Urban Outfitters, Inc. ............................................................. 47,500
1,000 (a)Viking Office Products, Inc. ....................................................... 47,500
--------
257,001
--------
SEMICONDUCTORS/TECHNOLOGY 12.7%
2,400 (a)Adaptec, Inc. ...................................................................... 37,800
5,500 (a)Advanced Micro Devices, Inc. ....................................................... 145,063
3,300 (a)C-Cube Microsystems, Inc. .......................................................... 58,575
3,000 (a)Exar Corp. ......................................................................... 72,750
1,500 Intel Corp. ........................................................................ 91,500
800 Linear Technology Corp. ............................................................ 38,000
700 (a)Maxim Integrated Products, Inc. .................................................... 34,213
2,000 (a)Xilinx, Inc. ....................................................................... 111,000
--------
588,901
--------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
------ ------------------------------- --------
<S> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES 11.2%
3,500 Autodesk, Inc. ..................................................................... $ 177,625
1,487 (a)Cadence Design Systems, Inc. ....................................................... 21,562
1,600 (a)Microsoft Corp. .................................................................... 148,000
40 (a)Minnesota Educational Computing Corp. .............................................. 370
500 (a)Sybase, Inc. ....................................................................... 25,000
400 (a)Synopsys, Inc. ..................................................................... 16,000
7,000 Wyle Laboratories .................................................................. 129,500
----------
518,057
----------
TRANSPORTATION 9.9%
4,700 Air Express International Co. ...................................................... 102,225
1,000 American President Cos. ............................................................ 20,375
5,600 Expeditors International of Washington, Inc. ....................................... 88,900
2,500 (a)Fritz Companies, Inc. .............................................................. 76,875
4,200 (a)Mesa Airlines, Inc. ................................................................ 60,900
5,000 (a)Southern Pacific Rail Corp. ........................................................ 110,000
----------
459,275
----------
UTILITIES 3.3%
2,000 (a)Airtouch Communications, Inc. ...................................................... 49,250
3,150 (a)IDB Communications Group, Inc. ..................................................... 51,975
2,600 Southern California Water .......................................................... 51,350
----------
152,575
----------
TOTAL COMMON STOCKS (COST $3,764,130) ........................................ 4,145,867
PREFERRED STOCKS ----------
OTHER
288 (a,b)Lynx Therapeutics, Inc., pfd., Series A (Cost $288) ................................ 288
----------
TOTAL COMMON AND PREFERRED STOCKS (COST $3,764,418) .......................... 4,146,155
----------
Face
Amount
------
(d,e)RECEIVABLES FROM REPURCHASE AGREEMENTS 10.6%
$505,919 Joint Repurchase Agreement, 3.56%, 05/02/94 (Maturity Value $491,757) (COST $491,611)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94 ................................ 491,611
----------
TOTAL INVESTMENTS (COST $4,256,029) 99.8% ........................... 4,637,766
OTHER ASSETS AND LIABILITIES, NET .2% ............................... 7,941
----------
NET ASSETS 100.0% ................................................... $4,645,707
==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
------------------------------- --------
<S> <C>
At April 30, 1994, the net unrealized appreciation based on the cost of investments
for income tax purposes of $4,256,029 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost ......................................... $ 520,986
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ............................................. (139,249)
---------
Net unrealized appreciation .................................................... $ 381,737
=========
</TABLE>

(a)Non-income producing.
(b)See Note 7 regarding restricted securities.
(d)Face amount for repurchase agreements is for the underlying collateral.
(e)See Note 1 regarding joint repurchase agreements.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
-------- -------- ------------------------------ --------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS 84.7%
ELECTRIC & GAS UTILITIES 59.8%
US 25,000 AES Corp. ......................................................... $ 443,750
US 57,200 American Electric Power Co., Inc. ................................. 1,859,000
US 49,500 Central & South West Corp. ........................................ 1,268,438
HK 302,400 China Light & Power, Ltd. ......................................... 1,575,714
US 165,000 Cincinnati Gas & Electric Co. ..................................... 3,774,375
HK 27,800 (a,c)Consolidated Electric Power Asia................................... 413,878
US 89,700 Dominion Resources, Inc. .......................................... 3,789,825
US 60,950 Duke Power Co. .................................................... 2,232,294
US 90,000 Eastern Electricity, ADR........................................... 1,577,556
US 55,900 Empresa Nacional de Electricidad, ADR.............................. 2,788,013
US 96,000 Enron Corp. ....................................................... 2,844,000
US 85,000 Entergy Corp. ..................................................... 2,603,125
US 39,000 FPL Group, Inc. ................................................... 1,379,625
US 45,800 Florida Progress Corp. ............................................ 1,385,450
US 49,600 General Public Utilities Corp. .................................... 1,512,800
US 29,700 Hawaiian Electric Industries, Inc. ................................ 1,009,800
HK 1,461,600 Hong Kong & China Gas Co., Ltd. ................................... 3,140,988
HK 121,800 (a)Hong Kong & China Gas Co., Ltd., warrants ......................... 0
HK 1,180,000 Hong Kong Electric Holdings, Ltd. ................................. 3,482,944
ES 285,000 Iberdrola, SA ..................................................... 2,039,179
US 60,300 NIPSCO Industries, Inc. ........................................... 1,906,988
US 139,000 National Fuel Gas Co. ............................................. 4,170,000
US 40,050 Ohio Edison Co. ................................................... 745,931
US 40,400 Pacific Gas & Electric Co. ........................................ 1,070,600
US 151,700 PacifiCorp ........................................................ 2,711,638
US 131,000 Panhandle Eastern Corp. ........................................... 2,636,375
US 67,500 Pinnacle West Capital Corp. ....................................... 1,392,188
DD 6,531 Rwe Aktiengesellschaft ............................................ 1,844,394
US 45,800 SCEcorp ........................................................... 732,800
US 158,000 Southern Co. ...................................................... 3,081,000
US 41,200 Southern Indiana Gas & Electric Co. ............................... 1,230,850
US 183,900 TECO Energy, Inc. ................................................. 3,678,000
US 75,700 Texas Utilities Co. ............................................... 2,668,425
DD 12,700 Veba, Ag .......................................................... 3,925,732
US 131,518 Williams Cos., Inc. ............................................... 3,386,589
-----------
74,302,264
-----------
TELECOMMUNICATIONS 5.5%
US 20,150 (a)Airtouch Communications, Inc. ..................................... 496,194
US 59,300 American Telephone & Telegraph Co. ................................ 3,031,713
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
-------- -------- ------------------------------ --------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
TELECOMMUNICATIONS (CONT.)
CA 88,900 (a,c)Call-Net Enterprises, Inc., Class B ............................... $ 619,439
CA 235,700 (a)Call-Net Enterprises, Inc., Class B ............................... 1,642,315
US 45,900 (a)International Cabletel, Inc. ...................................... 998,325
------------
6,787,986
------------
TELEPHONES 19.4%
US 47,300 British Telecommunications, Plc., ADR.............................. 2,690,188
US 16,700 Compania de Telefonos de Chile, ADR................................ 1,503,000
US 55,300 GTE Corp. ......................................................... 1,748,863
US 20,150 Pacific Telesis Group, Inc. ....................................... 644,800
IT 375,000 STET-Societa Finanziaria Telefonica ............................... 1,449,586
US 64,750 (c)Telecom de Argentina, GDS ......................................... 3,562,894
US 70,500 Telecommunications Corp. of New Zealand, Ltd., ADR ................ 3,278,250
US 85,000 Tele Denmark, A/S, ADS ............................................ 2,125,000
US 10,200 Telefonica de Argentina, ADS....................................... 650,250
US 55,950 Telefonica de Espana, ADR.......................................... 2,279,962
US 70,700 Telefonos de Mexico, ADR........................................... 4,162,461
------------
24,095,254
------------
TOTAL COMMON STOCKS & WARRANTS (COST $108,351,822) .......... 105,185,504
------------
PREFERRED STOCKS .5%
TELEPHONES
US 18,000 (c)Philippine Long Distance Co., 5.75% cvt. pfd., Series II
(COST $553,000).................................................. 670,500
------------
TOTAL COMMON STOCKS & WARRANTS AND PREFERRED STOCKS
(COST $108,904,822)........................................ 105,856,004
============
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
------
<S> <C> <C> <C>
(d,e)RECEIVABLES FROM REPURCHASE AGREEMENTS 18.0%
US $23,001,886 Joint Repurchase Agreement, 3.56%, 05/02/94
(Maturity Value $22,362,170) (COST $22,355,538)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94 ............. 22,355,538
------------
TOTAL INVESTMENTS (COST $131,260,360) 103.2%...... 128,211,542
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (3.2)% (4,023,463)
------------
NET ASSETS 100.0% ................................ $124,188,079
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
------------------------------ --------
<S> <C>
At April 30, 1994, the net unrealized depreciation based on the cost of
investments for income tax purposes of $131,263,163 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ................................... $ 4,810,343
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ................................... (7,861,964)
-----------
Net unrealized depreciation..................................................... $(3,051,621)
===========
</TABLE>

COUNTRY LEGEND:
CA - Canada
DD - Germany
DK - Denmark
ES - Spain
HK - Hong Kong
IT - Italy
US - United States of America

*Securities traded in currency of country indicated.
aNon-income producing.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1 regarding joint repurchase agreements.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
------ ------------------------------- --------
<S> <C> <C>
COMMON STOCKS 84.2%
AUTO PARTS 3.0%
20,000 Donnelly Corp. .................................................................. $ 312,500
12,900 Excel Industries, Inc. .......................................................... 232,200
8,300 (a)Lear Seating Corp. .............................................................. 160,813
----------
705,513
----------
BEVERAGES .9%
9,500 (a)Snapple Beverage Corp. .......................................................... 223,250
----------
BROADCASTING .9%
10,000 (a)All American Communications, Inc. ............................................... 90,000
9,100 (a)Evergreen Media Corp. ........................................................... 118,300
----------
208,300
----------
CEMENT PRODUCERS .6%
10,000 (a,f)Lone Star Industries ............................................................ 155,000
----------
COMPONENT SUPPLIERS 1.4%
12,100 (a)Atchison Casting Corp. .......................................................... 163,350
7,000 Roper Industries, Inc. .......................................................... 169,750
----------
333,100
----------
COMPUTER HARDWARE .3%
5,000 (a)Digital Link Corp. .............................................................. 77,500
----------
COMPUTER SOFTWARE 5.5%
6,500 Autodesk, Inc. .................................................................. 329,875
1,000 (a)Dialogic Corp. .................................................................. 15,250
9,500 (a)Integrated Systems, Inc. ....................................................... 106,875
20,160 (a)Minnesota Educational Computing Corp. ........................................... 186,480
2,000 (a)Progress Software Corp. ......................................................... 89,000
12,500 (a)Pyxis Corp. ..................................................................... 284,375
57,500 (a)Trinzic Corp. ................................................................... 265,938
4,500 (a)Wind River Systems .............................................................. 28,688
-----------
1,306,481
----------
CONSUMER SERVICES .3%
3,300 The Loewen Group, Inc. .......................................................... 80,438
----------
DATA PROCESSING .3%
1,200 (a)Sybase, Inc. .................................................................... 60,000
----------
ELECTRONICS/ELECTRICAL EQUIPMENT 5.7%
7,000 (a)Altera Corp. .................................................................... 271,250
16,700 (a)C-Cube Microsystems, Inc. ....................................................... 296,425
7,500 (a)First Alert, Inc. ............................................................... 165,000
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
------ ------------------------------ ---------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONICS/ELECTRICAL EQUIPMENT (CONT.)
10,000 Logicon, Inc. ................................................................... $ 287,500
9,000 (a)Microchip Technology, Inc. ...................................................... 252,000
6,000 (a)Thermotrex Corp. ................................................................ 94,500

1,366,675
----------
FINANCIAL SERVICES 4.1%
12,000 ACE, Ltd. ....................................................................... 342,000
8,200 Leucadia National Corp. ......................................................... 310,575
9,000 Trenwick Group, Inc. ............................................................ 326,250
----------
978,825
----------
FOREST PRODUCTS/PAPER .5%
40,000 (a)WTD Industries, Inc. ............................................................ 122,500
----------
GAMING 1.3%
17,700 Showboat, Inc. .................................................................. 311,963
----------
HEALTH SERVICES 6.6%
13,300 (a)Abbey Healthcare Group, Inc. .................................................... 259,350
9,500 (a)Integrated Health Services, Inc. ................................................ 302,813
10,400 (a)Pacificare Health Systems, Inc., Class B ........................................ 527,800
5,700 (a)Physician Corporation of America ................................................ 137,156
8,750 United Healthcare Corp. ......................................................... 363,125
----------
1,590,244
----------
HOMEBUILDERS .8%
24,600 (a)NVR, Inc. ....................................................................... 184,500
----------
HOSPITAL MANAGEMENT/SERVICES 4.3%
10,000 Columbia/HCA Healthcare Corp. ................................................... 423,750
16,000 (a)GranCare, Inc. .................................................................. 330,000
8,700 (a)Homedco Group, Inc. ............................................................. 286,013
----------
1,039,763
----------
HOSPITAL SUPPLY/TECHNOLOGY 1.4%
20,000 (a)Heart Technology, Inc. .......................................................... 330,000
----------
INDUSTRIAL SERVICES .6%
3,300 (a)Ionics, Inc. .................................................................... 150,150
----------
INSURANCE 1.2%
34,000 National Insurance Group ........................................................ 280,500
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
------ ------------------------------ --------
<S> <C> <C>
COMMON STOCKS (CONT.)
IRON/STEEL PRODUCTS 1.8%
14,500 (a)Geneva Steel Co., Class A ....................................................... $ 217,500
16,000 J&L Specialty Steel, Inc. ....................................................... 224,000
----------
441,500
----------
MACHINE - DIVERSIFIED 1.3%
21,000 (a)Quickturn Design System, Inc. ................................................... 301,875
----------
METAL FABRICATORS .3%
3,500 Varlen Corp. .................................................................... 65,625
----------
NETWORKING 8.4%
6,400 (a)Chipcom Corp. ................................................................... 300,000
8,400 (a)Cisco Systems, Inc. ............................................................. 254,625
5,900 Newbridge Networks Corp. ........................................................ 297,213
10,000 (a)Silicon Graphics, Inc. .......................................................... 251,250
15,500 (a)Sunward Technologies, Inc. ...................................................... 147,250
8,000 (a)3Com Corp. ...................................................................... 470,500
4,000 (a)Wellfleet Communications, Inc. .................................................. 295,500
----------
2,016,338
----------
OILFIELD SERVICES .7%
15,000 (a)Weatherford International, Inc. ................................................. 161,250
----------
PHARMACEUTICAL 2.6%
25,000 (a)Matrix Pharmaceutical, Inc. ..................................................... 281,250
22,300 (a)Noven Pharmaceuticals, Inc. ..................................................... 331,713
----------
612,963
----------
RESTAURANTS 2.8%
6,800 (a)Au Bon Pain Co., Inc., Class A .................................................. 130,900
15,000 (a)Back Bay Restaurant Group, Inc. ................................................. 225,000
6,500 (a)Fresh Choice, Inc. .............................................................. 177,938
10,500 (a)Pollo Tropical, Inc. ............................................................ 144,375
----------
678,213
----------
(a)RETAIL TRADE 6.1%
7,000 Barnes & Noble, Inc. ............................................................ 151,375
13,000 Carson Pirie Scott & Co. ........................................................ 206,375
20,000 Carter Hawley Hale Stores, Inc. ................................................. 227,500
20,000 Designs, Inc. ................................................................... 290,000
2,500 Michaels Stores, Inc. ........................................................... 110,625

</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
------ ------------------------------ ---------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL TRADE (CONT.)
18,800 Sportmart, Inc. ................................................................. $ 263,200
9,000 Urban Outfitters, Inc. .......................................................... 213,750
----------
1,462,825
----------
(a)SEMICONDUCTORS EQUIPMENT/SERVICES 3.6%
7,600 Asyst Technologies, Inc. ........................................................ 96,900
14,000 Exar Corp. ...................................................................... 339,500
10,000 LSI Logic Corp. ................................................................. 222,500
4,000 Maxim Integrated Products, Inc. ................................................. 195,500
----------
854,400
----------
TECHNOLOGY 2.5%
5,850 Sensormatic Electronics Corp. ................................................... 191,587
10,000 Wyle Laboratories ............................................................... 185,000
4,000 (a)Xilinx, Inc. .................................................................... 222,000
----------
598,587
----------
TELECOMMUNICATIONS 7.0%
6,000 (a)Aspect Telecommunications Corp. ................................................. 184,500
11,100 (a,c)Call-Net Enterprises, Inc., Class B ............................................. 77,343
20,000 (a)Call-Net Enterprises, Inc., Class B ............................................. 139,356
1,000 (a)Cencall Communications Corp. .................................................... 21,500
14,000 (a)Comnet Cellular, Inc. ........................................................... 224,000
1,000 (a)Dial Page, Inc. ................................................................. 36,000
11,900 ECI Telecommunications, Ltd. .................................................... 245,438
15,600 (a)International Cabletel .......................................................... 339,300
1,800 (a)Paging Network, Inc. ............................................................ 46,462
7,500 (a)Pronet, Inc. .................................................................... 84,374
14,000 (a)SynOptics Communications, Inc. .................................................. 280,000
----------
1,678,273
----------
TEXTILES 2.0%
18,000 (a)Cone Mills Corp. ................................................................ 243,000
9,000 (a)Nautica Enterprises, Inc. ....................................................... 243,000
----------
486,000
----------
TOYS .7%
12,000 (a)Acclaim Entertainment, Inc. ..................................................... 169,500
----------

TRANSPORTATION 4.7%
12,000 Air Express International Corp. ................................................. 261,000
57,500 (a)Atlantic Coast Airlines, Inc. ................................................... 215,624
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
------ ------------------------------ -----------
<S> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION (CONT.)
9,000 (a)Chicago & North Western Holdings Corp. .......................................... $ 212,624
16,200 Expeditors International of Washington, Inc. .................................... 257,174
11,500 (a)Mesa Airlines, Inc. ............................................................. 166,750
-----------
1,113,172
-----------
TOTAL COMMON STOCKS (COST $19,993,189)..................................... 20,145,223
-----------
FACE
AMOUNT
------
(d,e)RECEIVABLES FROM REPURCHASE AGREEMENTS 16.0%
$3,933,726 Joint Repurchase Agreement, 3.56%, 05/02/94 (Maturity Value $3,823,955)
(COST $3,822,821)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94 .............................. 3,822,821
-----------
TOTAL INVESTMENTS (COST $23,816,010) 100.2%........................ 23,968,044
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.2)%................... (52,953)
-----------
NET ASSETS 100.0% ................................................. $23,915,091
===========

At April 30, 1994, the net unrealized appreciation based on the cost of
investments for income tax purposes of $23,816,010 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost ...................................... $ 1,801,012
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value ...................................... (1,648,978)
-----------
Net unrealized appreciation.................................................. $ 152,034
===========
</TABLE>

(a)Non-income producing.
(c)See Note 8 regarding Rule 144A securities.
(d)Face amount for repurchase agreements is for the underlying collateral.
(e)See Note 1 regarding joint repurchase agreements.
(f)See Note 1 regarding securities purchased on a when-issued basis.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
-------- -------- -------------------------------- ----------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS 96.0%
(a)BIOTECHNOLOGY 7.3%
US 2,000 Amgen, Inc. ........................................................... $ 81,000
US 1,500 Biogen, Inc. .......................................................... 53,625
US 8,000 Biomira, Inc. ......................................................... 38,000
GB 15,000 British Bio-Technology Group, Plc. .................................... 93,242
GB 1,250 British Bio-Technology Group, warrants ................................ 4,065
US 10,000 Neurobiological Technologies, Inc. .................................... 70,000
US 12,000 Telios Pharmaceuticals, Inc. .......................................... 40,500
US 5,000 Univax Biologics, Inc. ................................................ 41,250
----------
421,682
----------
HEALTH MAINTENANCE ORGANIZATIONS 17.5%
US 2,000 (a)Healthsource, Inc. .................................................... 61,500
US 2,500 (a)Intergroup Healthcare Corp. ........................................... 112,188
US 4,500 (a)PacifiCare Health Systems, Inc., Class B .............................. 228,375
US 3,000 (a)Physician Corporation of America ...................................... 72,188
US 8,000 (a)Sierra Health Services, Inc. .......................................... 204,000
US 6,000 United Healthcare Corp. ............................................... 249,000
US 2,250 U.S. HealthCare, Inc. ................................................. 84,375
----------
1,011,626
----------
(a)HOMECARE/ALTERNATE SITE 12.9%
US 6,000 Career Horizons, Inc. ................................................. 117,000
US 5,000 Homedco Group, Inc. ................................................... 164,375
US 11,000 Interim Services, Inc. ................................................ 269,500
US 10,000 Rotech Medical Corp. .................................................. 197,500
----------
748,375
----------
HOSPITALS 7.6%
US 6,300 Columbia/HCA Healthcare Corp. ......................................... 266,963
US 3,000 (a)Healthtrust, Inc. - The Hospital Co. .................................. 87,750
US 5,000 (a)National Medical Enterprises .......................................... 85,625
----------
440,338
----------
MEDICAL TECHNOLOGY & SUPPLIES 15.2%
US 15,000 (a)Abaxis, Inc. .......................................................... 129,375
US 5,000 (a)Datascope Corp. ....................................................... 71,250
US 8,000 (a)Healthdyne Technologies, Inc. ......................................... 103,000
US 5,000 (a)Heart Technology, Inc. ................................................ 82,500
US 1,500 Medtronic, Inc. ....................................................... 113,063
US 2,000 St. Jude Medical, Inc. ................................................ 51,500
US 2,000 Stryker Corp. ......................................................... 54,000
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
-------- -------- -------------------------------- ---------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
MEDICAL TECHNOLOGY & SUPPLIES (CONT.)
US 9,000 (a)Thermotrex Corp. ...................................................... $ 141,750
US 7,000 (a)Uromed Corp. .......................................................... 42,875
US 5,000 (a)Ventritex, Inc. ....................................................... 91,250
----------
880,563
----------
NURSING HOMES/SUBACUTE 1.4%
US 4,000 (a)GranCare, Inc. ........................................................ 82,500
----------
PHARMACEUTICAL DISTRIBUTORS 2.3%
US 5,000 (a)Grupo Casa Autrey, SA de CV, ADR ...................................... 137,500
----------
PHARMACEUTICALS 7.2%
SE 3,000 Astra AB, Series B .................................................... 59,945
US 2,000 Pfizer, Inc. .......................................................... 118,000
CH 10 Sandoz, Ag-PC ......................................................... 26,312
CH 30 Sandoz, Ag-R ......................................................... 79,149
US 2,200 Schering-Plough Corp. ................................................. 134,200
----------
417,606
----------
PHYSICIAN MANAGEMENT 1.6%
US 24,000 (a)EquiVision, Inc. ...................................................... 90,000
----------
SPECIALTY PHARMACEUTICALS 17.3%
US 3,000 (a)Alza Corp. ............................................................ 75,750
CH 100 Ares Serono, Inc., Series B ........................................... 53,972
US 3,200 (a)Biochem Pharmaceutical, ADR ........................................... 29,200
US 4,000 (a)Elan Corp., Plc., ADR ................................................. 131,500
US 20,000 (a)Matrix Pharmaceutical, Inc. ........................................... 225,000
US 10,000 (a)Noven Pharmaceuticals, Inc. ........................................... 148,750
US 21,000 (a)Penederm, Inc. ........................................................ 262,500
US 2,000 (a)Scherer (R.P.) Corp. .................................................. 73,500
----------
1,000,172
----------
(a)SOFTWARE/INFORMATION SYSTEMS 5.7%
US 4,000 Cerner Corp. .......................................................... 127,000
US 9,000 Pyxis Corp. ........................................................... 204,750
----------
331,750
----------
TOTAL COMMON STOCKS & WARRANTS (COST $5,159,437) ................ 5,562,112
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
-------- -------- -------------------------------- ----------
<S> <C> <C> <C>
(d,e)RECEIVABLES FROM REPURCHASE AGREEMENTS 8.2%
US $488,502 Joint Repurchase Agreement, 3.56%, 05/02/94 (Maturity Value $474,838)
(COST $474,697)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94 .................. $ 474,697
----------
TOTAL INVESTMENTS (COST $5,634,134) 104.2%............. 6,036,809
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (4.2)% ..... (241,713)
----------
NET ASSETS 100.0% ..................................... $5,795,096
==========

At April 30, 1994, the net unrealized appreciation based on the cost
of investments for income tax purposes of $5,639,670 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost ............... $ 604,526
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value ............... (207,387)
----------
Net unrealized appreciation ...................................... $ 397,139
==========
</TABLE>

COUNTRY LEGEND:
CH - Switzerland
GB - United Kingdom
SE - Sweden
US - United States of America

*Securities traded in currency of country indicated.
(a)Non-income producing.
(d)Face amount for repurchase agreements is for the underlying collateral.
(e)See Note 1 regarding joint repurchase agreements.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994

<TABLE>
<CAPTION>
VALUE
SHARES FISCO MIDCAP GROWTH FUND (NOTE 1)
------ ------------------------ --------
<S> <C> <C>
COMMON STOCKS 94.4%
ADVERTISING .7%
700 Omnicom Group, Inc. ................................................................ $ 33,950
----------
AEROSPACE/DEFENSE 2.3%
4,800 Thiokol Corp. ...................................................................... 115,800
----------
CHEMICAL & MATERIALS 2.7%
2,100 ARCO Chemical Co. .................................................................. 97,124
900 (a)Applied Materials, Inc. ............................................................ 40,050
----------
COMMERCIAL SERVICES 4.4%
2,000 Banta Corp. ........................................................................ 73,000
3,300 PHH Corp. .......................................................................... 117,150
1,000 Paychex, Inc. ...................................................................... 35,000
----------
225,150
----------
(a)COMMUNICATIONS EQUIPMENT 3.4%
1,300 Cabletron Systems, Inc. ............................................................ 133,900
700 3Com Corp. ......................................................................... 41,169
----------
175,069
----------
(a)COMPUTER HARDWARE 4.2%
2,500 EMC Corp. .......................................................................... 44,687
1,400 Exabyte Corp. ...................................................................... 27,125
1,500 Seagate Technology, Inc. ........................................................... 39,563
4,100 Silicon Graphics, Inc. ............................................................. 103,013
----------
214,388
----------
COMPUTER SOFTWARE 1.2%
1,000 Adobe Systems, Inc. ................................................................ 26,750
600 (a)BMC Software, Inc. ................................................................. 36,000
----------
62,750
----------
CONSUMER PRODUCTS/SERVICES .8%
1,200 First Brands Corp. ................................................................. 40,500
900 (a)Perrigo Co. ........................................................................ 17,156
----------
57,656
----------
ELECTRONIC COMPONENTS/TECHNOLOGY 7.4%
1,300 (a)Arrow Electronics, Inc. ............................................................ 49,075
1,800 Comdisco, Inc. ..................................................................... 36,225
1,500 Intelligent Electronics, Inc. ...................................................... 28,500
2,000 (a)LSI Logic Corp. .................................................................... 44,500
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FISCO MIDCAP GROWTH FUND (NOTE 1)
------ ------------------------ --------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC COMPONENTS/TECHNOLOGY (CONT.)
2,000 Linear Technology Corp. ............................................................ $ 95,000
3,000 Micron Technology, Inc. ............................................................ 109,875
500 (a)Teradyne, Inc. ..................................................................... 11,813
----------
374,988
----------
ENTERTAINMENT .9%
900 (a)Caesars World, Inc. ................................................................ 43,762
----------
FINANCE 11.6%
1,000 Bank of New York Company, Inc. ..................................................... 55,375
7,400 Bear Stearns Companies, Inc. ....................................................... 156,325
500 Continental Bank Corp. ............................................................. 17,250
800 Crestar Financial Corp. ............................................................ 35,600
1,800 Mercantile Bancorp. ................................................................ 64,800
3,000 Morgan Stanley Group, Inc. ......................................................... 184,875
3,600 Southtrust Corp. ................................................................... 67,500
----------
581,725
----------
FOODS/BEVERAGE 1.7%
3,400 IBP, Inc. .......................................................................... 88,400
----------
HEALTHCARE PRODUCTS 1.6%
1,200 Cardinal Health, Inc. .............................................................. 51,600
600 (a)Cordis Corp. ....................................................................... 27,750
----------
79,350
----------
HEALTHCARE SERVICES 5.4%
500 (a)FHP International Corp. ............................................................ 12,125
500 (a)Health Management Associates, Inc. ................................................. 18,313
400 (a)PacifiCare Health Systems, Inc., Class A ........................................... 20,300
3,400 United Healthcare Corp. ............................................................ 141,100
2,250 U.S. HealthCare, Inc. .............................................................. 84,375
----------
276,213
----------
HOMEBUILDING .9%
2,250 Lennar Corp. ....................................................................... 46,125
----------
INSURANCE 2.1%
3,500 AFLAC, Inc. ........................................................................ 106,313
----------
MANUFACTURING - DIVERSIFIED 3.1%
1,000 Carlisle Co., Inc. ................................................................. 32,375
3,000 Danaher Corp. ...................................................................... 119,250
----------
151,625
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FISCO MIDCAP GROWTH FUND (NOTE 1)
------ ------------------------ --------
<S> <C> <C>
COMMON STOCKS (CONT.)
MANUFACTURING - SPECIALIZED INDUSTRIAL 2.4%
1,200 Legget & Platt, Inc. ............................................................... $ 51,300
1,400 Modine Manufacturing Co. ........................................................... 35,700
600 Tecumseh Products Co., Class B ..................................................... 34,200
--------
121,200
--------
METAL & MINING 2.8%
6,100 Brush Wellman, Inc. ................................................................ 99,125
700 Carpenter Technology Corp. ......................................................... 41,037
--------
140,162
--------
OFFICE SUPPLIES 3.2%
1,000 Miller (Herman), Inc. .............................................................. 25,000
2,200 Reynolds & Reynolds Co. ............................................................ 46,750
2,700 Wallace Computer Services, Inc. .................................................... 89,775
--------
161,525
--------
OIL & GAS 6.9%
2,900 Equitable Resources, Inc. .......................................................... 105,125
3,200 Murphy Oil Corp. ................................................................... 140,800
1,000 Tosco Corp. ........................................................................ 30,625
2,800 Ultramar Corp. ..................................................................... 74,900
--------
351,450
--------
RESTAURANT .2%
500 (a)International Dairy Queen, Inc., Class A ........................................... 9,125
--------
RETAIL TRADE 3.3%
2,000 (a)Burlington Coat Factory Co. ........................................................ 51,750
2,400 Clairs's Stores, Inc. .............................................................. 40,500
1,875 Dollar General Corp. ............................................................... 47,343
600 Lands' End, Inc. ................................................................... 27,900
--------
167,493
--------
TRANSPORTATION 4.8%
1,000 Airborne Freight Corp. ............................................................. 36,750
1,500 American President Cos. ............................................................ 30,563
2,400 Arnold Industries, Inc. ............................................................ 43,200
2,000 Illinois Central Corp. ............................................................. 68,750
1,600 (a)Kansas City Southern Industries, Inc. .............................................. 62,400
--------
241,663
--------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FISCO MIDCAP GROWTH FUND (NOTE 1)
------ ------------------------ --------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES 16.4%
2,000 Central Louisiana Electric, Inc. ................................................... $ 50,500
3,400 Delmarva Power & Light Co. ......................................................... 71,400
4,900 Iowa-Illinois Gas & Electric Co. ................................................... 115,150
3,300 MCN Corp. .......................................................................... 131,587
3,900 NIPSCO Industries, Inc. ............................................................ 123,338
1,400 Nevada Power Co. ................................................................... 29,575
1,300 Oklahoma Gas & Electric Co. ........................................................ 45,338
3,800 Portland General Corp. ............................................................. 71,725
600 Public Service Co. of Colorado ..................................................... 17,775
3,800 Scana Corp. ........................................................................ 174,325
----------
830,713
----------
TOTAL COMMON STOCKS (COST $4,815,732) ........................................ 4,793,769
----------
</TABLE>

FACE
AMOUNT
- ---------
<S> <C> <C>
(d, e)RECEIVABLES FROM REPURCHASE AGREEMENTS 5.4%
$ 285,305 Joint Repurchase Agreement, 3.56%, 05/02/94 (Maturity Value $277,018) (COST $276,936)
Collateral: U.S. Treasury Bills, 10/27/94
U.S. Treasury Notes, 4.625%, 12/31/94................................... 276,936
----------
TOTAL INVESTMENTS (COST $5,092,668) 99.8% ............................. 5,070,705
OTHER ASSETS AND LIABILITIES, NET .2% ................................. 8,235
----------
NET ASSETS 100.0% ..................................................... $5,078,940
==========

At April 30, 1994, the net unrealized depreciation based on the cost of investments
for income tax purposes of $5,092,668 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost ............................................. $ 262,445
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ............................................. (284,408)
----------
Net unrealized depreciation .................................................... $ (21,963)
==========
</TABLE>

(a) Non-income producing.
(d) Face amount for repurchase agreements is for the underlying collateral.
(e) See Note 1 regarding joint repurchase agreements.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS

STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 1994
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FISCO
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Assets:
Investments:
At identified cost........................... $3,764,418 $108,904,822 $19,993,189 $5,159,437 $4,815,732
========== ============ =========== ========== ==========
At value..................................... 4,146,155 105,856,004 20,145,223 5,562,112 4,793,769
Receivables from repurchase agreements, at
value and cost............................... 491,611 22,355,538 3,822,821 474,697 276,936
Cash.......................................... 142 27,764 66,361 5,033 --
Foreign currencies (Cost $358,848)............ -- 359,282 -- -- --
Receivables:
Dividends and interest...................... 2,021 427,666 3,008 538 8,235
Investment securities sold.................. -- 941,662 551,635 272,572 --
Capital shares sold......................... 9,548 276,207 54,920 30,092 --
From affiliates............................. -- -- 22,171 -- --
Unamortized organization costs (Note 2)....... 16,634 10,036 10,482 9,635 --
---------- ------------ ----------- ---------- ----------
Total assets............................. 4,666,111 130,254,159 24,676,621 6,354,679 5,078,940
---------- ------------ ----------- ---------- ----------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery............................ -- 5,882,581 554,189 523,795 --
When-issued basis (Note 1).................. -- -- 191,250 -- --
Capital shares repurchased................... -- 48,616 -- 21,400 --
Payable to Manager for organization costs.... 16,634 10,036 10,482 9,635 --
Shareholder servicing costs.................. -- 6,663 5,609 -- --
Distribution fees............................ 3,770 96,019 -- 4,753 --
Accrued expenses and other liabilities........ -- 22,165 -- -- --
---------- ------------ ----------- ---------- ----------
Total liabilities........................ 20,404 6,066,080 761,530 559,583 --
---------- ------------ ----------- ---------- ----------
Net assets, at value........................... $4,645,707 $124,188,079 $23,915,091 $5,795,096 $5,078,940
========== ============ =========== ========== ==========
Net assets consist of:
Undistributed net investment income........... $ 12,521 $ 939,053 $ 7,680 $ 6,840 $ 36,486
Unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities in foreign currencies............ 381,737 (3,046,259) 152,034 402,675 (21,963)
Accumulated net realized gain................. 243,087 3,325,470 1,184,956 81,936 7,317
Capital shares................................ 3,855 98,591 18,751 5,557 5,056
Additional paid-in capital.................... 4,004,507 122,871,224 22,551,670 5,298,088 5,052,044
---------- ------------ ----------- ---------- ----------
Net assets, at value........................... $4,645,707 $124,188,079 $23,915,091 $5,795,096 $5,078,940
========== ============ =========== ========== ==========
Shares outstanding............................. 385,542 9,859,052 1,875,106 555,714 505,604
========== ============ =========== ========== ==========
Net asset value per share...................... $12.05 $12.60 $12.75 $10.43 $10.05
========== ============ =========== ========== ==========
Representative computation (Franklin California
Growth Fund) of net asset value and offering
price per share:
Net asset value and redemption price per share
($4,645,707 / 385,542)...................... $12.05
==========
Maximum offering price (100/95.5 of $12.05).. $12.62
==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1994
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FISCO
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND*
----------- -------------- ----------- ------------- -----------
<S> <C> <C> <C>
Investment income:
Dividends+..................................... $ 44,714 $2,017,770 $ 31,648 $ 20,713 $67,193
Interest....................................... 6,754 392,459 40,644 15,879 8,794
Realized foreign currency loss (Note 1)........ -- (562) (312) (296) --
-------- ---------- ---------- -------- -------
Total income.............................. 51,468 2,409,667 71,980 36,296 75,987
-------- ---------- ---------- -------- -------

Expenses:
Management fees (Note 6)....................... -- 191,367 -- -- --
Shareholder servicing costs (Note 6)........... -- 36,762 10,202 -- --
Distribution fees (Note 6)..................... 3,770 89,556 15,699 4,753 --
Reports to shareholders........................ 10,797 61,476 18,370 18,917 47
Custodian fees................................. 412 26,295 1,581 850 283
Professional fees.............................. 12,491 59,617 15,163 3,756 8,000
Registration fees.............................. 14,309 65,574 40,178 9,183 250
Amortization of organization costs (Note 2).... 6,653 3,170 3,755 3,240 --
Other.......................................... 3,820 1,970 1,328 482 513
Payments from Manager (Note 6)................. (48,482) -- (66,550) (36,428) (9,093)
-------- ---------- ---------- -------- -------
Total expenses............................ 3,770 535,787 39,726 4,753 --
-------- ---------- ---------- -------- -------
Net investment income..................... 47,698 1,873,880 32,254 31,543 75,987
-------- ---------- ---------- -------- -------
Realized and unrealized gain on investments:
Net realized gain.............................. 533,611 3,574,739 1,627,612 361,025 24,817
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities in foreign currencies............. 276,756 (4,000,978) 156,594 438,510 (21,963)
-------- ---------- ---------- -------- -------
Net realized and unrealized gain (loss) on
investments.................................... 810,367 (426,239) 1,784,206 799,535 2,854
-------- ---------- ---------- -------- -------
Net increase in net assets resulting from
operations..................................... $858,065 $1,447,641 $1,816,460 $831,078 $78,841
======== ========== ========== ======== =======
</TABLE>

*For the period August 17, 1993 (effective date) to April 30, 1994.
+Net of foreign taxes withheld of $74,747 in the Global Utilities Fund, $521 in
the Small Cap Growth Fund, $689 in the Global Health Care Fund and $25 in the
FISCO MidCap Growth Fund.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1994 AND 1993
(AS DESCRIBED IN THE COLUMN HEADINGS)

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN GLOBAL
GROWTH FUND UTILITIES FUND
------------------------- ------------------------------
7/02/92
YEAR ENDED YEAR ENDED YEAR ENDED (EFFECTIVE DATE)
04/30/94 04/30/93 04/30/94 TO 04/30/93
------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Increase/decrease in net assets:
Operations:
Net investment income.............................. $ 47,698 $ 39,943 $ 1,873,880 $ 205,182
Net realized gain (loss) on investments............ 533,611 (62,035) 3,574,739 14
Net unrealized appreciation (depreciation) on
investments and translation of assets and liabilities
in foreign currencies............................. 276,756 172,084 (4,000,978) 954,719
---------- ---------- ------------ -----------
Net increase in net assets resulting from
operations.................................. 858,065 149,992 1,447,641 1,159,915
Distributions to shareholders:
From undistributed net investment income........... (48,522) (38,332) (1,053,413) (86,596)
From net realized capital gains.................... (195,872) -- (249,283) --
Increase in net assets from capital share transactions
(Note 4)........................................... 620,455 208,836 109,816,315 13,153,500
---------- ---------- ------------ -----------
Net increase in net assets.................... 1,234,126 320,496 109,961,260 14,226,819
Net assets:
Beginning of year.................................. 3,411,581 3,091,085 14,226,819 --
---------- ---------- ------------ -----------
End of year........................................ $4,645,707 $3,411,581 $124,188,079 $14,226,819
========== ========== ============ ===========
Undistributed net investment income included in net
assets:
Beginning of year................................. $ 13,345 $ 11,734 $ 118,586 $ --
========== ========== ============ ==========
End of year....................................... $ 12,521 $ 13,345 $ 939,053 $ 118,586
========== ========== ============ ==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED APRIL 30, 1994 AND 1993
(AS DESCRIBED IN THE COLUMN HEADINGS)

<TABLE>
<CAPTION>
Franklin Small Cap Franklin Global FISCO MidCap
Growth Fund Health Care Fund Growth Fund
------------------------- ------------------------ -----------------
08/17/93
Year ended Year ended Year ended Year ended (effective date)
04/30/94 04/30/93 04/30/94 04/30/93 to 04/30/94
---------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Increase/decrease in net assets:
Operations:
Net investment income.................. $ 32,254 $ 26,053 $ 31,543 $ 26,708 $ 75,987
Net realized gain (loss) on investments 1,627,612 (9,854) 361,025 (64,571) 24,817
Net unrealized appreciation
(depreciation) on investments........ 156,594 42,467 438,510 51,735 (21,963)
----------- ---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations....... 1,816,460 58,666 831,078 13,872 78,841
Distributions to shareholders:
From undistributed net investment
income................................ (35,477) (20,025) (33,141) (21,960) (39,501)
From net realized gains................ (427,302) -- (137,028) -- (17,500)
Increase in net assets from capital
share transactions (Note 4)............ 16,535,237 4,719,695 1,711,689 2,062,265 5,057,100
----------- ---------- ---------- ---------- ----------
Net increase in net assets........ 17,888,918 4,758,336 2,372,598 2,054,177 5,078,940
Net assets:
Beginning of year...................... 6,026,173 1,267,837 3,422,498 1,368,321 --
----------- ---------- ---------- ---------- ----------
End of year............................ $23,915,091 $6,026,173 $5,795,096 $3,422,498 $5,078,940
=========== ========== ========== ========== ==========

Undistributed net investment income
included in net assets:
Beginning of year..................... $ 10,903 $ 4,875 $ 8,438 $ 3,690 $ --
=========== ========== ========== ========== ==========
End of year........................... $ 7,680 $ 10,903 $ 6,840 $ 8,438 $ 36,486
=========== ========== ========== ========== ==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Strategic Series (the Series) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Series currently has three separate diversified funds consisting
of Franklin California Growth Fund (the California Growth Fund), Franklin Small
Cap Growth Fund (the Small Cap Fund), and FISCO MidCap Growth Fund (the FISCO
MidCap Fund); and two separate non-diversified funds: Franklin Global Health
Care Fund (the Global Health Fund) and Franklin Global Utilities Fund (the
Global Utilities Fund). Prior to July 12, 1993, the California Growth Fund was
known as the Franklin California 250 Growth Fund. Each of the Funds issues a
separate series of shares and maintains a totally separate investment
portfolio.

On January 13, 1993, the Board of Trustees approved the addition of Franklin
MidCap Growth Fund to the Series. The new Fund is an open-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended, and will invest all of its assets in the MidCap Growth
Portfolio, a no load diversified management investment company. The Fund has
been effective since June 15, 1993, but has not commenced operations.

On November 16, 1993, the Board of Trustees approved the addition of a new fund
to the Series. A registration statement relating to the new fund has been filed
with the Securities and Exchange Commission, but has not become effective as of
April 30, 1994.

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

A. SECURITIES VALUATIONS: Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from a pricing service, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Short-term securities and similar investments with remaining
maturities of 60 days of less are valued at amortized cost, which approximates
value.

Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner, and these values are
translated into U.S. dollars at current market quotations of their respective
currency against U.S dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
procedures established by the Board of Trustees.

The fair values of securities restricted as to resale, or other securities for
which market quotations are not readily available, if any, are determined
following procedures approved by the Board of Trustees -- see Note 7.

B. INCOME TAXES: The Funds intend to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code,
and to make the requisite distributions to their shareholders which will be
sufficient to relieve them from income and excise taxes. Therefore, no income
tax provision is required. Each Fund is treated as a separate entity in the
determination of compliance with the Internal Revenue Code.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (cont.)

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.

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

Net realized capital gains differ for financial statement and tax purposes
primarily due to losses deferred for wash sale transactions.

E. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS: The Series
may trade securities on a when-issued or delayed delivery basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Series will
generally purchase these securities with the intention of acquiring such
securities, they may sell such securities before the settlement date. These
securities are identified on the accompanying statement of investments in
securities and net assets. The Funds have set aside sufficient investment
securities as collateral for these purchase commitments.

F. EXPENSE ALLOCATION: Common expenses incurred by the Series are allocated
among the Funds based on the ratio of net assets of each Fund to the combined
net assets. In all other respects, expenses are charged to each Fund as
incurred on a specific identification basis.

G. FOREIGN CURRENCY TRANSLATION: The accounting records of the Series are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rate of exchange of such
currencies against U.S. dollars on the date of the valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are
recognized as adjustments to investment income when reported by the custodian
bank.

H. REPURCHASE AGREEMENTS: The Series may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board and/or
member banks of the Federal Reserve System. In a repurchase agreement, the Fund
purchases a U.S. government security from a dealer or bank subject to an
agreement to resell it at a mutually agreed upon price and date. Such a
transaction is accounted for as a loan by the Fund to the seller,
collateralized by the underlying security. The transaction requires the initial
collateralization of the seller's obligation by U.S. government securities with
market value, including accrued interest, of at least 102% of the dollar amount
invested by the Fund, with the value of the underlying security marked to
market daily to maintain coverage of at least 100%. The collateral is delivered
to the Fund's custodian and held until resold to the dealer or bank. At April
30, 1994, all outstanding repurchase agreements held by the Funds had been
entered into on April 29, 1994.

The Series may enter into Joint Repurchase Agreements whereby each Fund's
uninvested cash balance is deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
Joint Repurchase Agreements are allocated to the Funds based on its pro-rata
interest at April 29, 1994.

2. UNAMORTIZED ORGANIZATION COSTS

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

2. UNAMORTIZED ORGANIZATION COSTS (CONT.)

Inc. New investors purchasing shares of the Series subsequent to that date bear
such costs during the amortization period only as such charges are accrued
daily against investment income. The Series' Manager advanced all of the
organization costs of the Series, which amounted to $33,267, $15,648, $18,775
and $16,816 for the California Growth Fund, the Global Utilities Fund, the
Small Cap Fund, and the Global Health Fund, respectively. In an effort to
reduce the Series' expenses, the manager has reimbursed the current period's
amortization of $6,653, $3,170, $3,755 and $3,240 for the California Growth
Fund, the Global Utilities Fund, the Small Cap Fund, and the Global Health
Fund, respectively.

3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At April 30, 1994, for tax purposes, the Funds have accumulated undistributed
net realized capital gains as follows:

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FISCO
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Accumulated net realized gains............. $243,087 $3,328,273 $1,184,956 $87,472 $7,317
======== ========== ========== ======= ======
</TABLE>

For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower or unrealized depreciation is higher) than for
financial reporting purposes at April 30, 1994 by $2,803 in the Global
Utilities Fund and $5,536 in the Global Health Fund.

4. TRUST SHARES

At April 30, 1994, there were an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in the Series' shares for the
years ended April 30, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN GLOBAL
GROWTH FUND UTILITIES FUND
------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- ---------- ------------
<S> <C> <C> <C> <C>
1994 -
Shares sold.............................................. (50,123) $ 596,456 4,597,333 $ 58,206,365
Shares issued in reinvestment of distributions........... 20,366 232,835 83,094 1,057,033
Shares redeemed.......................................... (32,139) (374,204) (531,949) (6,782,713)
Changes from exercise of exchange privilege:
Shares sold............................................. 54,080 648,657 5,765,127 73,837,870
Shares redeemed......................................... (40,915) (483,289) (1,307,264) (16,502,240)
------- --------- --------- ------------
Net increase.............................................. 51,515 $ 620,455 8,606,341 $109,816,315
======= ========= ========= ============
1993 -
Shares sold.............................................. 41,843 $ 411,734 994,605 $ 10,368,700**
Shares issued in reinvestment of distributions........... 3,759 36,574 6,155 64,377
Shares redeemed.......................................... (15,340) (151,357) (38,029) (416,639)
Changes from exercise of exchange privilege:
Shares sold............................................. 25,008 255,915 313,975 3,390,079
Shares redeemed......................................... (34,397) (344,030) (23,995) (253,017)
------- --------- --------- ------------
Net increase.............................................. 20,873 $ 208,836 1,252,711 $ 13,153,500
======= ========= ========= ============
</TABLE>

**For the period July 2, 1992 (effective date) to April 30, 1993.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

4. TRUST SHARES (cont.)

<TABLE>
<CAPTION>
FRANKLIN SMALL CAP FRANKLIN GLOBAL FISCO MIDCAP
GROWTH FUND HEALTH CARE FUND GROWTH FUND*
------------------------- ----------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1994 -
Shares sold..................... 527,823 $ 6,523,254 174,501 $1,732,415 500,010 $5,000,099
Shares issued in reinvestment of
distributions.................. 33,180 410,352 16,250 160,950 5,594 57,001
Shares redeemed................. (111,639) (1,417,140) (66,382) (692,594) -- --
Changes from exercise of
exchange privilege:
Shares sold................... 1,634,135 21,097,953 329,826 3,285,773 -- --
Shares redeemed............... (798,157) (10,079,182) (283,890) (2,774,855) -- -
--------- ----------- -------- ---------- ------- ----------
Net increase..................... 1,285,342 $16,535,237 170,305 $1,711,689 505,604 $5,057,100
========= =========== ======== ========== ======= ==========
1993 -
Shares sold..................... 214,611 $2,211,776 153,536 $1,377,815
Shares issued in reinvestment of
distributions.................. 1,904 18,724 2,275 21,174
Shares redeemed................. (48,448) (545,795) (6,780) (62,318)
Changes from exercise of
exchange privilege:
Shares sold................... 500,942 5,304,850 140,965 1,276,275
Shares redeemed............... (211,578) (2,269,860) (59,434) (550,681)
--------- ----------- -------- ----------
Net increase...................... 457,431 $ 4,719,695 230,562 $2,062,265
========= =========== ======== ==========
</TABLE>

*For the period August 17, 1993 (effective date) to April 30, 1994.

5. PURCHASES AND SALES OF SECURITIES

Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended April 30, 1994 were as follows:

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FISCO
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Purchases............................... $5,138,771 $102,176,248 $24,173,768 $6,322,114 $8,340,790
========== ============ =========== ========== ==========

Sales................................... $5,202,795 $ 8,820,451 $11,006,216 $4,605,471 $3,549,858
========== ============ =========== ========== ==========
</TABLE>

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to each
Fund, and receives fees computed monthly based on the net assets of each Fund,
except for the FISCO MidCap Fund, at an annual rate of .625 of 1% of the
average daily net assets up to and including $100 million; .50 of 1% of the
average daily net assets over $100 million, up to and including $250 million;
.45 of 1% of the average daily net assets over $250 million, up to and
including $10 billion; .44 of 1% of the average daily net

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)

assets over $10 billion, up to and including $12.5 billion; .42 of 1% of the
average daily net assets over $12.5 billion, up to and including $15 billion;
and .40 of 1% of the average daily net assets over $15 billion. Franklin
Institutional Services Corporation (FISCO) serves as the investment adviser for
the FISCO MidCap Fund, and receives fees computed monthly at the annual rate of
.65% of the Fund's average daily net assets.

The terms of the management agreements provide that annual aggregate expenses
of the Series' be limited to the extent necessary to comply with the
limitations set forth in the laws, regulations and administrative
interpretations of the states in which the Series' shares are registered. The
Series' expenses did not exceed these limitations; however, for the year ended
April 30, 1994, Franklin Advisers, Inc., and FISCO reduced their fees, as
indicated below, in an effort to minimize the Series' expenses. Additionally,
Franklin Advisers, Inc. paid other expenses of $48,482, $66,550, $36,428 and
$9,093 for the California Growth Fund, the Small Cap Fund, the Global Health
Fund and the FISCO MidCap Growth Fund, respectively.

<TABLE>
<CAPTION>
FRANKLIN ADVISERS, INC. FISCO
--------------------------------------------------------- ----------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FISCO
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
---------- -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Management fees earned..................... $22,724 $394,550 $82,978 $28,960 $22,209
Less reduction of fees..................... 22,724 203,183 82,978 28,960 22,209
------- -------- ------- ------- -------
Management fees paid....................... $ -- $191,367 $ -- $ -- $ --
======= ======== ======= ======= =======
</TABLE>

Under the terms of a shareholder servicing agreement with Franklin/Templeton
Investor Services, Inc., the Series pays costs on a per shareholder account
basis. Shareholder servicing costs of $65,684 were incurred for the year ended
April 30, 1994 of which $62,896 was for services provided by Franklin/Templeton
Investor Services, Inc. In an effort to minimize such costs, Franklin/Templeton
Investor Services, Inc. bore shareholder servicing costs of $2,218 in the
California Growth Fund, $7,284 in the Global Utilities Fund, $3,748 in the
Small Cap Fund, $5,467 in the Global Health Fund, and $5 in the FISCO MidCap
Fund.

Under the terms of a Distribution Agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Funds, except for the FISCO MidCap Fund,
will reimburse Franklin/Templeton Distributors, Inc. in an amount up to .25%
per annum of the Series' average daily net assets for costs incurred in the
promotion, offering and marketing of the Funds' shares. Franklin/Templeton
Distributors, Inc., reduced their fees, as indicated below, in an effort to
minimize such Funds' expenses.

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND
------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Distribution fees earned................................. $4,250 $155,167 $31,563 $9,579
Less reduction of fees................................... 480 65,611 15,864 4,826
------ -------- ------- ------
Distribution fees paid................................... $3,770 $ 89,556 $15,699 $4,753
====== ======== ======= ======
</TABLE>
In its capacity as underwriter for the shares of the Funds, except for the
FISCOMidCap Fund, Franklin/Templeton Distributors, Inc. received commissions on
sales of the Funds' shares. Commissions received by Franklin/Templeton

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)

Distributors, Inc. and the amounts which were subsequently paid to other
dealers for the year ended April 30, 1994 were as follows:

Commissions are deducted from the gross proceeds received from the sale of the
shares of the Funds, and as such are not expenses of the Funds.

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

At April 30, 1994, Franklin Resources owned 56% of the California Growth Fund,
1% of the Global Utilities Fund, 6% of the Small Cap Fund, 19% of the Global
Health Fund, and 100% of the FISCO MidCap Fund.

7. RESTRICTED SECURITIES

A restricted security is a security which has not been registered with the
Securities & Exchange Commission pursuant to the Securities Act of 1933. The
Series may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Series values these
securities as disclosed in Note 1. At April 30, 1994, the California Growth
Fund held restricted securities with a value aggregating $288 representing less
than one percent of the Fund's net assets. Such securities are:

<TABLE>
<CAPTION>
ACQUISITION
SHARES SECURITY DATE COST VALUE
- ------ -------- ----------- ------ -----
<S> <C> <C> <C>
198 Lynx Therapeutics, Inc...................................................... 10/19/92 $ 40 $ --
288 Lynx Therapeutics, Inc., pfd., Series A..................................... 10/19/92 288 288

</TABLE>

8. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resale of restricted
securities to qualified institutional investors. The Series values these
securities as disclosed in Note 1. At April 30, 1994, 144A securities were held
as follows:

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
GLOBAL SMALL CAP
UTILITIES FUND GROWTH FUND
-------------- -----------
<S> <C> <C>
Value.................................................. $5,266,711 $77,343
========== =======
Ratio of value to net assets........................... 4.24% 0.32%
========== =======
</TABLE>

See the accompanying statement of investments in securities and net assets for
specific information on such securities.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (CONT.)

9. SUBSEQUENT EVENTS

On May 17, 1994, the Board of Trustees declared distributions as follows:

<TABLE>
<CAPTION>
FROM NET FROM NET
RECORD DATE PAYMENT DATE INVESTMENT INCOME REALIZED CAPITAL GAINS
----------- ------------ ----------------- ----------------------
<S> <C> <C> <C> <C>
Franklin California Growth Fund.............. 6/14/94 6/30/94 $.055 $.595
Franklin Global Utilities Fund............... 6/14/94 6/30/94 .173 .331
Franklin Small Cap Growth Fund............... 6/14/94 6/30/94 .012 .574
Franklin Global Health Care Fund............. 6/14/94 6/30/94 .021 .149
FISCO MidCap Growth Fund...................... 6/14/94 6/30/94 .134 .015
</TABLE>

10. FINANCIAL HIGHLIGHTS

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

FINANCIAL STATEMENTS
The Financial Statements are incorporated by reference herein to the Financial
Statements attached to the Franklin California Growth Fund Statement of
Additional Information.

<PAGE>
99P
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN GLOBAL HEALTH CARE FUND
FRANKLIN STRATEGIC SERIES
DATED SEPTEMBER 1, 1994

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

1. EXPENSE TABLE

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
------------------- -------------- ------------------ ----------------------
<S> <C> <C> <C>
Less than $100,000............................. 4.50% 4.71% 4.00%
$100,000 but less than $250,000................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000................ 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000.............. 2.25% 2.30% 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: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.

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

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

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

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

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

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

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

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

Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund. Shares of the
Fund may be purchased at net asset value and without the imposition of a
contingent deferred sales charge by registered investment advisors and/or their
affiliated broker-dealers, who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in a
comprehensive fee program (also known as a wrap fee program).

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

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

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

<PAGE>
purchase, which may be established by Distributors. Currently, those criteria
require that the amount invested or to be invested during the subsequent
13-month period in this Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be accepted by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following such
order.

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

4. EXCHANGE PRIVILEGE

a) Add the following paragraph under "Exchanges by Telephone": The automatic
TeleFACTS(R) system at 1-800/247-1753 is available for processing exchanges
(day or night.) During periods of drastic economic or market changes, however,
this option may not be available, in which event the shareholder should follow
other exchange procedures discussed in the section.

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

Contingent Deferred Sales Charge

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

The contingent deferred sales charge is waived for: exchanges; distributions to
participants in Trust Company retirement plan accounts due to death, disability
or attainment of age 59 1/2; tax-free returns of excess contributions to
employee benefit plans; distributions from employee benefit plans, including
those due to plan termination or plan transfer; redemptions through a
Systematic Withdrawal Plan set up prior to February 1, 1995 and, for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually); and
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size.

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

FRANKLIN
GLOBAL HEALTH
CARE FUND

Franklin Strategic Series

PROSPECTUS SEPTEMBER 1, 1994

[LOGO]

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

Franklin Global Health Care Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is capital appreciation; it seeks to
accomplish its objective by investing primarily in the equity securities of
health care companies located throughout the world.

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

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.

<PAGE>
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table................................... 2
Financial Highlights............................ 3
About the Fund.................................. 4
Investment Objective and
Policies of the Fund........................... 4
Management of the Fund.......................... 10
Distributions to Shareholders................... 11
Taxation of the Fund
and Its Shareholders........................... 12
How to Buy Shares of the Fund................... 14
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments............. 20
Other Programs and Privileges
Available to Fund Shareholders................. 21
Exchange Privilege.............................. 23
How to Sell Shares of the Fund.................. 25
Telephone Transactions.......................... 27
Valuation of Fund Shares........................ 28
How to Get Information
Regarding an Investment in the Fund............ 30
Performance..................................... 30
General Information............................. 31
Account Registrations........................... 32
Important Notice Regarding
Taxpayer IRS Certifications.................... 33
Portfolio Operations............................ 33
</TABLE>

EXPENSE TABLE

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)....................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends ............................................... NONE
Deferred Sales Charge............................................................................... NONE
Redemption Fees..................................................................................... NONE
Exchange Fee ....................................................................................... NONE
</TABLE>

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<S> <C> <C>
Management Fees..................................................................................... 0.63%*
12b-1 Fees.......................................................................................... 0.21%**
Other Expenses:
Reports to Shareholders ................................................................ 0.41%
Registration fees....................................................................... 0.20%
Other.................................................................................... 0.29%
-----
Total Other Expenses................................................................................ 0.90%
------
Total Fund Operating Expenses....................................................................... 1.74%*
======
</TABLE>

*Represents the amount that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager
limited its management fees and assumed responsibility for making payments to
offset certain operating expenses otherwise payable by the Fund. With this
reduction, the Fund paid no management fees and total operating expenses
represented 0.10% of the average net assets of the Fund. This arrangement may
be terminated by the investment manager at any time.
**Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.

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

EXAMPLE

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

1 YEAR 3 YEARS 5 YEARS 10 YEARS
$62 $97 $135 $241

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

FINANCIAL HIGHLIGHTS

Set forth below is a table containing financial highlights for a share of the
Fund from the effective date of registration through April 30, 1992 and for
fiscal years ended April 30, 1993 and 1994. The information for each of the
periods ended April 30, 1994, has been audited by Coopers & Lybrand,
independent auditors, whose audit report appears in the financial statements in
the Fund's Statement of Additional Information. See the discussion "Report to
Shareholders" under "General Information."

PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------------------
NET
NET ASSET REALIZED & DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM TOTAL AT END TOTAL
APRIL 30 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR RETURN(*)
- -------- --------- ---------- ------------- ----------- ------------- -------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992(1) $10.00 $0.02 $(1.180) $(1.160) $ -- $ -- $ -- $ 8.84 (55.14)%**
1993 8.84 0.09 0.037 0.127 (0.087) -- -- 8.88 1.41
1994 8.88 0.07 1.856 .926 (0.078) (0.298) (0.376) 10.43 21.93
</TABLE>

<TABLE>
<CAPTION>
RATIO/SUPPLEMENTAL DATA
- ------------------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
YEAR AT END EXPENSES INCOME TO PORTFOLIO
ENDED OF YEAR TO AVERAGE AVERAGE TURNOVER
APRIL 30 (IN 000'S) NET ASSETS*** NET ASSETS RATE
- -------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
1992(1) $1,368 --% 1.68%** 41.01%
1993 3,422 -- 1.13 62.74
1994 5,795 0.10 0.68 110.82
</TABLE>

(1) For the period February 14, 1992 (effective date) to April 30, 1992.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum 4.5% initial sales charge and
assumes reinvestment of dividends and capital gains at net asset value.
**Annualized
***During the periods indicated, the investment manager reduced its management
fees and reimbursed other expenses incurred by the Fund. Had such action not
been taken, the ratios of expenses to average net assets would have been 1.62%
(annualized), 2.16% and 1.74%.

<PAGE>
ABOUT THE FUND

Franklin Global Health Care Fund (the "Fund"), is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company, commonly called a "mutual fund" and registered with the SEC under the
Investment Company Act of 1940 as amended (the "1940 Act"). The Trust is a
Delaware business trust, organized on January 25, 1991. The Fund is managed by
Franklin Advisers, Inc. (the "Manager" or "Advisers"). Because the Fund is
non-diversified, it may have a larger portion of its assets invested in a
single issuer than a diversified fund. Consequently, changes in the financial
condition of a single issuer may have a greater effect on the Fund's share
value than such changes would have on the performance of other mutual funds,
particularly those which invest in a broad range of issuers and industries.

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
based upon a variable percentage (ranging from 4.50% to less than 1.00% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND

The Fund's investment objective is to seek capital appreciation by investing
primarily in the equity securities of health care companies located throughout
the world. The investment objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. The Fund will seek to invest in
companies which have, in the opinion of the Manager, the potential for above
average growth in revenues and/or earnings.

A "health care" company is defined as one which has at least 50% of its
earnings or revenues derived from health care activities, or at least 50% of
its assets devoted to such activities, based upon the company's most recently
reported fiscal year. Health care activities consist of research, development,
production or distribution of products and services in industries such as:
pharmaceutical, biotechnology, health care facilities, medical supplies,
medical technology and personal health care products.

The Fund will invest at least 70% of its total assets in the equity securities
of health care companies. Equity securities consist of common stocks, preferred
stocks, convertible preferred stocks, securities convertible into common
stocks, rights and warrants. A warrant is a security that gives the holder the
right, but not the obligation, to subscribe for newly created securities of the
issuer or a related company at a fixed price either at a certain date or during
a set period. A convertible security is a security that may be converted either
at a stated price or rate within a specified period of time into a specified
number of shares of common stock. In investing in convertible securities, the
Fund seeks to participate in the capital appreciation of the common stock into
which the securities are convertible through the conversion feature. The Fund
will mix its investments globally by investing 70% of its assets in issues of
not less than three different countries, however the Fund will not invest more
than 40% of the Fund's total net assets in any one country (other than the
United States ["U.S."]). The Manager believes that by investing globally, the
Fund can minimize currency, political and economic risks associated with
investing in a single country. Global investing does entail certain risks,
however, which are discussed in "Special Considerations and Risk Factors." The
Fund does expect that from time to time a significant por-

<PAGE>
tion of its investments will be in securities of domestic issuers. The Fund
may also invest up to 30% of its assets in domestic and foreign debt securities
of any type of issuer (such as foreign and domestic corporations and foreign
and domestic governments and their political subdivisions), consisting of
bonds, notes and debentures as well as debt securities convertible into equity.
The Fund may seek capital appreciation through changes in relative foreign
currency exchange rates or improvement in the creditworthiness of the issuer
related to investments in debt securities. The receipt of income from such debt
securities is incidental to the Fund's investment objective of growth of
capital. The Fund will invest in debt securities rated B or above by Moody's
Investors Service ("Moody's") or Standard & Poor's Corporation ("S&P"), two
nationally recognized statistical ratings organizations ("NRSROs"), or in bonds
which have not been rated by any NRSRO but are, in the Manager's opinion,
comparable to securities rated B or above by the NRSROs. Securities rated B are
considered to be below investment grade and regarded, on balance, as
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the obligation. It is the
Fund's current intention to invest less than 5% in debt securities considered
to be below investment grade. The Statement of Additional Information contains
a discussion of the ratings. The Fund may also seek to protect capital through
the use of forward currency exchange contracts, options and futures contracts.

Many major developments in health care come from companies based abroad, thus
in the opinion of the Manager, a portfolio of only U.S. based health care
stocks is not sufficiently diversified to participate in global developments
and discoveries in the field of health care. The Manager believes that health
care is becoming an increasingly globalized industry and that many important
investment opportunities lie abroad. Therefore, the Manager believes that a
portfolio of global securities may provide a greater potential for investment
participation in present and future opportunities that may present themselves
in the health care related industries. The Manager also believes that the U.S.
health care industry may be subject to increasing regulation and government
control, thus a global portfolio may reduce the risk of a single government's
actions on the portfolio. The Fund concentrates its investments in a limited
group of related industries and is not intended to be a complete investment
program. There is, of course, no assurance the Fund will achieve its objective.

As a global fund, the Fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the European Currency Unit. Investments will not be made in
securities of foreign issuers issued without stock certificates or comparable
evidence of ownership. Securities which are 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 are not considered by the Fund to be
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 at
approximately the amount at which the Fund has valued the security in the U.S.
or foreign market; and current market quotations are readily available.

<PAGE>
investors, provided that such loans do not exceed 20% of the value of the
Fund's total assets at the time of the most recent loan, and further provided
that the borrower deposits and maintains 102% collateral for the benefit of the
Fund. 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 the cash
collateral in short-term interest bearing obligations or by receiving a loan
premium from the borrower. Under the securities loan agreement, the Fund
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.

Any voting rights the securities may have may pass to the borrower during the
term of the loan. Loans are typically subject to termination by the Fund in the
normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Where matters are submitted to the vote of the security
holders of a portfolio company and such matters would materially affect the
Fund, the Fund will either terminate the loan or it will have provided other
means to permit it to vote such securities.

Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of the assets of the Fund, except that the Fund may enter into
reverse repurchase agreements or borrow from banks up to 10% of its total asset
value to meet redemption requests and for other temporary or emergency
purposes. While borrowings exceed 5% of the Fund's total assets, the Fund will
not make any additional investments.

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) 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. The Trust's Board of
Trustees has authorized the Fund to invest in restricted securities (securities
not registered with the SEC, which might otherwise be considered illiquid)
where such investment is consistent with the Fund's investment objective and
has authorized such securities to be considered to be liquid (and thus not
subject to the foregoing 10% limitation), to the extent the Manager determines
on a daily basis that there is a liquid institutional or other market for such
securities. Notwithstanding the Manager's determination in this regard, the
Trust's Board of Trustees will remain responsible for such determinations and
will consider appropriate action, consistent with the Fund's objective and
policies, if a security should become illiquid subsequent to its purchase. In
this regard, if qualified institutional buyers are no longer interested in
purchasing restricted securities previously designated as liquid or if the
market for these securities contracts, these securities will be redesignated as
illiquid and subject to the 10% limitation. See "The Fund's Investment
Objective and Restrictions - Short-term Investments," in the Statement of
Additional Information.

American Depository Receipts. The Fund may hold securities of foreign issuers
in the form of American Depository Receipts ("ADRs"). ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. ADRs in registered
form are designed for use in U.S. securities markets. For purposes of the
Fund's

<PAGE>
investment policies, investments in ADRs will be deemed to be investments in
the equity securities representing securities of foreign issuers into which
they may be converted.

Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases of Fund shares and sales of portfolio securities, temporarily in
short-term debt instruments, including high grade commercial paper, repurchase
agreements and other money market equivalents and the shares of money market
funds with the same investment advisor as the Fund, which invest primarily in
short-term debt securities. Such temporary investments will only be made with
cash held to maintain liquidity or pending investment. In addition, for
temporary defensive purposes in the event of, or when Advisers anticipates a
general decline in the market prices of stocks in which the Fund invests, the
Fund may invest an unlimited amount of its assets in short-term debt
instruments.

Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts ("Forward Contracts") 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 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 high grade debt
securities equal to the amount of the purchase will be held aside or segregated
with/at 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.

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.

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
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and 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

<PAGE>
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. For
further discussion of the use, risks and costs of options on foreign
currencies, see the Statement of Additional Information.

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 government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System. Under the 1940 Act, a repurchase agreement is
deemed to be the loan of money by the Fund to the seller, collateralized by the
underlying security. The U.S. government security subject to resale (the
collateral) will be held pursuant to a written agreement and the Fund's
custodian will take title to, or actual delivery of, the security.

The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities on an agreed-upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although
reverse repurchase agreements are borrowings under Section 2(a)(23) of the 1940
Act, the Fund does not treat these arrangements as borrowings under its
fundamental investment restriction against borrowing (set forth in the
Statement of Additional Information) so long as the segregated account is
properly maintained.

Portfolio Turnover. The portfolio turnover for the fiscal years ended April 30,
1993 and 1994, were 62.74% and 110.82%, respectively. The higher portfolio
turnover rate for fiscal year ended April 30, 1994, was due to the volatility
of the market. High portfolio turnover increases transactions costs which must
be paid by the Fund.

The investment policies of the Fund, except as otherwise specifically indicated
herein or in the Statement of Additional Information, are not fundamental
policies of the Fund and may be changed without the approval of a majority of
the Fund's outstanding shares.

SPECIAL CONSIDERATIONS AND RISK FACTORS

Prospective investors should take into account their individual investment
objectives as well as other investments when considering the purchase of shares
of the Fund.

<PAGE>
those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and
issuers. Some foreign securities markets have substantially less volume than
the New York Stock Exchange (the "Exchange") and some foreign government
securities may be less liquid and more volatile than U.S. government
securities. Transaction costs on foreign securities exchanges may be higher
than in the U.S. and foreign securities settlements may, in some instances, be
subject to delays and related administrative uncertainties. Furthermore,
foreign securities may be subject to withholding taxes, thus reducing net
investment income available for distribution to shareholders.

The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of
the additional expenses of the Fund, such as custodial costs, valuation costs
and communication costs, although they are expected to be similar to expenses
of other investment companies investing in a mix of U.S. securities and
securities of one or more foreign countries.

Investments of the Fund may be denominated in foreign currencies. Changes in
the relative values of these foreign currencies and the U.S. dollar, therefore,
will affect the value of investments in the Fund. However, the Fund may utilize
forward currency contracts to attempt to minimize these changes. The Fund may
purchase foreign currency futures contracts and options provided that not more
than 5% of the Fund's assets are then invested as initial or variation margin
deposits on such contracts or options. The Fund may acquire and sell such
contracts in order to hedge against changes in the level of future currency
rates. Such contracts involve an agreement to purchase or sell a specific
currency at a future date at a price set in the contract. By entering into such
contracts, the Fund is able to protect against a loss resulting from an adverse
change in the relationship between the U.S. dollar and a foreign currency
occurring between the trade and settlement dates of the Fund securities
transaction, but such contracts also tend to limit the potential gains that
might result from a positive change in such currency relationships.

While the Fund may invest in foreign securities, it is generally not its
intention to invest in foreign equity securities of an issuer which meet the
definition in the Internal Revenue Code of 1986, as amended ("the Code") of a
Passive Foreign Investment Company (PFIC). However, to the extent that the Fund
makes such an investment, the Fund may be subject to both an income tax and an
additional tax in the form of an interest charge with respect to such
investment. To the extent possible, the Fund will avoid such taxes by not
investing in PFIC securities or by adopting other tax strategies for any PFIC
securities it does purchase. These rules are further discussed in the Statement
of Additional Information.

Although the Fund's assets will usually be invested in a substantial number of
issuers, the Fund is "non-diversified" as defined by the 1940 Act. This
generally means that more than 5% of the Fund's assets may be invested in the
securities of a single issuer. Because the Fund is non-diversified and
concentrates its investments in a limited group of related industries, the
value of the Fund's shares may fluctuate more widely, and the Fund may present
greater risk than other investments.

Unlike more widely diversified mutual funds, the Fund is subject to industry
risk, the possibility that a particular group of related stocks will decline in
price. The activities of health care companies may be funded or subsidized by
federal and state governments. Consequently, discontinuance of gov-

<PAGE>
ernment subsidies could adversely affect the profitability of such
companies. Stocks held by the Fund will be affected by government policies on
health care reimbursements, regulatory approval for new drugs and medical
instruments, and similar matters. Health care companies may face lawsuits
related to product liability issues. Also, many products and services provided
by health care companies are subject to rapid obsolescence. The value of an
investment in the Fund may fluctuate significantly over relatively short
periods of time.

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 Trust who are responsible for
administering its day-to-day operations.

Franklin Advisers, Inc., serves as the Fund's investment manager. Advisers is a
wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly
owned holding company, the principal shareholders of which are Charles B.
Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann, who own approximately
20%, 16% and 10%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (112 separate series) with aggregate assets of
over $74 billion.

During the fiscal year ended April 30, 1994, fees totaling 0.63% of the
average daily net assets of the Fund would have been accrued by Advisers. Total
operating expenses, including management fees, would have represented 1.74% of
the average daily net assets of the Fund. Advisers did not impose its
management fees and assumed responsibility for making payments to offset
certain operating expenses otherwise payable by the Fund. Pursuant to the
action by Advisers, the Fund paid no management fees and total operating
expenses represented 0.10% of the average daily net assets of the Fund. This
action by Advisers to limit its management fee and assume responsibility for
payment of expenses related to the operations of a Fund may be terminated by
Advisers at any time.

PLAN OF DISTRIBUTION

The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan"), whereby it

<PAGE>
may reimburse Distributors or others for expenses actually 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.

DISTRIBUTIONS TO SHAREHOLDERS

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

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. The Fund
may make more than one distribution derived from net short-term and net
long-term capital gain in any year or adjust the timing of these distributions
for operational or other reasons.

DISTRIBUTION DATE

Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends payable semiannually in June and December for shareholders of record
generally on the first business day preceding the 15th of the month, payable on
or about the last business day of such months. 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

<PAGE>
record date of a distribution should be aware that because the value of the
Fund's shares is based directly on the amount of its net assets, rather than on
the principle of supply and demand, any distribution of income or capital gain
will result in a decrease in the value of the Fund's shares equal to the amount
of the distribution. While a dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a return of a portion of
the shareholder's investment, it may be taxable as dividend income or capital
gain.

DIVIDEND REINVESTMENT

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

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.

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, or the Templeton
Group, to another person, or directly to a checking account. If the bank at
which the account is maintained is a member of the Automated Clearing House,
the payments may be made automatically by electronic funds transfer. If this
last option is requested, the shareholder should allow at least 15 days for
initial processing. 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.
Dividend and capital gain distributions are eligible for investment in another
fund in the Franklin Group of Funds or the Templeton Group at net asset value.

TAXATION OF THE FUND AND ITS SHAREHOLDERS

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

<PAGE>
capital gain and by 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.

The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to its shareholders the pro rata share of
foreign taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of foreign
source income (including any foreign taxes paid by the fund), and (ii) entitled
to either deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code. Shareholders will be informed by
the Fund at the end of each calendar year regarding the availability of any
credits and the amount of foreign source income (including any foreign taxes
paid by the Fund) to be included on their income tax returns.

For corporate shareholders, 39.17% of the income dividends paid by the Fund for
the last fiscal year ended April 30, 1994, qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the Statement of Additional
Information.

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

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.

<PAGE>
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 on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received
from the Fund.

HOW TO BUY SHARES OF THE FUND

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

PURCHASE PRICE OF FUND SHARES

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

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

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
--------------------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
</TABLE>

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

<PAGE>

On purchases in excess of $2,500,000, the sales charge is 1.00% of the offering
price on the first $2,500,000 plus 0.5% on the next $2,500,000 (with a dealer
concession of 0.5%), plus 0.25% on the excess over $5,000,000 (with a dealer
concession of 0.25%). Sales charges on purchases of $1,000,000 or more are paid
to the securities dealer, if any, involved in the trade, who may therefore be
deemed an "underwriter" under the Securities Act of 1933, as amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R), and the Templeton Group of Funds. Included for
these purposes are (a) the open-end investment companies in the Franklin Group
(except Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments
may not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on
the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation
will be at the applicable sales charge of 1% or more until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $2,500,000, in which event the sales charge on the excess
will be calculated as stated above. Sales charge reductions based upon
purchases in more than one of the funds in the Franklin Group or Templeton
Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.

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

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

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

<PAGE>

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

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

GROUP PURCHASES

<PAGE>
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.

PURCHASES AT NET ASSET VALUE

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

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the bank or
trust company, with payment by federal funds received by the close of business
on the next business day following such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information. Shares of the Fund
may be purchased at net asset value by persons who have redeemed, within the
previous 120 days, their shares of the Fund or another fund in the Franklin
Group of Funds or the

<PAGE>
Templeton Group which were purchased with a sales charge. An investor may
reinvest an amount not exceeding the redemption proceeds. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within
120 days after the redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The 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
Statement of Additional Information.

Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment
in a registered management investment company which charges a contingent
deferred sales charge, and which has investment objectives similar to those of
the Fund.

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

<PAGE>
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

GENERAL

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

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

Franklin Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. Brochures for each of the plans
sponsored by Franklin contain important information regarding eligibility,
contribution limits and IRS requirements. Please note that separate
applications other than the one contained in this prospectus must be used to
establish a Franklin Trust Company retirement account. To obtain a retirement
plan brochure or application, call toll free 1-800/DIAL BEN (1-800/342-5236).

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

A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such
as a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the
distribution will be exempt from 20% mandatory federal withholding, a new
withholding law enacted in 1993. The Franklin Simplified Employee Pension Plan
(SEP-IRA) and Salary Reduction Simplified Employee Pension Plan (SAR-SEP) are
for use by small businesses (generally 25 or fewer employees) to provide a
retirement plan for their employees and, at the same time, provide for a
tax-deduction to the employer. SEP-IRA contributions are made to an employee's
IRA, at the discretion of the employer, up to the lesser of $30,000 or 15% of
compensation* per employee. The SAR-SEP allows employees to contribute a
portion of their salary to an IRA on a pre-tax basis through salary deferrals.
The

<PAGE>
maximum annual salary deferral limit for a SAR-SEP is the lesser of 15% of
compensation (adjusted for deferrals) or $9,240 (1994 limit; indexed for
inflation).

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

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

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

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

OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS

SHARE CERTIFICATES

CONFIRMATIONS

<PAGE>

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

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semiannual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the shareholder's account in additional shares at net
asset value. Payments 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 fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record. Liquidation of
shares may reduce or possibly exhaust the shares in the shareholder's account,
to the extent withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market decline. If the withdrawal
amount exceeds the total plan balance, the account will be closed and the
remaining balance 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

<PAGE>
the Fund would be disadvantageous because of the sales charge on the additional
purchases. The shareholder should ordinarily not make additional investments of
less than $5,000 or three times the annual withdrawals under the plan during
the time such a plan is in effect. A Systematic Withdrawal Plan may be
terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified 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

EXCHANGE PRIVILEGE

EXCHANGES BY MAIL

EXCHANGES BY TELEPHONE

During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this

<PAGE>
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

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least 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 and
capital gain dividends 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 Statement
of Additional Information.

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 ACCOUNTS

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

<PAGE>
HOW TO SELL SHARES OF THE FUND

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

REDEMPTIONS BY MAIL

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

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

(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.

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

Where shares to be redeemed are represented by share certificates, the
request for redemption must be accompanied by the share certificate and a share

<PAGE>
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.

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

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

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 Accounts
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 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 Franklin's Institutional Services Department by telephoning
1-800/321-8563.

<PAGE>
REDEEMING SHARES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

RETIREMENT ACCOUNTS

OTHER

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.

<PAGE>
All shareholders will be able 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)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file the 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

RESTRICTED ACCOUNTS

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

GENERAL

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

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

VALUATION OF FUND SHARES

The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that

<PAGE>
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum sales charge of the Fund).

The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund 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 sales price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market quotations are
readily available are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the Board of
Trustees. All money market instruments with a maturity of more than 60 days are
valued at current market, as discussed above. All money market instruments with
a maturity of 60 days or less are valued at their amortized cost, which the
Board of Trustees has determined in good faith constitutes fair value for
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the Board of Trustees determine that it does not
constitute fair value for such purposes. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.

Generally, trading in foreign securities markets is completed each day at
various times prior to the close of the New York Stock Exchange. The values of
foreign securities held by the Fund are determined as of such times for
computing the net asset value of the Fund. If events which materially affect
the value of the investments of the Fund occur subsequent to the close of the
securities market on which such securities are primarily traded, the
investments affected thereby will be valued at "fair value" as described above.

<PAGE>
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND

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

From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R),
by calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 99 followed by the # sign, when requested to do so by the automated
operator.

<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
--------------- ------------- ---------------------------------
<S> <C> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

PERFORMANCE

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

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

Yield which is calculated according to a formula prescribed by the SEC (see the
Statement of Additional Information) is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the cur-

<PAGE>
rent 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. 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. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus. Additional information on Fund performance is included
in the Fund's Annual Report to Shareholders and the Statement of Additional
Information.

ORGANIZATION

The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. Each series, in
effect, represents a separate mutual fund with its own investment objective and
policies. All shares have one vote, and, when issued, are fully paid,
non-assessable, and redeemable. The Trust issues shares in seven series: the
Fund, the Franklin California Growth Fund, the Franklin Small Cap Growth Fund,
the Franklin Global Utilities Fund, the Franklin Strategic Income Fund, the
Franklin Institutional MidCap Growth Fund and the Franklin MidCap Growth Fund.
Additional series may be added in the future by the Board of Trustees. All
shares of the Fund have equal voting, dividend and liquidation rights. The
Trust's shareholders will vote together to elect trustees and on other matters
affecting the entire Trust, but will vote separately on matters affecting
separate series. The shares have non-cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of trustees can
elect 100% of the trustees if they choose to do so. The Fund does not intend to
hold annual shareholders meetings. The Fund may, however, hold a special
meeting for such purposes as changing fundamental investment restrictions,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
a majority of the Board of Trustees or by shareholders holding at least ten
percent of the shares entitled to vote at the meeting. Shareholders may receive
assistance in communicat-

<PAGE>
ing with other shareholders in connection with the election or removal of
trustees such as that provided in Section 16(c) of the 1940 Act.

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

REDEMPTIONS BY THE FUND

OTHER INFORMATION

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

ACCOUNT REGISTRATIONS

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.

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."

<PAGE>
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.

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

IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS

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

PORTFOLIO OPERATIONS

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

Rupert H. Johnson, Jr., President of Advisers and Portfolio Manager -- Mr.
Johnson is a graduate of Washington and Lee University. He joined Franklin in
1965 after serving as an officer in the U.S. Marine Corps. He has worked in the
securities industry since 1965. He previously served on the executive committee
and as a member of the board of governors of the Investment Company Institute.
Kurt von Emster, Portfolio Manager -- Mr. von Emster holds a B.A. in Business
and Economics from U.C. Santa Barbara. He joined Franklin in 1989 as a
management trainee and worked as a health care analyst before accepting his
current position.
33

<PAGE>
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN GLOBAL HEALTH CARE FUND
DATED SEPTEMBER 1, 1994

a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

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

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

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

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

<PAGE>
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.

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

REINVESTMENT DATE

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

<PAGE>

FRANKLIN
GLOBAL HEALTH
CARE FUND [LOGO]
FRANKLIN STRATEGIC SERIES

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

<PAGE>
FRANKLIN
GLOBAL HEALTH
CARE FUND [LOGO]
FRANKLIN STRATEGIC SERIES

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

<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Fund (See also
the Prospectus "About the Fund,"
"General Information").......................... 2
The Fund's Investment Objective
and Restrictions (See also the
Prospectus "Investment Objective
and Policies of the Fund")...................... 2
Special Considerations
and Risk Factors................................ 8
Officers and Trustees............................ 14
Investment Advisory and Other Services
(See also the Prospectus
"Management of the Fund")....................... 17
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions.................. 18
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")..................... 19
Additional Information
Regarding Taxation.............................. 21
The Fund's Underwriter........................... 24
General Information.............................. 25
Appendix......................................... 28
Financial Statements............................. 30
</TABLE>

Franklin Global Health Care Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund seeks capital appreciation by primarily investing in the
equity securities of health care companies located throughout the world.

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

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

<PAGE>

ABOUT THE FUND

The Franklin Global Health Care Fund, is a non- diversified series of the
Franklin Strategic Series, an open-end management investment company, commonly
called a "mutual fund." The Trust is a Delaware business trust organized on
January 25, 1991.

THE FUND'S INVESTMENT
OBJECTIVE AND RESTRICTIONS

As noted in the Prospectus, the Fund seeks capital appreciation. The investment
objective of capital appreciation is a fundamental policy and may not be
changed without shareholder approval. The Fund seeks to accomplish its
objective by primarily investing in the equity securities of health care
companies located throughout the world.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Short-term Investments. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its short
term cash in shares of the Franklin Money Fund, the assets of which are managed
under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment, and for defensive purposes in the event or in anticipation
of a general decline in the market prices of stocks in which the Fund invests.

The Fund will not invest more than 10% of its net assets in illiquid
securities. Generally, an "illiquid security" is any security that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument.
Notwithstanding this limitation, the Trust's Board of Trustees has authorized
the Fund to invest in certain restricted securities which are considered to be
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities - for example, 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, where such investment is
consistent with the Fund's investment objective. The Board of Trustees will
review any determination by the investment manager to treat a restricted
security as a liquid security on an ongoing basis, including the investment
manager'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 investment manager 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 in the Fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.

TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES

The Fund may write covered put and call options and purchase put and call
options which trade on securities exchanges and in the over-the-counter market.
The Fund may purchase and sell futures and options on futures with respect to
securities and currencies. Additionally, the Fund may purchase and sell futures
and options to "close out" futures and options it may have sold or purchased.
The Fund will not enter into any futures contract or related options (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial deposits and premiums on open contracts and options would exceed 5%
of the Fund's total assets taken at current value. The Fund will not engage in
any stock options or stock index options if the option premiums paid regarding
its open option positions exceed 5% of the value of the Fund's total assets.

The Fund's transactions in options, futures contracts and forward contracts may
be limited by the requirements of the Internal Revenue Code of 1986, as amended
("the Code") for qualification as a regulated investment company. These
transactions are also subject to special tax rules that may affect the amount,
timing and character of certain distributions to shareholders. See "Additional
Information Regarding Taxation."

<PAGE>

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 bank) 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 bank. 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 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.

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.

<PAGE>

write covered put options in circumstances where the investment manager wishes
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 investment manager deems it desirable to continue
to hold the security or currency because of tax considerations. The premium
paid for the put option and any transaction costs would reduce any 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.

For state law purposes, 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), 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 option 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.

<PAGE>

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.

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 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"). 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. 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, 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.

<PAGE>

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.

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 it 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.

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 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.

INVESTMENT RESTRICTIONS

The Fund DOES NOT:

2. Borrow money (does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require
the untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value of
the Fund's total assets (including the amount borrowed) based on the lesser of
cost or

<PAGE>

market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments;

3. Underwrite securities of other issuers or invest more than 10% of its assets
in securities with legal or contractual restrictions on resale (although the
Fund may invest in such securities to the extent permitted under the federal
securities laws, for example, transactions between the Fund and Qualified
Institutional Buyers subject to Rule 144A under the Securities Act of 1933) or
which are not readily marketable, or which have a record of less than three
years continuous operation, including the operations of any predecessor
companies, if more than 10% of the Fund's total assets would be invested in
such companies;

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

5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships
(other than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;

6. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;

7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);

8. 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, and
except where the Fund would not own, immediately after the acquisition,
securities of the investment companies which exceed in the aggregate i) more
than 3% of the issuer's outstanding voting stock, ii) more than 5% of the
Fund's total assets and iii) together with the securities of all other
investment companies held by the Fund, exceed, in the aggregate, more than 10%
of the Fund's total assets. The Fund may invest in shares of one or more money
market funds managed by Franklin Advisers, Inc. or its affiliates consistent
with the terms of the exemptive order issued by the SEC.

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 Trust,
one or more of the officers or trustees of the Trust, 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.

10. Concentrate in any industry except that the fund will invest at least 25%
of total assets in the group of health care industries consisting of
pharmaceuticals, biotechnology, health care services, medical supplies and
medical technology.

In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to pledge,
mortgage or hypothecate the Fund's assets as security for loans, nor to engage
in joint or joint and several trading accounts in securities, except that it
may participate in joint repurchase arrangements, invest its short term cash in
shares of the Franklin Money Fund, or combine orders to purchase or sell with
orders from other persons to obtain lower brokerage commissions. The Fund may
not invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not listed
on either the New York or American Stock Exchanges. It is also the policy of
the Fund that it may, consistent with its objective, invest a portion of its
assets, as permitted by the Investment Company Act of 1940 (the "1940 Act") and
the rules adopted thereunder, in securities or other obligations issued by
companies engaged in securities related businesses, including such companies
that are securities brokers, dealers, underwriters or investment advisers.

Pursuant to an undertaking given to the Ohio Commissioner of Securities, the
Fund will not purchase the securities of any issuer if, as to 75% of the assets
of the Fund at the time of the purchase, more than 10% of the voting securities
of any issuer would be held by the Fund.

<PAGE>

SPECIAL CONSIDERATIONS AND RISK FACTORS

Biotechnology Companies. Health care companies in which the Fund may invest
include biotechnology companies. These companies are primarily small, start-up
ventures whose fortunes to date have risen mainly on the strength of
expectations about future products, not actual products. Although numerous
biotechnology products are in the research stage by many companies, only a
handful have reached the point of approval by the U.S. Food and Drug
Administration and subsequent commercial production and distribution. Shares of
biotechnology companies may advance on the strength of new product filings with
governmental authorities and research progress, but may also drop sharply in
response to regulatory or research setbacks.

Political and Economic Risks. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in any such country.

Illiquid Securities. The Fund may invest up to 10% of its net assets in
securities the disposition of which may be subject to legal or contractual
restrictions or the markets for which may be illiquid. The sale of restricted
or illiquid securities often requires more time and results in higher brokerage
charges or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower
than similar securities that are not subject to restrictions on resale.

Internal Political Instability. Certain countries in which the Fund may invest
may have factions that advocate revolutionary change related to political
philosophies, religious ideology or ethnic based territorial independence. Any
disturbance on the part of such groups could carry the potential for
wide-spread destruction or confiscation of property owned by individuals and
entities foreign to such country and could cause the loss of the Fund's
investment in those countries.

Foreign Investment Restrictions. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities
of the company available for purchase by nationals. Moreover, the national
policies of certain countries may restrict investment opportunities in issuers
or industries deemed sensitive to national interests. In addition, some
countries require governmental approval for the repatriation of investment
income, capital or the proceeds of securities sales by foreign investors. The
Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments.

Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Most of the securities held by the Fund
will not be registered with the SEC or regulators of any foreign country, nor
will the issuers thereof be subject to the SEC's reporting requirements. Thus,
there will be less available information concerning foreign issuers of
securities held by the Fund than is available concerning U.S. issuers. In
instances where the financial statements of an issuer are not deemed to reflect
accurately the financial situation of the issuer, the investment manager will
take appropriate steps to evaluate the proposed investment, which may include
on-site inspection of the issuer, interviews with its management and
consultations with accountants, bankers and other specialists.

Currency Fluctuations. Because the Fund under normal circumstances will invest
a substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.

The rate of exchange between the U.S. dollar and other currencies is determined
by several factors

<PAGE>

including the supply and demand for particular currencies, central bank efforts
to support particular currencies, the movement of interest rates, the pace of
business activity in certain other countries, and the U.S., and other economic
and financial conditions affecting the world economy.

Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to sell that currency to the dealer.

Adverse Market Characteristics. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The investment manager will consider such
difficulties when determining the allocation of the Fund's assets, although the
investment manager does not believe that such difficulties will have a material
adverse effect on the Fund's portfolio trading activities.

Non-U.S. Withholding Taxes. The Fund's net investment income from foreign
issuers may be subject to non-U.S. withholding taxes, thereby reducing the
Fund's net investment income.

RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS,
FUTURES AND OPTIONS ON FUTURES

The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indices, 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 indices, stock index futures,
financial futures and related options will be subject to the investment
manager's 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 over the counter ("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

<PAGE>

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 Fund understands the current position of the staff of the Securities and
Exchange Commission ("SEC") to be that purchased OTC options are illiquid
securities and that the assets used to cover the sale of an OTC option are
considered illiquid. The Fund and its investment manager disagree with this
position. Nevertheless, pending a change in the staff's position, the Fund will
treat OTC options and "cover" assets as subject to the Fund's limitation on
illiquid securities.

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 investment adviser 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 investment adviser'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.

Forward Foreign Currency Exchange Contracts. The Fund may purchase or sell
forward foreign currency exchange contracts. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In such
event the Fund's ability to utilize forward contracts in the manner set forth
in the Prospectus may be restricted. Forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Fund than if it had not entered
into such contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. Dollar equivalent value of, or
rates of return on, the Fund's foreign currency denominated portfolio

<PAGE>

securities and the use of such techniques will subject the Fund to certain
risks.

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

Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or part, the adverse
effect on its portfolio which otherwise would have resulted.

Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.

The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.

Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.

The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if the Fund has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. Government securities or other high grade liquid debt securities in a
segregated account with its custodian bank.

The Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for

<PAGE>

cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying
the option due to an adverse change in the exchange rate. In such
circumstances, the Fund collateralizes the option by maintaining in a
segregated account with the Fund's custodian bank, cash or U.S. Government
Securities or other high grade liquid debt securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars marked to
market daily.

Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchase of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.

Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.

The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions, on
exercise.

In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies. The value of
such positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.

RISK FACTORS RELATING TO HIGH YIELDING, FIXED-INCOME SECURITIES

The Fund intends to invest less than 5% of its assets in lower rated
fixed-income securities and unrated securities of comparable quality (known as
"junk bonds"). The market values of such securities tend to reflect individual
corporate developments to a greater extent than do higher rated debt
securities, which react primarily to fluctuations in the general

<PAGE>

level of interest rates. Such lower rated securities also tend to be more
sensitive to economic conditions than higher rated securities. These lower
rated fixed-income securities are considered by Standard & Poor's Corporation
("S&P") and Moody's Investors Service ("Moody's") two nationally recognized
statistical rating organizations ("NRSROs"), on balance, to be predominantly
speculative with respect to capacity to meet their payment obligations and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated BBB or Baa by S&P and Moody's, ratings which
are considered investment grade, possess some speculative characteristics, and
the Fund may invest in securities below these ratings.

High yielding, fixed-income securities frequently have call or buy-back
features which would permit an issuer to call or repurchase the security from
the Fund. Although such securities are typically not callable for a period from
three to five years after their issuance, when calls are exercised by the
issuer during periods of declining interest rates, the Fund would likely have
to replace such called security with a lower yielding security, thus decreasing
the net investment income to the Fund and 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. Further information is included under
"Taxation of the Fund and Its Shareholders" in the Fund's Prospectus.

The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other
institutional buyers, rather than individuals. To the extent a 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 market price and the Fund's ability to dispose of particular issues,
when necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as 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
these high yield issues 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" in the Fund's Prospectus.)

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 were required to sell such restricted
securities before the securities have been registered, it may be deemed an
underwriter of such securities as defined in the Securities Act of 1933, which
entails special responsibilities and liabilities. The Fund may incur special
costs in disposing of such securities; however, the Fund will generally incur
no costs when the issuer is responsible for registering the securities.

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

<PAGE>

Rather than relying principally on the ratings assigned by the NRSROs, however,
the investment manager will perform its own internal investment analysis of
debt securities being considered for the Fund's portfolio. Such analysis may
include, among other things, consideration of relative values, based on such
factors as: anticipated cash flow; interest coverage; asset coverage; earning
prospects; the experience and managerial strength of the issuer; responsiveness
to changes in interest rates and business conditions; debt maturity schedules
and borrowing requirements; and the issuer's changing financial condition and
public recognition thereof. Investments will be evaluated in the context of
economic and political conditions in the issuer's domicile, such as the
inflation rate, growth prospects, global trade patterns and government
policies. In the event the rating on an issue held in the Fund's portfolio is
changed by the ratings service, such change will be considered by the Fund in
its evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security.

At fiscal year end, April 30, 1994, none of the securities in the Fund's
portfolio were in default on their contractual provisions.

OFFICERS AND TRUSTEES

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott Corporation (an investment
1045 Sansome St. company); Director, Vacu-Dry Co. (a food processing company)
San Francisco, CA 94111 and Mother Lode Gold Mines Consolidated; and director,
trustee or managing general partner, as the case may be, of
most of the investment companies in the Franklin Group of
Funds.

Harris J. Ashton Trustee President, Chief Executive Officer and Chairman of the Board,
General Host Corporation General Host Corporation (nursery and craft centers);
Metro Center, 1 Station Place Director, RBC Holdings, Inc. (a bank holding company) , Bar-S
Stamford, CT 06904-2045 Foods and Sunbelt Nursery Group, Inc.; director of certain of
the investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.
</TABLE>

<PAGE>

S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County Director of General Host Corporation; director of certain of
P.O. Box 1945 the investment companies in the Templeton Group of Funds; and
Morristown, NJ 07962-1945 director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.

*Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. Board and Trustee Franklin/Templeton Distributors, Inc.; Chairman of the Board
San Mateo, CA 94404 and Director, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and General Host
Corporation; director of certain of the investment companies
in the Templeton Group of Funds; and officer and/or director,
trustee or managing general partner, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of
most of the investment companies in the Franklin Group of
Funds.

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

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
---------------- --------------------- --------------------------------------------
<S> <C> <C>
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and Miller & LaHaye,
20833 Stevens Creek Blvd. which are General Partners of Peregrine Ventures and
Suite 102 Peregrine Ventures II (venture capital firms); Chairman of
Cupertino, CA 95014 the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or
trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.

Gordon S. Macklin Trustee Chairman, White River Corporation (information services);
8212 Burning Tree Road Director, Fundamerican Enterprises Holdings, Inc., Martin
Bethesda, MD 20817 Marietta Corporation, Medimmune, Inc., Infovest Corporation
and MCI Communications Corporation; director of certain of
the investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds; formerly, Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.

Charles E. Johnson Vice President President and Director of Templeton Worldwide, Inc.; Senior
777 Mariners Island Blvd. Vice President, Franklin Resources, Inc. and
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.; President, Franklin
Institutional Services Corporation; director of certain of
the investment companies in the Templeton Group of Funds;
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 some of the
investment companies in the Franklin Group of Funds.

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

<PAGE>

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager may be but are not currently paid fees or expenses
incurred in connection with attending meetings. As of June 7, 1994, the
trustees and officers did not own any shares of the Fund. Certain officers or
trustees who are shareholders of Franklin Resources, Inc. may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. 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

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly-owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $113
billion in assets for over 3.5 million shareholders. Please refer to the table
above which indicates officers and trustees who are affiliated persons of the
Fund and who are also affiliated persons of Distributors and Advisers.

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

Pursuant to the management agreement, the Fund is obligated to pay the Manager
a fee computed and accrued daily and paid monthly at the annual rate of .625 of
1% of the value of average daily net assets up to and including $100 million;
.50 of 1% of the value of average daily net assets over $100 million up to and
including $250 million; .45 of 1% of the value of average daily net assets over
$250 million up to and including $10 billion; .44 of 1% of the value of average
daily net assets over $10 billion up to and including $12.5 billion; .42 of 1%
of the value of average daily net assets over $12.5 billion up to and including
$15 billion; and .40 of 1% of the value of average daily net assets over $15
billion.

The Manager has not imposed its management fees and has assumed responsibility
for making payments to offset certain operating expenses otherwise payable by
the Fund. This action by the Manager to limit its management fees and to assume
responsibility for payment of the expenses related to the operations of the
Fund may be terminated by the Manager at any time. The management agreement
specifies that the management fee will be reduced to the extent necessary to
comply with the most stringent limits on the expenses which may be borne by the
Fund as prescribed by any state in which the Fund's shares are offered for
sale. The most stringent current limit requires the Manager to reduce or
eliminate its fee to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes, brokerage commissions and extraordinary expenses
such as litigation costs) would otherwise exceed in any fiscal year 2.5% of the
first $30 million of average net assets of the Fund, 2% of the next $70 million
of average net assets of the Fund and 1.5% of average net assets of the Fund in
excess of $100 million. Expense reductions have not been necessary based on
state requirements. Management fees, which would have accrued to the Manager,
for the period ended April 30, 1992, and the fiscal years ended April 30, 1993
and 1994, were $1,394, $14,814 and $28,960, respectively, none of which were
paid by the Fund.

<PAGE>

vote of the Trust's Trustees who are not parties to the management agreement or
interested persons of any such party (other than as Trustees 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 the Manager on
30 days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended April 30, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this Statement of
Additional Information.

THE FUND'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS

<PAGE>

in such amount of total brokerage as may reasonably be required.

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

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

During the period ended April 30, 1992, the Fund paid total brokerage
commissions of $1,587. During the fiscal years ended April 30, 1993 and 1994,
the Fund paid total brokerage commissions of $5,064 and $13,270, respectively.
As of April 30, 1994, 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) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.

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 reserves the right to delay acquiring the shares of
another investment company 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.

Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In

<PAGE>

conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:

<TABLE>
<CAPTION>
SIZE OF PURCHASE SALES CHARGE
- ---------------- ------------
<S> <C>
Up to U.S. $100,000.......................... 3%
U.S. $100,000 to U.S. $1,000,000............. 2%
Over U.S. $1,000,000......................... 1%
</TABLE>

PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS

Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the New York Stock Exchange (the
"Exchange") is open for trading and promptly transmitted to the Fund will be
based upon the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions after 1:00 p.m.
Pacific time will be effected at the Fund's public offering price on the day it
is next calculated. The use of the term "securities dealer" 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 his dealer.

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with respect to the Franklin Group of Funds, Distributors or its affiliates may
make a payment, out of their own resources, to such dealer in an amount not to
exceed .25% of the amount invested (1% for certain 401(k) or similar categories
as discussed in the Prospectus), paid pro rata on a quarterly basis on average
quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount, however, during any 90-day period to
the lesser of $250,000 or 1% of the value of the Fund's net assets at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. In the case of requests for redemption in excess of such
amounts, the Trustees reserve the right to make payments in whole or in part in
securities or other assets of the Fund from which the shareholder is redeeming
in case of an emergency, or if the payment of such a redemption in cash would
be detrimental to the existing shareholders of the Fund. In such circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets. Should the Fund do so, a shareholder may incur brokerage
fees in converting the securities to cash. 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

CALCULATION OF NET ASSET VALUE

As noted in the Prospectus, the Fund generally calculates net asset value as of
1:00 p.m. Pacific time each day that the Exchange is open for trading. As of
the date of this Statement of Additional Information, the Fund is informed that
the Exchange observes the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Trading takes place in various foreign markets on days on which
the Exchange is not open and therefore the Fund's net asset value is not
calculated. The Fund's net asset value may be

<PAGE>

significantly affected by such trading on days when a shareholder has no access
to the Fund.

REINVESTMENT DATE

SPECIAL SERVICES

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 and qualified to be treated
as a regulated investment company under Subchapter M of 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 ordinary dividend income to the extent of
the Fund's available earnings and profits.

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

<PAGE>

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

The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. 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 contracts and certain foreign currency contracts
and options thereon.

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.

This requirement may limit the Fund's ability to engage in options, straddles,
hedging transactions and forward or futures contracts because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in

<PAGE>

the case of short sales of portfolio securities, reduce the holding periods of
certain securities within the Fund, resulting in additional short-short income
for the Fund.

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

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 (along with the aforementioned 30
percent test). Foreign exchange gains are presently treated as qualifying
income for purposes of this 90% limitation. Foreign exchange gains derived by
the 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
derived with respect to the Fund's business of investing in stock or securities
and related options or futures. Under current law, non-directly related gains
arising from foreign currency positions or instruments held for less than 3
months are treated as derived from the disposition of securities held less than
3 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, if
entered into, 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 taxation 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. A Fund may be also subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any tax
paid by a Fund as a result of its ownership of shares in 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 gross 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."

Legislation introduced in the U.S. House of Representatives would unify, and,
in some cases, modify the anti-deferral rules contained in various provisions
of the Code, including the provisions dealing with PFICs, related to the
taxation of U.S. shareholders of foreign corporations. In the case of passive
foreign company, as defined in the proposed legislation ("PFC"), having
"marketable stock," the proposed legislation would require U.S. shareholders,
such as the Fund, owning less than 25% of a PFC that is not U.S.-controlled to
mark to market PFC stock annually, unless the shareholders elected to include
in income currently their proportionate shares of the PFC's income and gain.
Otherwise, U.S. shareholders would be treated substantially the same as under
current law. Special rules applicable to mutual funds would classify as
"marketable stock" all stock in PFCs held by the Fund; however, the Fund would
not be liable for tax on income from PFCs that is distributed to its
shareholders. It is unclear if or when the proposed legislation will become law
and if enacted what form it will take. On April 1, 1992, the U.S. Internal
Revenue Service released proposed regulations regarding a mark to market
election for regulated investment companies that would have effects similar to
the proposed legislation.

<PAGE>

These regulations would be effective for taxable years ending after
promulgation of the regulations as final regulations. The IRS subsequently
issued a notice indicating that final regulations will provide that regulated
investment companies may elect the mark to market election for tax years ending
after March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear.

THE FUND'S UNDERWRITER

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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

Distributors allows a portion of the underwriting commission on the sale of
Fund shares to the securities dealer of record, if any, on an account (see the
Prospectus "How to Buy Shares of the Fund").

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the period ended April 30, 1992 and for the fiscal years ended
April 30, 1993 and 1994 were $17,608 , $57,189 and $69,153, respectively. After
allowances to dealers, Distributors retained $1,946, $6,845 and $8,273,
respectively.

PLAN OF DISTRIBUTION

The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan"), whereby it may pay up to a maximum of 0.25% per annum (1/4 of
1%) 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 preparation and distribution of sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, 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 Manager or
Distributors or other parties on behalf of the Fund, the Manager 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.

<PAGE>

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 Plan has been approved by Resources, the Fund's initial shareholder, and by
the trustees , including those trustees who are not interested persons, as
defined in the 1940 Act. The Plan is effective through April 30, 1995, and
renewable annually by a vote of the Trust's Board of Trustees, including a
majority vote of the trustees who are non-interested persons of the Fund and
who have no direct or indirect financial interest in the operation of the Plan,
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 the Manager 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 noninterested
trustees, cast in person at a meeting called for the purpose of voting on any
such amendment.

For the fiscal year ended April 30, 1994, the total amount paid by the Fund,
pursuant to the Plan, to reimburse Distributors or others for fees paid to
dealers was $4,826.

GENERAL INFORMATION

PERFORMANCE

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

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods, or
fractional portion thereof, that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes the maximum
sales charge is deducted from the initial $1,000 purchase order and 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.

<PAGE>

retains the investment in the Fund. The average annual compounded rate of
return for the Fund for the one-year period ending April 30, 1994 was 16.43%,
and for the period from inception (February 14, 1992) to April 30, 1994, was
1.97%.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV
where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than to its average return over one-, five-, and ten-year periods, (or
fractional portion thereof). The total rate of return for a one year period
ended April 30, 1994, was 16.43% and for the period from inception (February
14, 1992) to April 30, 1994, was 4.40%.

YIELD

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

These figures were obtained using the following SEC formula:

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

a = dividends and interest earned during the period

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

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

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

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

OTHER PERFORMANCE QUOTATIONS

<PAGE>

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
underwriters of both the Franklin Group of Funds and Templeton Group of Funds.

COMPARISONS

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 (Dow Jones Transportation Average). Comparisons
of performance assume reinvestment of dividends.

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

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) Valueline Index - an unmanaged index which follows the stock of
approximately 1700 companies.

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) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Bloomberg L.P.,
Merrill Lynch, Pierce, Fenner & Smith, Lehman Brothers, Morgan Stanley, Goldman
Sachs and Metha and Isaly.

k) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, and Money magazines - rate fund performance over specified
time periods.

l) Morgan Stanley Capital International World Indices, including, among others,
the Morgan Stanley Capital International Europe, Australia, Far East Index
("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.

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.

<PAGE>

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.

OTHER FEATURES AND BENEFITS

MISCELLANEOUS INFORMATION

The Funds is a member of the Franklin/Templeton Group, one of the largest
mutual fund organizations in the U.S. and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $113 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 103 U.S.-based mutual funds. The Fund may identify itself by its NASDAQ
or CUSIP number.

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. As of June 1, 1994, the principal shareholder of the Fund,
beneficial or of record, was Resources, the Fund's initial shareholder, which
owns 104,812 shares or 17.83% of total Fund assets.

OWNERSHIP AND AUTHORITY DISPUTES

APPENDIX

DESCRIPTION OF BOND RATINGS

Moody's rates the long-term debt securities issued by various entities from
"Aaa" to "C". Debt ratings for allowable investments of the Fund are as
follows:

Aaa - Best quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt edged." Interest payments are
protected by a large or by an 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 - High quality by all standards. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat greater.

A - Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present

<PAGE>

which suggest a susceptibility to impairment sometime in the future.

Baa - Medium grade obligations. 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.

S&P rates the long-term securities debt of various entities in categories
ranging from "AAA" to "D" according to quality. Debt ratings for allowable
investments of the Fund are as follows:

AAA - Highest rating. Capacity to pay interest and repay principal is extremely
strong.

AA - High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree.

A - Have a strong capacity to pay interest and repay principal although they
are somewhat more susceptible to the adverse effects of change in circumstances
and economic conditions than debt in higher rated categories.

BBB - Regarded as having adequate capacity to pay interest and repay principal.
These bonds normally exhibit adequate protection parameters, but adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than for debt in higher
rated categories.

BB, B - Bonds rated BB and B 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. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.

COMMERCIAL PAPER RATINGS

Moody's employs the designations "Prime-1," "Prime-2" and " Prime-3" to
indicate commercial paper having the highest capacity for timely repayment.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics; leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protections; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

S&P's ratings of commercial paper are graded into four categories ranging from
"A" for the highest quality obligations to "D" for the lowest.

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

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

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

29
FINANCIAL STATEMENTS

The Financial Statements are incorporated by reference herein to the Financial
Statements attached to the Franklin California Growth Fund Statement of
Additional Information.
<PAGE>
97P

SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN GLOBAL UTILITIES FUND

Franklin Strategic Series
Dated September 1, 1994, as amended December 30, 1994

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

1. EXPENSE TABLE

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

a) Add the following language as paragraph two:

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

TOTAL SALES CHARGE
--------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................. 4.50% 4.71% 4.00%

$100,000 but less than $250,000..... 3.75% 3.90% 3.25%

$250,000 but less than $500,000..... 2.75% 2.83% 2.50%

$500,000 but less than $1,000,000... 2.25% 2.30% 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 to dealers who
initiate and are responsible for purchases of $1 million or more: 1.00% on
sales of $1 million but less than $2 million, plus 0.80% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3 million but less
than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. Dealer concession
breakpoints are reset every 12 months for purposes of additional purchases.

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

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

<PAGE>

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

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

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

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

<PAGE>

a contingent deferred sales charge within 120 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 anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution. In
order to exercise this privilege a written order for the purchase of shares
of the Fund must be received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be obtained by
calling toll free at 1-800/DIAL BEN (1-800/342-5236).

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

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

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

<PAGE>

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

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

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

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

<PAGE>

FRANKLIN GLOBAL
UTILITIES FUND

FRANKLIN STRATEGIC SERIES

PROSPECTUS SEPTEMBER 1, 1994
AS AMENDED DECEMBER 30, 1994

[FRANKLIN LOGO]

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

Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company, with the investment objective of seeking to provide total return
without incurring undue risk. The Fund seeks to accomplish its objective by
investing primarily, that is, at least 65% of its total assets, in securities
issued by companies which are, in the opinion of management, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telephone communications, cable and other pay television
services, radio-telephone communications, gas or water.

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

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

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.

<PAGE>

CONTENTS PAGE

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

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

About the Fund ............................................................ 4

Investment Objective and Policies of the Fund ............................. 4

Management of the Fund .................................................... 12

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

Taxation of the Fund and Its Shareholders ................................. 14

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

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

Other Programs and Privileges Available to Fund Shareholders .............. 23

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

How to Sell Shares of the Fund............................................. 27

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

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

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

Performance................................................................ 32

General Information........................................................ 33

Account Registrations...................................................... 34

Important Notice Regarding Taxpayer IRS Certifications..................... 35

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

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

SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends .............. NONE
Deferred Sales Charge.............................................. NONE
Redemption Fees.................................................... NONE
Exchange Fee....................................................... NONE

<PAGE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................................ 0.62%*
12b-1 Fees..................................................... 0.24%**
Other Expenses:
Reports to shareholders............................. 0.10%
Registration........................................ 0.10%
Other Expenses...................................... 0.22%
-----
Total Other Expenses........................................... 0.42%
Total Fund Operating Expenses.................................. 1.28%*
====

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS

$57 $84 $112 $193

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

<PAGE>

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

Set forth below is a table containing financial highlights for a share of the
Fund from the effective date of registration through April 30, 1993, and for
fiscal year ended April 30, 1994. The information for each of the periods ended
April 30, 1994, has been audited by Coopers & Lybrand, independent auditors,
whose audit report appears in the financial statements in the Fund's SAI. See
the discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>

PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------------
NET
NET ASSET REALIZED & DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM TOTAL END TOTAL
APRIL 30 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR RETURN*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993(1) $10.00 $0.22 $1.270 $1.490 $(0.130) $ -- $ -- $11.36 18.08%**
1994 11.36 0.30 1.280 1.580 (0.299) (0.042) (0.341) 12.60 14.04
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
YEAR AT END EXPENSES INCOME TO PORTFOLIO
ENDED OF YEAR TO AVERAGE AVERAGE TURNOVER
APRIL 30 in 000's) NET ASSETS*** NET ASSETS RATE
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1993(1) $ 14,227 -- % 3.89%** -- %
1994 124,188 0.84 2.95 16.28
</TABLE>

(1) For the period July 2, 1992 (effective date) to April 30, 1993.

*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum 4.5% initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value.

**Annualized

***During the period indicated the investment manager reduced its management
fees and reimbursed other expenses incurred by the Fund. Had such action not
been taken, the ratios of expenses to average net assets would have been 1.51%
(annualized) and 1.28%, respectively.

ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a non-diversified series of the Trust, a Delaware business trust
organized on January 25, 1991 and registered with the SEC as an open-end
management investment company, commonly called a "mutual fund" under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Trust issues
its shares of beneficial interest under separate series, each with its own
investment objective and policies and totally separate investment portfolios.

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
based upon a variable percentage (ranging from 4.50% to less than 1.00% of the
offering price), depending upon the amount invested. (See "How to Buy Shares of
the Fund.")

INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------
The Fund is managed by Franklin Advisers, Inc. (the "Manager" or "Advisers").
Because the Fund is non-diversified, it may have greater investments in a single
issuer than a diversified fund. Consequently, changes in the financial condition
of a single issuer may have a greater effect on the Fund's share value than such
changes would have on the performance of other mutual funds, particularly those
which invest in a broad range of issuers and industries.

The Fund seeks to provide total return, without incurring undue risk, by
investing at least 65% of its total assets in securities issued by companies
which are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telephone communications, cable and other pay television services,
radio-telephone communications, gas or water. The Fund's total return consists

<PAGE>

of both capital appreciation and current dividend and interest income. There is,
of course, no assurance that the Fund's objective will be achieved. The
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval.

The Fund may use a variety of strategies to enhance income and to hedge against
market and currency risk, as described more fully under "Strategies Involving
Options, Forward and Futures Contracts" in the SAI.

The Fund invests in common stocks (including preferred or debt securities
convertible into common stocks), preferred stocks and debt securities. The
mixture of common stocks, debt securities and preferred stocks varies from time
to time based upon the Manager's assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective. The Fund
may invest, without percentage limitation, in fixed-income securities having at
the time of purchase one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), two nationally recognized statistical rating organizations
("NRSROs") or in securities which are not rated by any NRSRO, provided that, in
the opinion of the Fund's Manager, such securities are comparable in quality to
those within the four highest ratings. These are considered to be "investment
grade" securities, although bonds rated Baa are regarded as having an adequate
capacity to pay principal and interest but with greater vulnerability to adverse
economic conditions and some speculative characteristics. The Fund's commercial
paper investments at the time of purchase will be rated "A-1" or "A-2" by S&P or
"Prime-1" or "Prime-2" by Moody's or, if not rated by any NRSRO, will be of
comparable quality as determined by Advisers. The Fund may also invest up to 5%
of its total assets at the time of purchase in lower rated fixed-income
securities and unrated securities of comparable quality (sometimes referred to
as "junk bonds" in the popular media). Such investments will be rated no lower
than Caa by Moody's or CCC by S&P. (See the SAI for a more complete discussion
regarding these investments.) In the event the rating on an issue held in the
Fund's portfolio is changed by the NRSRO, such event will be considered by the
Fund in its evaluation of the overall investment merits of that security but
will not necessarily result in an automatic sale of the security. A discussion
of ratings is contained in the Appendix to the SAI.

The Fund may invest in the securities of foreign issuers in the form of
sponsored or unsponsored American Depositary Receipts (ADRs) or other securities
convertible into securities of foreign issuers. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, which are issued in registered form, are
designed for use in the United States ("U.S.") securities markets. The issuers
of unsponsored ADRs are not obligated to disclose material information in the
U.S. and, therefore, there may be less information available to the investing
public than with sponsored ADRs. Advisers will attempt to independently
accumulate and evaluate information with respect to the issuers of the
underlying securities of sponsored and unsponsored ADRs to attempt to limit the
Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.

<PAGE>

A change in prevailing interest rates is likely to affect the Fund's net asset
value because prices of debt, as well as equity securities of utility companies,
tend to increase when interest rates decline and decrease when interest rates
rise.

Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three countries, one of which may be the
U.S., although the Manager expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities. The Fund at all times, except during temporary defensive periods,
will maintain at least 65% of its total assets invested in securities issued by
companies in the utilities industries. The Fund reserves the right to hold, as a
temporary defensive measure or as a reserve for redemptions, short-term U.S.
government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as, in the opinion of the
Manager, prevailing market or economic conditions warrant.

The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because the
expenses of the Fund, such as custodial and brokerage costs, are higher.

The Fund is permitted to invest up to 35% of its assets in securities of issuers
that are outside the utility industries. Such investments will consist of common
stocks, debt securities or preferred stocks and will be selected to meet the
Fund's investment objective of providing total return without incurring undue
risk. These securities may be issued by either U.S. or non-U.S. companies,
governments, or governmental instrumentalities. Some of these issuers may be in
industries related to utility industries and, therefore, may be subject to
similar risks. Securities that are issued by foreign companies or are
denominated in foreign currencies are subject to the risks outlined below. See
"Special Considerations and Risk Factors."

Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities ("U.S. Government Securities"), including U.S. Treasury bills,
notes and bonds as well as certain agency securities and mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
(GNMA), may be backed by the "full faith and credit" of the U.S. government. Any
such guarantee will extend to the payment of interest and principal due on the
securities and will not provide any protection from fluctuations in either the
securities' yield or value or to the yield or value of the Fund's shares. Other
securities issued by the U.S. government agencies or instrumentalities are not
necessarily backed by the "full faith and credit" of the U.S. government, such
as certain securities issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.

The Fund may invest in securities issued or guaranteed by foreign governments.
Such securities are typically denominated in foreign currencies and are subject
to the currency fluctuation and other risks of foreign securities investments
outlined below. See "Special Considerations and Risk Factors." The foreign
government securities in which the Fund intends to invest generally will consist
of obligations issued by national, state or local governments or similar
political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction

<PAGE>

or development and international banking institutions and related government
agencies. Examples include the International Bank of Reconstruction and
Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.

Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12 member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.

UTILITY INDUSTRIES

Under normal circumstances, the Fund will invest at least 65% of its total
assets in common stocks (including preferred or debt securities convertible into
common stocks), debt securities and preferred stocks of companies in the utility
industries, which may be domestic and/or foreign. To meet its objective, the
Fund may invest in domestic utility companies that pay higher than average
dividends, but have a lesser potential for capital appreciation. There can be no
assurance that the positive relative returns on utility securities that has
historically been the case will continue to occur in the future. The Manager
believes that the average dividend yields of common stocks issued by foreign
utility companies have also historically exceeded those of foreign industrial
companies' common stocks. To meet its objective of total return, without
incurring undue risk, the Fund may invest in foreign utility companies which pay
lower than average dividends, but have a greater potential for capital
appreciation.

The utility companies in which the Fund invests include companies primarily
engaged in the ownership or operation of facilities used to provide electricity,
telephone communications, cable and other pay television services,
radio-telephone communications, gas or water. "Primarily engaged," for this
purpose, means that (1) more than 50% of the company's assets are devoted to the
ownership or operation of one or more facilities as described above or (2) more
than 50% of the company's operating revenues are derived from the business or
combination of businesses described above. See "The Fund's Investment Objective
and Restrictions" in the SAI.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

When-Issued or Delayed Delivery Transactions. The Fund may purchase debt
obligations on a "when-issued" or "delayed delivery" basis. Such securities are
subject to market fluctuation prior to delivery to the Fund and generally do not
earn interest until their scheduled delivery date. Therefore, 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. 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 such 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 its investment objectives and policies, and not for the purpose of
investment leverage. (See the

<PAGE>

Fund's SAI for a more complete discussion regarding when-issued and delayed
delivery transactions.)

Standby Commitment Agreements. The Fund may from time to time enter into standby
commitment agreements. Such agreements commit the Fund, for a stated period of
time, to purchase a stated amount of a fixed-income security which may be issued
and sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
assets, taken at the time of acquisition of such commitment or security. The
Fund will at all times maintain a segregated account with its custodian bank of
cash, cash equivalents, U.S. Government Securities or other high grade liquid
debt securities denominated in U.S. dollars or non- U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.

There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.

The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.

Loans of Portfolio Securities. As 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 one-third 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 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 the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with

<PAGE>

any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the securities fail
financially.

Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of the assets of the Fund, except that the Fund may enter into
reverse repurchase agreements or borrow money from banks in an amount up to 33%
of its total asset value (computed at the time the loan is made) for temporary
or emergency purposes. While borrowings exceed 5% of the Fund's total assets,
the Fund will not make any additional investments.

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) may not constitute, at the time of purchase, more than 15% of the
value of the total net assets of the Fund. Subject to this limitation, the
Fund's Board of Trustees has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the Manager determines on a daily basis that there is a liquid
institutional or other market for such securities. Notwithstanding the Manager's
determination in this regard, the Fund's Board of Trustees will remain
responsible for such determinations and will consider appropriate action,
consistent with the Fund's objective and policies, 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. See "The Fund's Investment Objective and Restrictions - Short-Term
Investments" in the SAI.

Notwithstanding the above policy and the federal securities laws, which permit
investments in illiquid securities up to 15% of the Fund's portfolio, the Fund
is aware that the securities laws in various states impose more restrictive
limits upon such investments. To comply with applicable state restrictions, the
Fund will limit its investments in illiquid securities, including securities of
unseasoned issuers, equity securities deemed not readily marketable and
securities subject to legal or contractual restrictions to 10% of the Fund's
Portfolio.

Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, the Manager
has agreed to waive its management fee on any portion of the Fund's assets
invested in such affiliated fund. Temporary investments will only be made with
cash held to maintain liquidity or pending investment. In addition, for
temporary defensive purposes in the event of, or when the Adviser anticipates, a
general decline in the market prices of stocks in which the Fund invests, the
Fund may invest an unlimited amount of its assets in short-term debt
instruments.

<PAGE>

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 and will be held pursuant to a written agreement.

The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities on an agreed upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked to market each day. Although reverse
repurchase agreements are borrowings under Section 2(a)(23) of the 1940 Act, the
Fund does not treat these arrangements as borrowings under investment
restriction 2 (set forth in the SAI) so long as the segregated account is
properly maintained.

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.

The Fund expects that its portfolio turnover rate will generally not exceed
100%, but this rate should not be construed as a limiting factor. High portfolio
turnover increases transaction costs which must be paid by the Fund. High
turnover may also result in the realization of net capital gain, which is
taxable when distributed to shareholders.

SPECIAL CONSIDERATIONS AND RISK FACTORS

Each prospective investor should take into account his/her investment objectives
as well as his/her other investments when considering the purchase of shares of
the Fund.

The Fund is designed for long-term investors and not as a trading vehicle, and
is not intended to present a complete investment program.

Investment in the Fund's shares requires consideration of certain factors that
are not normally involved in investment solely in U.S. securities. Among other
things, the financial and economic policies of a foreign country may not be as
stable as in the U.S. Furthermore, foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers.
Some foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S. and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties. Furthermore, foreign securities may be subject to

<PAGE>

withholding taxes, thus reducing net investment income available for
distribution to shareholders.

Utility companies in the U.S. and in foreign countries are generally subject to
substantial regulations. Such regulations are intended to ensure appropriate
standards of service and adequate ability to meet public demand. The nature of
regulations of utility industries is evolving both in the U.S. and in foreign
countries. Although certain companies may develop more profitable opportunities,
others may be forced to defend their core businesses and may be less profitable.
Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs
on borrowings, costs associated with compliance with environmental, nuclear
facility and other safety regulations and changes in the regulatory climate.
Increased scrutiny of electric utilities might result in higher costs and higher
capital expenditures, with the risk that regulators may disallow inclusion of
these costs in rate authorizations. Increasing competition due to past
regulatory changes in the telephone communications industry continues and,
whereas certain companies have benefitted, many companies may be adversely
affected in the future. The cable television industry is regulated in most
countries and, although such companies typically have a local monopoly, emerging
technologies and pro-competitive legislation are combining to threaten these
monopolies and could slow future growth rates. The radio-telecommunications
industry is in its early developmental stages, and is predominantly
characterized by emerging, rapidly growing companies. Gas transmission and
distribution companies continue to undergo significant changes as well. Many
companies have diversified into oil and gas exploration and development, making
returns more sensitive to energy prices. The water supply industry is highly
fragmented due to local ownership. Generally, such companies are more mature and
expect little or no per capita volume growth. There is no assurance that
favorable developments will occur in the utility industries generally or that
investment opportunities will continue to undergo significant changes or growth.
See "The Fund's Investment Objective and Restrictions - Utility Industries
Description and Risk Factors" in the SAI.

The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.

Although the Fund's assets will usually be invested in a substantial number of
issuers, the Fund is non-diversified as defined by the 1940 Act. This generally
means that more than 5% of the Fund's assets may be invested in the securities
of a single issuer. Because the Fund is non-diversified and concentrates its
investments in a limited group of related industries, the value of the Fund's
shares may fluctuate more widely, and the Fund may present greater risk than
other investments.

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 in-

<PAGE>

crease 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.

A decline in the stock market of any country in which the Fund is invested may
also be reflected in declines in the Fund's share price. Changes in currency
valuations will also affect the price of Fund shares. History reflects both
decreases and increases in worldwide stock markets and currency valuations, 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 Trust who are responsible for
administering its day-to-day operations.

Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a publicly owned holding
company, the principal shareholders of which are Charles B. Johnson, Rupert H.
Johnson, Jr. and R. Martin Wiskemann, who own approximately 20%, 16% and 10%,
respectively, of Resources' outstanding shares. Through its subsidiaries,
Resources is engaged in various aspects of the financial services industry.
Advisers acts as investment manager or administrator to 34 U.S. registered
investment companies (112 separate series) with aggregate assets of over $74
billion.

During the fiscal year ended April 30, 1994, fees totaling 0.62% of the average
daily net assets of the Fund would have been accrued by Advisers. Total
operating expenses, including management fees, would have represented 1.28% of
the average daily net assets of the Fund. Advisers, however, waived a portion of
its management fees. Pursuant to the action by Advisers, management fees and
total operating expenses represented 0.30% and 0.84%, respectively, of the
average daily net assets of the Fund. This action by Advisers to limit its
management fee may be terminated by Advisers at any time.

<PAGE>

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.

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.

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 payable semiannually in June and December for shareholders of record
generally on the first business day preceding the 15th of the month, payable on
or about the last business day of such months. 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

<PAGE>

following the record date. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.

DIVIDEND REINVESTMENT

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

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, or the Templeton Group, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. 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. Dividend and capital gain
distributions are eligible for investment in another fund in the Franklin Group
of Funds or the Templeton Group at net asset value.

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

The 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"),
qualified as such, and intends to continue to so qualify. By distributing all of
its net investment income, net foreign currency gains recharacterized as
ordinary income and net realized short-term and long-term capital gain and by
meeting certain

<PAGE>

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.

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

Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. All or a portion of the sales charge incurred in purchasing shares
of the Fund will not be included in the federal tax basis of such shares sold or
exchanged within 90 days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin/Templeton Group (defined under "How to
Buy Shares of the Fund") 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.

For corporate shareholders, 77.79% of the income dividends paid by the Fund for
the fiscal year ended April 30, 1994, qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.

The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of foreign source
income (including any foreign taxes paid by the fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code. Shareholders will be informed by the Fund at
the end of each calendar year regarding the availability of any credits and the
amount of foreign source income (including any foreign taxes paid by the Fund)
to be included on their income tax returns.

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

<PAGE>
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.

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

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

PURCHASE PRICE OF FUND SHARES

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

Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
<TABLE>
<CAPTION>

TOTAL SALES CHARGE
-------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
- ------------------------------------------------------------------------------------------
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
</TABLE>

<PAGE>

On purchases in excess of $2,500,000, the sales charge is 1.00% of the offering
price on the first $2,500,000 plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. All sales charges on purchases of $1,000,000 or more
are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.

The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group"), and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on the
excess over $2,500,000. Purchases pursuant to the Rights of Accumulation will be
at the applicable sales charge of 1% or more until the additional purchase, plus
the value of the account or the amount previously invested, less redemptions,
exceeds $2,500,000, in which event the sales charge on the excess will be
calculated as stated above. Sales charge reductions based upon purchases in more
than one of the funds in the Franklin Group or Templeton Group (the
"Franklin/Templeton Group") may be effective only after notification to
Distributors that the investment qualifies for a discount.

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

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

<PAGE>

QUANTITY DISCOUNTS IN SALES CHARGES

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

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

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

<PAGE>

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

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by 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
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.

<PAGE>

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

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

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the bank or
trust company, with payment by federal funds received by the close of business
on the next business day following such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such dealer in an
amount not to exceed 1% of the amount invested. Contact Franklin's Institutional
Sales Department for additional information.

<PAGE>

Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds or the Templeton Group which were purchased with
a sales charge. An investor may reinvest an amount not exceeding the redemption
proceeds. Shares of the Fund redeemed in connection with an exchange into
another fund (see "Exchange Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days, however, do
not begin to run on redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may charge the shareholder
a fee for this service. The 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 may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) registered securities dealers and their
affiliates, for their investment accounts only, and (3) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing securities
dealer. Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Fund. Employees of securities dealers must obtain a special application from
their employers or from Franklin's Sales Department in order to qualify.

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

<PAGE>

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

GENERAL

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

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

FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and IRS requirements. Please note that separate applications other than
the one contained in this prospectus must be used to establish a FTTC retirement
account. To obtain a retirement plan brochure or application, call toll free
1-800/DIAL BEN (1-800/342-5236).

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

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

<PAGE>

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

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

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

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

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

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

SHARE CERTIFICATES

<PAGE>

ance") minimizes the risk of loss or theft of a share certificate. A lost,
stolen or destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is generally borne by
the shareholder, can be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in writing by the
shareholder or by the securities dealer.

CONFIRMATIONS

AUTOMATIC INVESTMENT PLAN

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

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments 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 fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent

<PAGE>

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. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified 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's Institutional Services Department at 1-800/321-8563.

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

EXCHANGES BY MAIL

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 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.

<PAGE>

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

EXCHANGES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least 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 secu-

<PAGE>

rities 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 ACCOUNTS

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

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

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

REDEMPTIONS BY MAIL

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

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

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

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

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

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

<PAGE>

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.

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.

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."

<PAGE>

that case, a shareholder should follow the other redemption procedures set forth
in this Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from Franklin's
Institutional Services Department by telephoning 1-800/321-8563.

REDEEMING SHARES THROUGH SECURITIES DEALERS

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

ADDITIONAL INFORMATION REGARDING REDEMPTIONS

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

RETIREMENT ACCOUNTS

<PAGE>

OTHER

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: (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) exchange
Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file the 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 by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.

RESTRICTED ACCOUNTS

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

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
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.

<PAGE>

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

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

The net asset value per share of the Fund is determined as of 1:00 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 sales charge of the Fund).

The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including, without limitation, the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
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 sales price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. Other securities for
which market quotations are readily available are valued at the current market
price, which may be obtained from a pricing service, based on a variety of
factors, including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All money
market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees has determined in good faith
constitutes fair value for purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the Board of
Trustees determine that it does not constitute fair value for such purposes.
With the approval of trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.

Generally, trading in foreign securities markets is completed each day at
various times prior to the close of the Exchange. The values of foreign
securities held by the Fund are determined as of such times for computing the
net asset value of the

<PAGE>
Fund. If events which materially affect the value of the investments of the Fund
occur subsequent to the close of the securities market on which such securities
are primarily traded, the investments affected thereby will be valued at "fair
value" as described above.

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

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

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

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

In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin'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
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.

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

<PAGE>

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, 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

ORGANIZATION

<PAGE>

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

VOTING RIGHTS

The Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $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.

OTHER INFORMATION

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

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

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

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 docu-

<PAGE>

ment. 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 dealer 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, or which are anticipated to be made available in the near future,
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.

<PAGE>
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 and have been since its inception.

Charles B. Johnson, Chairman of the Board of Advisers - Mr. Johnson has been
with Advisers and its predecessor since 1957. He has a B.A. degree in economics
and political science from Yale University and has been involved in the
securities industry since 1954. He is a member of the Financial Analysts
Federation.

Greg Johnson, Vice President of Advisers and Portfolio Manager - Mr. Johnson has
a B.S. degree in accounting and business administration from Washington and Lee
University and holds a certificate as a Certified Public Accountant. He joined
Advisers in 1986.

Sally Edwards Haff, Portfolio Manager - Ms. Haff holds a B.A. degree in
economics from the University of California at Santa Barbara and joined Advisers
in 1986. She is a Chartered Financial Analyst and a member of industry-related
associations.

Brian Nelson, Portfolio Manager - Mr. Nelson holds a B.A. degree in economics
from the University of California at Santa Barbara and joined Advisers in 1988.
He is a Chartered Financial Analyst and a member of industry-related
associations.

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN GLOBAL UTILITIES FUND
DATED SEPTEMBER 1, 1994

a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":

ADDITIONAL INFORMATION REGARDING PURCHASES

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

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

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

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

<PAGE>

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.

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

REINVESTMENT DATE

<PAGE>
FRANKLIN
GLOBAL [FRANKLIN LOGO]
UTILITIES FUND

STATEMENT OF
ADDITIONAL INFORMATION 777 Mariners Island Blvd., P.O. Box 7777
SEPTEMBER 1, 1994 San Mateo, CA 94403-7777 1-800/DIAL BEN
- -------------------------------------------------------------------------------

CONTENTS PAGE

About the Fund (See also the Prospectus
"About the Fund," "General Information").................................. 2

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

Special Consideration and Risk Factors..................................... 11

Officers and Trustees...................................................... 17

Investment Advisory and Other Services
(See also the Prospectus "Management

of the Fund").............................................................. 20

The Fund's Policies Regarding

Brokers Used on Portfolio Transactions.................................... 21

Additional Information Regarding Fund Shares
(See also the Prospectus "How to
Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")................................................ 23

Additional Information
Regarding Taxation........................................................ 25

The Fund's Underwriter..................................................... 27

General Information........................................................ 29

Appendix................................................................... 32

Financial Statements....................................................... 34

Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund seeks to provide total return without incurring undue risk
through investment primarily in securities issued by companies which are, in the
opinion of management, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity, telephone
communications, cable and other pay television services, radiotelephone
communications, gas or water.

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

<PAGE>

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

The Franklin Global Utilities Fund is a non-diversified series of the Franklin
Strategic Series, an open-end management investment company, commonly called a
mutual fund, and registered as such under the Investment Company Act of 1940
("1940 Act"). The Trust is a Delaware business trust organized on January 25,
1991.

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

As noted in the Prospectus, the Fund seeks to provide total return, without
incurring undue risk. The Fund seeks to accomplish its objective by primarily
investing in securities issued by companies which are, in the opinion of
management, primarily engaged in the ownership or operation of facilities used
to generate, transmit or distribute electricity, telephone communications, cable
and other pay television services, radiotelephone communications, gas or water.
The Fund's objective of total return is a fundamental policy and may not be
changed without shareholder approval.

UTILITY INDUSTRIES-DESCRIPTION AND RISK FACTORS

Utility companies in the United States ("U.S.") and in foreign countries are
generally subject to regulation. In the U.S., most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the public
while ensuring that the rate of return earned by utility companies is sufficient
to allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.

The nature of regulation of utility industries is evolving both in the U.S. and
in foreign countries. Changes in regulation in the U.S. increasingly allow
utility companies to provide services and products outside their traditional
geographic areas and lines of business, creating new areas of competition within
the industries. Furthermore, the investment manager, Franklin Advisers, Inc.
("Advisers" or "Manager"), believes that the emergence of competition will
result in utility companies potentially earning more than their traditional
regulated rates of return. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. The Manager seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.

Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the U.S. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the U.S.

The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting current investment
opportunities for the Fund, Advisers believes that, in order to attract
significant capital for growth, foreign governments are likely to seek global
investors through the privatization of their utility industries. Privatization,
which refers to the trend toward investor ownership of assets rather than
government ownership, is expected to occur in newer, faster-growing economies
and also in more mature economies. In addition, the economic unification of
European markets is expected to improve economic growth, reduce costs and
increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.

The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. The Manager takes into account anticipated economic growth rates and
other economic developments when selecting securities of utility companies.
Further descriptions of some of the anticipated opportunities and risks of
specific segments within the global utility industries are set forth below.

Electric. The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies in general have recently been favorably affected by lower fuel
and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permit-

<PAGE>
ting some degree of diversification into unregulated businesses. Some electric
utilities have also taken advantage of the right to sell power outside of their
traditional geographic areas. Electric utility companies have historically been
subject to the risks associated with increases in fuel and other operating
costs, high interest costs on borrowing needed for capital construction
programs, costs associated with compliance with environmental, nuclear and other
safety regulations and changes in the regulatory climate. For example, in the
U.S., the construction and operation of nuclear power facilities are subject to
increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission. Increased scrutiny might result in higher operating costs and higher
capital expenditures, with the risk that regulators may disallow inclusion of
these costs in rate authorizations.

Telephone Communications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to telephone networks
compose the largest portion of this segment. The telephone industry is large and
highly concentrated. Telephone companies in the U.S. are still experiencing the
effects of the break-up of American Telephone & Telegraph Company, which
occurred in 1984. Since that time the number of local and long-distance
companies and the competition among such companies has increased. In addition,
since 1984, companies engaged in telephone communication services have expanded
their nonregulated activities into other businesses, including cellular
telephone services, cable television, data processing, equipment retailing and
software services. This expansion has provided significant opportunities for
certain telephone companies to increase their earnings and dividends at faster
rates than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.

Cable and Other Pay Television Services. Cable and pay television companies
produce and distribute programming over private networks. Cable television
continues to be a growth industry throughout most of the world. The industry is
regulated in most countries, but such regulation is typically less restrictive
than regulation of the electric and telephone utility industries. Cable
companies usually enjoy local monopolies; however, emerging technologies and
pro-competition legislation are presenting substantial challenges to these
monopolies and could slow growth rates.

Radiotelephone Communications. The radiotele-communications segment includes
those companies which provide alternative telephone and communications services.
These technologies may include: cellular, paging, satellite, microwave and
private communication networks, and other emerging technologies. The
radiotelecommunications industry is in the early development stage and is
characterized by emerging, rapidly growing companies.

Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruption in the oil industry and have also been affected by increased
concentration and competition.

Water. Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.

There can be no assurance that the positive developments noted above, including
those relating to business growth and changing regulation, will occur or that
risk factors, other than those noted above, will not develop in the future.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Loans of Portfolio Securities. As approved by the Board of Trustees and subject
to various conditions which may be imposed under various securities regulations,
the Fund may lend its portfolio securities to qualified securities dealers or
other institutional investors provided that such loans do not exceed one-third
of the value of the Fund's total assets at the time of the most recent loan, and
that the borrower deposits and maintains with the Fund 102% cash collateral. 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 through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
the Fund will not lose the tax treatment available to regulated investment

<PAGE>

companies. 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
securities fail financially.

Any voting rights the securities may have may pass to the borrower during the
term of the loan. Loans are typically subject to termination by the Fund in the
normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated. Where matters are submitted to the vote of the security holders
of a portfolio company and such matters would materially affect the Fund, the
Fund will either terminate the loan or it will have provided other means to
permit it to vote such securities.

Short-term Investments. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of which are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment, and for defensive purposes in the event or in anticipation
of a general decline in the market prices of stocks in which the Fund invests.

The Fund will not invest more than 15% of its net assets in illiquid securities.
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
Trust's Board of Trustees has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the Manager determines that there is a liquid institutional or other
market for such securities - for example, 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 any
determination by the Manager to treat a restricted security as a liquid security
on an ongoing basis, including the Manager'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
Manager 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 in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.

To comply with applicable state restrictions, the Fund will limit its
investments in illiquid securities, including illiquid securities with legal or
contractual restrictions on resale and securities which are not readily
marketable, to 10% of the Fund's net assets.

When-Issued and Delayed Delivery Transactions. The Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements under which the Fund may purchase securities with payment and
delivery scheduled for a future time, generally within 15 to 60 days. These
transactions are subject to market fluctuation and 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 these securities on a when-issued basis with the
intention of acquiring such securities, it may sell such securities before the
settlement date if it is deemed advisable. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
other party'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. The Fund is not subject to any percentage limit on the amount of its
assets which may be invested in "when-issued" purchase obligations.

TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES

The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund has authority to deal in forward foreign exchange transactions and
foreign currency options and futures and options on such futures. The Fund also
has authority to write (i.e., sell) cov-

<PAGE>

ered put and call options on its portfolio securities, purchase put and call
options on securities and engage in transactions in stock index options and
financial futures, including stock and bond index futures and related options on
such futures. Although certain risks are involved in options and futures
transactions (as discussed below and in "Risk Factors and Considerations
Regarding Options, Futures and Options on Futures"), the Manager believes that,
because the Fund will (i) write only covered options on portfolio securities,
and (ii) engage in other options and futures transactions only for hedging
purposes, the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will only engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities when movement in the equity, debt and currency markets
occurs.

The Fund may enter into a Forward Contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of 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 high grade 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.

Foreign Currency Futures. The Fund may acquire and sell foreign currency futures
contracts in order to hedge against changes in the level of future currency
rates. Such contracts involve an agreement to purchase or sell a specific
currency at a future date at a price set in the contract. The Fund will not
purchase such contracts if more than 5% of the Fund's assets are then invested
as initial or variation margin deposits on such contracts or options. Assets
will be held aside or segregated in the Fund's custodian bank, as required to
cover the Fund's obligations under foreign currency futures contracts.

Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options on stocks, stock indices and bonds which trade
on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell futures and options on futures with respect to stock and bond
indices. Additionally, the Fund may engage in "close-out" transactions with
re-

<PAGE>

spect to futures and options. The Fund will not enter into any futures contract
or related options (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open contracts and
options would exceed 5% of the Fund's total assets (taken at current value). The
Fund will not engage in any securities options or securities index options, if
the option premiums paid regarding its open option positions, exceed 5% of the
value of the Fund's total assets.

The Fund's option and futures investments involve certain risks. For example,
the effectiveness of an options and futures strategy depends on the degree to
which price movements in the underlying index or securities correlate with price
movements in the relevant portion of the Fund's portfolio. The Fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation which would result in a loss on both such securities and the option
or future.

Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and, if the Fund
had insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
options ("OTC options") may not be closed out on an exchange and 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.
There can be no assurance that a liquid secondary market will exist for any
particular option or futures contract at any specific time. Thus, it may not be
possible to close such an option or futures position. The Fund will enter into
an option or futures position only if there appears to be a liquid secondary
market for such option or futures.

The Fund understands the current position of the staff of the Securities and
Exchange Commission ("SEC") to be that purchased OTC options are illiquid
securities and that the assets used to cover the sale of an OTC option are
considered illiquid. The Fund and Advisers disagree with this position.
Nevertheless, pending a change in the staff's position, the Fund will treat OTC
options and "cover" assets as subject to the Fund's limitation on illiquid
securities. (See "Investment Objective and Policies of the Fund - Illiquid
Investments" in the Prospectus.)

The Fund's transactions in options, futures contracts, and forward contracts may
be limited by the requirements of the Internal Revenue Code of 1986, as amended
("the Code") for qualification as a regulated investment company. These
transactions are also subject to special tax rules that may affect the amount,
timing, and character of certain distributions to shareholders, more information
about which is included in the section entitled "Additional Information
Regarding Taxation."

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.

<PAGE>

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. A writer
may not effect a closing purchase transaction, however, 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. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent 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.

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 Adviser wishes 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.

The Fund may purchase a put option on an underlying security or currency (a
"protective put") owned

<PAGE>

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
Advisers 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.

For state law purposes, 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), 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. 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. OTC options, however, 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. OTC options are
available, however, 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.

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 in an amount at least equal to the market value of the underlying
stock index and will

<PAGE>

maintain the account while the option is open or it will otherwise cover the
transaction.

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.

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, to the
extent required by the rules of the SEC, 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.

<PAGE>

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.

INVESTMENT 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
Fund's shareholders. In order to change any of these restrictions (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented at
that meeting or (ii) more than 50% of the outstanding voting securities of the
Fund, whichever is less, must vote to make the change.

The Fund does not:

1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are 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;

2. Borrow money or mortgage or pledge any of its assets, except in the form of
reverse repurchase agreements or from banks for temporary or emergency purposes
in an amount up to 33% of the value of the Fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments;

3. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, if more than 15% of the
Fund's total assets would be invested in such companies;

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

5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities), in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the

<PAGE>

Fund's transactions in futures, including puts, calls, straddles, spreads, or
any combination thereof;

6. Effect short sales, unless at the time the Fund owns securities equivalent in
kind and amount to those sold (which will normally be for deferring recognition
of gains or losses for tax purposes). The Fund does not currently intend to
employ this investment technique;

7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);

8. 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, and except where
the Fund would not own, immediately after the acquisition, securities of the
investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
Pursuant to available exemptions from the 1940 Act, the Fund may invest in
shares of one or more money market funds managed by Franklin Advisers, Inc. or
its affiliates;

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 Trust,
one or more of the officers or trustees of the Trust, 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;

10. Concentrate in any industry, except that the Fund will invest at least 25%
of total assets in the equity and debt securities issued by domestic and foreign
companies in the utilities industries; and

11. Invest more than 10% of its assets in securities of companies which have a
record of less than three years continuous operation, including the operations
of any predecessor companies.

In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to engage in
joint or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and any
conditions therein, issued by the SEC permitting such investments), or combine
orders to purchase or sell with orders from other persons to obtain lower
brokerage commissions. The Fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2% of
its net assets in warrants not listed on either the New York or American Stock
Exchange. It is also the policy of the Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and the
rules adopted thereunder, in securities or other obligations issued by companies
engaged in securities related businesses, including such companies that are
securities brokers, dealers, underwriters or investment advisers.

SPECIAL CONSIDERATIONS AND RISK FACTORS
- -------------------------------------------------------------------------------

Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities the disposition of which may be subject to legal or contractual
restrictions or the markets for which may be illiquid. To comply with applicable
state restrictions, the Fund will limit its investments in illiquid securities,
including illiquid securities with legal or contractual restrictions on resale
and securities which are not readily marketable to 10% of the Fund's net assets.
The sale of restricted or illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
often sell at a price lower than similar securities that are not subject to
restrictions on resale.

Religious and Ethnic Instability. Certain countries in which the Fund may invest
may have vocal minorities that advocate radical religious or revolutionary

<PAGE>

philosophies or support ethnic independence. Any disturbance on the part of such
individuals could carry the potential for wide-spread destruction or
confiscation of property owned by individuals and entities foreign to such
country and could cause the loss of the Fund's investment in those countries.

Foreign Investment Restrictions. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sold by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.

Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Most of the securities held by the Fund will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers thereof be subject to the SEC's reporting requirements. Thus, there
will be less available information concerning foreign issuers of securities held
by the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, Advisers may take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists.

Currency Fluctuations. Because the Fund under normal circumstances will invest a
substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.

The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.

Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to sell that currency to the dealer.

Adverse Market Characteristics. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could either result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible gain
to the purchaser. The Manager will consider such dif-

<PAGE>

ficulties when determining the allocation of the Fund's assets, although the
Manager does not believe that such difficulties will have a material adverse
effect on the Fund's portfolio trading activities.

Non-U.S. Taxes. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's
net investment income.

RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS, FUTURES AND OPTIONS ON
FUTURES

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 Manager's 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.

The CFTC 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

<PAGE>

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.

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.

Forward Foreign Currency Exchange Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate forward contracts. In such event, the Fund's ability to utilize forward
contracts may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of, or rates of return on, the
Fund's foreign currency denominated portfolio securities and the use of such
techniques will subject the Fund to certain risks.

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

Foreign Currency Futures. By entering into such contracts, the Fund is able to
protect against a loss resulting from an adverse change in the relationship
between the U.S. dollar and a foreign currency occurring between the trade and
settlement dates of the Fund's securities transaction. Such contracts also tend
to limit the potential gains that might result from a positive change in such
currency relationships.

Options on Foreign Currencies. As stated above, the Fund may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or part, the adverse
effect on its portfolio which otherwise would have resulted.

Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forgo a por-

<PAGE>

tion or all of the benefits of advantageous changes in such rates.

The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.

Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forgo all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.

The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. government
securities or other high grade liquid debt securities in a segregated account
with its custodian.

The Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with the
Fund's custodian, cash or U.S. government securities or other high grade liquid
debt securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked to market daily.

Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.

Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.

<PAGE>

The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.

In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign currencies. The value of
such positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.

RISK FACTORS RELATING TO HIGH YIELDING, FIXED-INCOME SECURITIES

The Fund may invest up to 5% of its assets in lower-rated, fixed-income
securities and unrated securities of comparable quality (known as "junk bonds").
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do values of 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. These lower-rated, fixed-income
securities are considered by Standard and Poor's Corporation ("S&P") and Moody's
Investors Service ("Moody's"), two nationally recognized statistical rating
organizations ("NRSROS"), 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 securities
rated BBB or Baa by S&P and Moody's, ratings which are considered investment
grade, possess some speculative characteristics.

High yielding, fixed-income securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, when calls are exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Fund and 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. Further information is included under "Taxation of
the Fund and Its Shareholders" in the Fund's Prospectus.

<PAGE>

retail market. Generally, purchasers of these securities are predominantly
dealers and other institutional buyers, rather than individuals. To the extent a
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 market price and the Fund's ability to dispose of particular
issues, when necessary, to meet the Fund's liquidity needs or in response to a
specific economic event, such as 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
these high yield issues 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 were required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter of
such securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.

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

Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset values. For example, adverse publicity
regarding lower-rated bonds which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many such
securities. The Fund may also incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. The Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the 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.

Rather than relying principally on the ratings assigned by the NRSROs, however,
the Manager will perform its own internal investment analysis of debt securities
being considered for the Fund's portfolio. Such analysis may include, among
other things, consideration of relative values, based on such factors as:
anticipated cash flow; interest coverage; asset coverage; earning prospects; the
experience and managerial strength of the issuer; responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; and the issuer's changing financial condition and public
recognition thereof. Investments will be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in the Fund's portfolio is changed by the ratings
service, such change will be considered by the Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security.

The Fund may engage in a substantial number of portfolio transactions. Portfolio
turnover is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.

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

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

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott
1045 Sansome St. Corporation (an investment company);
San Francisco, CA 94111 Director, Vacu-Dry Co. (a food processing
company) and Mother Lode Gold Mines
Consolidated; and director, trustee or
managing general partner, as the case may
be, of most of the investment companies
in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------
Harris J. Ashton Trustee President, Chief Executive Officer and
General Host Corporation Chairman of the Board, General Host
Metro Center, 1 Station Place Corporation (nursery and craft centers);
Stamford, CT 06904-2045 Director, RBC Holdings, Inc. (a bank
holding company), Bar-S Foods and Sunbelt
Nursery Group, Inc.; director of certain
of the investment companies in the
Templeton Group of Funds; and director,
trustee or managing general partner, as
the case may be, of most of the
investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
*Harmon E. Burns Trustee and Executive Vice President, Secretary and
777 Mariners Island Blvd. Vice President Director, Franklin Resources, Inc.;
San Mateo, CA 94404 Executive Vice President and Director,
Franklin/Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; director of certain of the
investment companies in the Templeton
Group of Funds; officer and/or director,
as the case may be, of other subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee of all the
investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin,
Park Avenue at Morris County Kipp & Szuch; Director of General Host
P. O. Box 1945 Corporation; director of certain of the
Morristown, NJ 07962-1945 investment companies in the Templeton
Group of Funds; and director, trustee or
managing general partner, as the case may
be, of most of the investment companies
in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant
111 New Montgomery St., Secretary/Treasurer and Director,
#402 Berkeley Science Corporation (a venture
San Francisco, CA 94105 capital company); and director, trustee
or managing general partner, as the case
may be, of most of the investment
companies in the Franklin Group of Funds.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
*Charles B. Johnson Chairman of the President and Director, Franklin
777 Mariners Island Blvd. Board and Trustee Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Chairman of the Board
and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor
Services, Inc. and General Host
Corporation; director of certain of the
investment companies in the Templeton
Group of Funds; and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin Resources,
Inc. and of most of the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------
*Rupert H. Johnson, Jr. President and Executive Vice President and Director,
777 Mariners Island Blvd. Trustee Franklin Resources, Inc. and
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.;
President and Director, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; director of certain of the
investment companies in the Templeton
Group of Funds; and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin Resources,
Inc. and of most of the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and
20833 Stevens Creek Blvd. Miller & LaHaye, which are General
Suite 102 Partners of Peregrine Ventures and
Cupertino, CA 95014 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 most of the
investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
Gordon S. Macklin Trustee Chairman, White River Corporation
8212 Burning Tree Road (information services); Director,
Bethesda, MD 20817 Fundamerican Enterprises Holdings, Inc.,
Martin Marietta Corporation, MCI
Communications Corporation, Medimmune,
Inc. and Infovest Corporation; director
of certain of the investment companies in
the Templeton Group of Funds; and
director, trustee or managing general
partner, as the case may be, of most of
the investment companies in the Franklin
Group of Funds; formerly, Chairman,
Hambrecht and Quist Group; Director, H &
Q Healthcare Investors; and President,
National Association of Securities
Dealers, Inc.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles E. Johnson Vice President President and Director of Templeton
777 Mariners Island Blvd. Worldwide, Inc.; Senior Vice President,
San Mateo CA 94404 Franklin Resources, Inc. and
Franklin/Templeton Distributors, Inc.;
President, Franklin Institutional
Services Corporation; director of certain
of the investment companies in the
Templeton Group of Funds; 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 some of
the investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales
777 Mariners Island Blvd. Manager, Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; and officer of many of the
investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President, Senior Vice President, Franklin
777 Mariners Island Blvd. Treasurer, Resources, Inc. and Franklin Advisers,
San Mateo, CA 94404 Chief Financial Inc.; Vice President, Franklin/Templeton
Officer and Distributors, Inc.; officer and/or
Accounting director, as the case may be, of other
Officer subsidiaries of Franklin Resources, Inc.;
and officer and/or managing general
partner, as the case may be, of all the
investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin
777 Mariners Island Blvd. and Secretary Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Vice President,
Franklin Advisers, Inc.; and officer of
all the investment companies in the
Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager may be, but are not currently, paid fees or expenses
incurred in connection with attending meetings. As of June 7, 1994, the trustees
and officers did not own any outstanding shares of the Fund. Certain officers or
trustees who are shareholders of Franklin Resources, Inc. may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. 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 is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company whose shares are listed on the New York Stock
Exchange ("Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The Manager and
other subsidiary companies of Resources currently manage over $113 billion in
assets for over 3.5 million shareholders. The preceding table indicates those
officers and directors who are also affiliated persons of Distributors and
Advisers.

<PAGE>

ment activities. The Manager, at its own expense, furnishes the Fund with office
space and office furnishings, facilities and equipment required for managing the
business affairs of the Fund; maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and provides certain
telephone and other mechanical services. The Manager is covered by fidelity
insurance on its officers, directors and employees for the protection of the
Fund. The Fund bears all of its expenses not assumed by the Manager. See the
Statement of Operations in the financial statements at the end of this Statement
of Additional Information for additional details of these expenses.

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

The Manager has limited its management fees and has assumed responsibility for
making payments to offset certain operating expenses otherwise payable by the
Fund. This action by the Manager to limit its management fees and to assume
responsibility for payment of the expenses related to the operations of the Fund
may be terminated by the Manager at any time. The management agreement specifies
that the management fee will be reduced to the extent necessary to comply with
the most stringent limits on the expenses which may be borne by the Fund as
prescribed by any state in which the Fund's shares are offered for sale. The
most stringent current limit requires the Manager to reduce or eliminate its fee
to the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 2.5% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 1.5% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on state requirements.
Management fees for the period ended April 30, 1993 would have been $33,316.
Because the Manager did not impose any management fee, the Fund paid no
management fees for the period. For the fiscal year ended April 30, 1994, the
management fees the Fund was contractually obligated to pay the Manager were
$394,550, and the management fees actually paid by the Fund were $191,367.

The management agreement is in effect until April 30, 1995. Thereafter, it 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 Fund's trustees
who are not parties to the management agreement or interested persons of any
such party (other than as trustees of the Fund), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Fund or by the Manager on 30 days' written notice and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal period ended April 30, 1994,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report and this Statement
of Additional Information.

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

Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth

<PAGE>

in the management agreement and any directions which the Trust's Board of
Trustees may give.

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

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

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

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

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

<PAGE>
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. During the fiscal year ended April 30, 1994, the Fund
paid brokerage commissions of $156,666. As of April 30, 1994, the Fund did not
own securities of its regular broker-dealers.

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

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 funds into which the Fund 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.

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.

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:

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- -------------------------------------------------------------------------------

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS

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

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 his securities dealer.

PURCHASES AT NET ASSET VALUE

<PAGE>

cuted a dealer or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested (1% for certain 401(k) or
similar categories, as discussed in the Prospectus), paid pro rata on a
quarterly basis on average quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. 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

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

REINVESTMENT DATE

SPECIAL SERVICES

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.

<PAGE>

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

As stated in the Prospectus, the Fund has elected and has qualified to be
treated as a regulated investment company under Subchapter M of 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 ordinary dividend income to the extent of
the Fund's available earnings and profits.

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

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

The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales, or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, OTC options on debt securities and equity options, including options on
stock and on narrow-based stock indexes, will be subject to tax under Section

<PAGE>

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's 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
contracts and certain foreign currency contracts 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 the amount,
character and time 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.

As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months, ("short-short income"). This requirement may limit the Fund's ability to
engage in options, straddles, hedging transactions and forward or futures
contracts because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.

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

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 the 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 derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-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.

<PAGE>

poration as a "qualified electing fund" within the meaning of the Code, the Fund
may be subject to U.S. federal income taxation 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. A Fund may be also subject to
additional interest charges in respect of deferred taxes arising from such
distributions or gains. Any tax paid by a Fund as a result of its ownership of
shares in 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 gross 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."

Legislation introduced in the U.S. House of Representatives would unify, and, in
some cases, modify the anti-deferral rules contained in various provisions of
the Code, including the provisions dealing with PFICs, related to the taxation
of U.S. shareholders of foreign corporations. In the case of passive foreign
company, as defined in the proposed legislation ("PFC"), having "marketable
stock," the proposed legislation would require U.S. shareholders, such as the
Funds, owning less than 25% of a PFC that is not U.S.-controlled to mark to
market PFC stock annually, unless the shareholders elected to include in income
currently their proportionate shares of the PFC's income and gain. Otherwise,
U.S. shareholders would be treated substantially the same as under current law.
Special rules applicable to mutual funds would classify as "marketable stock"
all stock in PFCs held by a Fund; however, a Fund would not be liable for tax on
income from PFCs that is distributed to its shareholders. It is unclear if or
when the proposed legislation will become law and if enacted what form it will
take. On April 1, 1992, the U.S. Internal Revenue Service released proposed
regulations regarding a mark to market election for regulated investment
companies that would have effects similar to the proposed legislation. These
regulations would be effective for taxable years ending after promulgation of
the regulations as final regulations. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark to market election for tax years ending after March
31, 1992 and before April 1, 1993. Whether and to what extent the notice will
apply to taxable years of the Fund is unclear.

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

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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

Distributors allows a portion of the underwriting commission on the sale of Fund
shares to the securities dealer of record, if any, on an account (see the
Prospectus "How to Buy Shares of the Fund").

In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1993 and 1994 were $419,248 and
$2,538,088, respectively. After allowances to dealers, Distributors retained
$18,194 and $304,423, respectively. Distributors received no other compensation
from the Fund for acting as underwriter.

DISTRIBUTION PLAN

The Fund has adopted a distribution plan (the "Plan"), pursuant to Rule 12b-1
under the 1940 Act, whereby it may pay up to a maximum of 0.25% per annum (1/4
of 1%) 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

<PAGE>

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 preparation and
distribution of sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, 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.

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 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 effective through
April 30, 1995, and renewable annually 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 the Manager 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.

<PAGE>

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.

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

PERFORMANCE

Performance quotations by investment companies are subject to rules recently
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 new
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Fund to compute or express
performance follows.

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods (or fractional
portion thereof) that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order and 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 set forth below investors should remember that the
maximum sales charge reflected in each quotation is a one-time fee (charged on
all direct purchases) which will have its greatest impact during the early
stages of an investor's investment in the Fund. The actual performance of an
investment will be affected less by this charge the longer an investor retains
the investment in the Fund. The average annual compounded rates of return for
the Fund for a one-year period ending April 30, 1994, was 8.87% and for the
period from inception (July 2, 1992) to April 30, 1994, was 13.10%.

These figures were calculated according to the Securities and Exchange
Commission formula:

P(1 + T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Fund for a
one-year period ended April 30, 1994, was 8.87%, and for the period from
inception (July 2, 1992) to April 30, 1994, was 25.27%.

In considering quotations of total return by the Fund, investors should remember
that the 4.50% maximum sales charge reflected in each quotation is a one-time
fee (charged on all direct purchases) which will have its greatest impact during
the early stages of an investor's investment in the Fund. The actual performance
of an investment will be affected less by this charge the longer the investor
retains the investment in the Fund.

YIELD

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

<PAGE>

the base period. The yield for the Fund for the 30-day period ended on the date
of the financial statements included herein was 2.63%.

This figure was obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period

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

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
Statement of Additional Information with the substitution of net asset value for
the public offering price.

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
underwriters of both the Franklin Group of Funds and Templeton Group of Funds.

COMPARISONS

b) S&P's 500 Stock Index or its component indices - an unmanaged index composed
of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and

<PAGE>

20 transportation stocks. Comparisons of performance assume reinvestment of
dividends.

c) The Exchange composite or component indices - unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
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 - measure of total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.

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

h) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.

j) 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 L.P.

k) 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.

m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.

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.

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.

The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations

<PAGE>

in the United States and may be considered in a program for diversification of
assets. Founded in 1947, Franklin, one of the oldest mutual fund organizations,
has managed mutual funds for over 45 years and now services more than 2.4
million shareholder accounts. In 1992, Franklin, a leader in managing
fixed-income mutual funds and an innovator in creating domestic equity funds,
joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $113 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 103 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 of
36 mutual fund groups in service quality for 1993. One other fund group was also
ranked number one. Franklin has been ranked number one in service quality by
Dalbar for five of the past six years.

Franklin has been managing utility securities since 1948. As a pioneer in
running the oldest mutual fund exclusively devoted to utilities, this expertise
is applied to the management 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 Internal Revenue Service in response
to a Notice of Levy.

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 by an 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.

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

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.

DESCRIPTION OF S&P'S 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.

<PAGE>

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 they
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.

<PAGE>
SUPPLEMENT
TO THE PROSPECTUS OF
FRANKLIN SMALL CAP GROWTH FUND
(FRANKLIN STRATEGIC SERIES)
DATED SEPTEMBER 1, 1994, AS AMENDED FEBRUARY 1, 1995

The following revisions are made to certain operating policies of the Fund,
which are effective as of February 1, 1995:

HOW TO BUY SHARES OF THE FUND -

a) PURCHASES AT NET ASSET VALUE

i) Substitute the following language for the third sentence of paragraph three
under the section:

While credit will be given for any contingent deferred sales charge paid on
the shares redeemed, a new contingency period will begin.

ii) Each of the remaining paragraphs in the section which defines the categories
of investors who may purchase at net asset value is revised to reflect that
such purchases are without a front-end sales charge (net asset value) and
without the imposition of a contingent deferred sales charge.

b) DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

i) Substitute the following for the first paragraph:

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.

ii) The two paragraphs which follow are revised to reflect that purchases are
without a front-end sales charge and without the imposition of a contingent
deferred sales charge.

HOW TO SELL SHARES OF THE FUND - CONTINGENT DEFERRED SALES CHARGE

Substitute the following for paragraph two, which describes waivers:

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

<PAGE>

FRANKLIN
SMALL CAP
GROWTH FUND

FRANKLIN STRATEGIC SERIES

PROSPECTUS SEPTEMBER 1, 1994
AS AMENDED FEBRUARY 1, 1995

[FRANKLIN LOGO]

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

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

Franklin Small Cap Growth Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital growth. It seeks to accomplish
its objective by investing primarily in equity securities of companies which
have a market capitalization of less than $1 billion at the time of the Fund's
investment and by attempting to keep at least a third of its assets invested in
common stocks of companies with market capitalization of $550 million or less.

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

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

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.

<PAGE>

CONTENTS PAGE

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

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

About the Fund ............................................................. 4

Investment Objective and Policies of the Fund .............................. 4

Management of the Fund ..................................................... 11

Distributions to Shareholders .............................................. 12

Taxation of the Fund and Its Shareholders .................................. 13

How to Buy Shares of the Fund .............................................. 14

Purchasing Shares of the Fund in Connection with Retirement Plans
Involving Tax-Deferred Investments ........................................ 20

Other Programs and Privileges Available to Fund Shareholders................ 22

Exchange Privilege.......................................................... 23

How to Sell Shares of the Fund.............................................. 25

Telephone Transactions...................................................... 29

Valuation of Fund Shares.................................................... 30

How to Get Information Regardingan Investment in the Fund................... 30

Performance................................................................. 31

General Information......................................................... 32

Account Registrations....................................................... 33

Important Notice Regarding Taxpayer IRS Certifications...................... 34

Portfolio Operations........................................................ 34

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
operating expenses of the Fund (before expense reductions or fee waivers) for
the fiscal year ended April 30, 1994.

SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..................................... 4.50%
Deferred Sales Charge.................................................... NONE*
Exchange Fee (per transaction)........................................... NONE

<PAGE>

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees ...................................................... 0.63%**
12b-1 Fees ........................................................... 0.24%***
Other Expenses:
Registration fees ...................................... 0.30%
Reports to shareholders ................................ 0.14%
Other expenses ......................................... 0.27%
-----
Total Other Expenses ................................................. 0.71%
Total Fund Operating Expenses ........................................ 1.58%**
=====

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

**Represents the amount that would have been payable to the investment manager,
absent a fee reduction by the investment manager. The investment manager has
voluntarily agreed to limit its management fees and assume responsibility for
making payments to offset certain operating expenses otherwise payable by the
Fund. With this reduction, the Fund paid no management fees and total other
expenses represented 0.30% of the average net assets of the Fund. This
arrangement may be terminated by the investment manager at any time.

***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.

EXAMPLE

1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$60 $93 $127 $224
</TABLE>

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

<PAGE>

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

Set forth below is a table containing the financial highlights for a share of
the Fund from February 14, 1992 (the effective date of the registration
statement for the Fund) through April 30, 1992, and for the fiscal years ended
April 30, 1993 and 1994. The information has been audited by Coopers & Lybrand,
independent auditors, whose audit report appears in the financial statements in
the Fund's SAI. See the discussion "Reports to Shareholders" under "General
Information."

PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------------

NET ASSET NET REALIZED DISTRIBUTIONS
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS
ENDED BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT ON FROM TOTAL
APRIL 30 OF YEAR INCOME SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992(1) $10.00 $0.04 $(0.460) $(0.420) $ -- $ -- $ --
1993 9.58 0.07 0.657 0.727 (0.087) -- --
1994 10.22 0.03 2.944 2.974 (0.043) (0.401) (0.444)

</TABLE>

PER SHARE OPERATING PERFORMANCE RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
YEAR NET ASSET ASSETS AT EXPENSES TO INCOME TO PORTFOLIO
ENDED VALUE AT TOTAL END OF YEAR AVERAGE NET AVERAGE TURNOVER
APRIL 30 END OF YEAR RETURN* (IN 000'S) ASSETS*** NET ASSETS RATE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1992(1) $ 9.58 (19.96)%** $ 1,268 --% 2.45%** 2.41%
1993 10.22 7.66 6,026 -- 0.84 63.15
1994 12.75 29.26 23,915 0.30 0.24 89.60

</TABLE>

(1) For the period February 14, 1992 (effective date) to April 30, 1992.

**Annualized

***During the periods indicated, Franklin Advisers, Inc. did not impose
management fees and absorbed other expenses incurred by the Fund. Had such
action not been taken, the ratios of expenses to average net assets would have
been as follows:

RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
1992(1)............ 1.74%**
1993............... 1.95
1994............... 1.58
</TABLE>

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

Franklin Small Cap Growth Fund is a diversified series of Franklin Strategic
Series, an open-end maagement investment company, commonly called a "mutual
fund". The Trust is a Delaware business trust organized on January 25, 1991, and
registered with the SEC under the Investment Company Act of 1940 (the "1940
Act").

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 4.50% of the offering price. (See "How to Buy Shares of the Fund.")

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

The Fund's investment objective is long-term capital growth. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. The Fund seeks to accomplish its objective by investing primarily in
equity securities of small capitalization growth companies. Small capitalization
growth companies typically are companies with relatively small market
capitalizations which the Fund's investment adviser believes to be positioned
for rapid growth in revenues or earnings and assets, characteristics which may
provide for significant capital appreciation. Small companies often pay no
dividends and current income is not a factor in the selection of stocks. In
general, companies in which the Fund will invest have a market capitalization of
less than $1 billion at the time of the

<PAGE>

Fund's investment. Market capitalization is defined as the total market value of
a company's outstanding common stock. The securities of small capitalization
companies are traded on the New York and American stock exchanges and in the
over-the-counter market. There is, of course, no assurance that the Fund's
objective will be achieved.

Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of small capitalization growth companies. Equity
securities of such companies consist of common stock, preferred stock, warrants
for the purchase of common stock and debt securities convertible into or
exchangeable for common or preferred stock. A warrant is a security that gives
the holder the right, but not the obligation, to subscribe for newly created
securities of the issuer or a related company at a fixed price either at a
certain date or during a set period. A convertible security is a security that
may be converted either at a stated price or rate within a specified period of
time into a specified number of shares of common or preferred stock. By
investing in convertible securities, the Fund seeks to participate in the
capital appreciation of the common stock into which the securities are
convertible through the conversion feature.

Although the Fund's assets will be invested pri-marily in equity securities of
small companies, the Fund may invest up to 35% (measured at the time of
purchase) of its total assets in corporate debt securities consisting of bonds,
notes and debentures if the Fund deems the investment to present a favorable
investment opportunity, consistent with the Fund's objective of long-term
capital growth. The Fund may seek capital appreciation by investing in such debt
securities which the Fund's investment manager believes have the potential for
capital appreciation as a result of improvement in the creditworthiness of the
issuer. The receipt of income from such debt securities is incidental to the
Fund's investment objective of capital growth. The Fund will invest in debt
securities rated B or above by Moody's Investors Service ("Moody's") or Standard
& Poor's Corporation ("S&P"), or in securities which are unrated if, in the
investment manager's opinion, such securities are comparable to securities rated
B or above by Moody's or S&P. The Fund will not invest more than 5% of its
assets in debt securities rated lower than BBB or Baa. Securities rated B are
regarded, on balance, as predominantly speculative with respect to the capacity
to pay interest and repay principal in accordance with the terms of the
obligation. For a description of ratings, please refer to the "Appendix" in the
SAI.

The Fund may also invest in short-term money market instruments for liquidity
purposes to meet redemption requirements. Short-term investments that the Fund
may hold include U.S. government securities, certificates of deposit, high grade
commercial paper and repurchase agreements. The Fund may also invest in equity
securities of larger capitalization companies which the Fund's investment
manager believes have strong growth potential, or in relatively well-known,
larger companies in mature industries which the investment manager believes have
the potential for capital appreciation.

The Fund has been designed to provide investors with potentially greater
long-term rewards by investing in securities of small companies which may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Small companies
generally are not as well known to the investing public and have less of an
investor following than larger companies, and therefore may provide greater
opportunities for long-term capital growth as a result of relative
inefficiencies in the marketplace. Such companies may be undervalued

<PAGE>

because they are part of an industry that is out of favor with investors,
although the individual companies may have high rates of earning growth and be
financially sound. Selection of small company equity securities for the Fund
will be based on characteristics such as the financial strength of the company,
the expertise of management, the growth potential of the company within its
industry and the growth potential of the industry itself.

Special Risk Considerations. The Fund may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid growth
is expected to be above average. Securities of unseasoned companies present
greater risks than securities of larger, more established companies. The Fund
may not invest more than 10% of its net assets in securities of issuers with
less than three years continuous operation. The companies in which the Fund may
invest may have relatively small revenues, limited product lines, and may have a
small share of the market for their products or services. Small companies may
lack depth of management, they may be unable to internally generate funds
necessary for growth or potential development or to generate such funds through
external financing or favorable terms, or they may be developing or marketing
new products or services for which markets are not yet established and may never
become established. Due to these and other factors, small companies may suffer
significant losses as well as realize substantial growth, and investments in
such companies tend to be volatile and are therefore speculative.

Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the value of the Fund's shares
may be more volatile than the shares of a fund that invests in larger
capitalization stocks.

The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the Fund be considered a balanced or complete investment program.

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 20% 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 the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agree-

<PAGE>

ment, 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. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.

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) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund. The Board of Trustees has authorized
the Fund to invest in restricted securities (securities not registered with the
SEC, which might otherwise be considered illiquid) where such investment is
consistent with the Fund's investment objective and has authorized such
securities to be considered liquid (and thus not subject to the foregoing 10%
limitation), to the extent the investment manager determines on a daily basis
that there is a liquid institutional or other market for such securities.
Notwithstanding the investment manager's determination in this regard, the Board
of Trustees will remain responsible for such determinations and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security should become illiquid subsequent to its purchase. In this regard, if
qualified institutional buyers are no longer interested in purchasing restricted
securities previously designated as liquid or if the market for these securities
contracts, these securities will be redesignated as illiquid and subject to the
10% limitation. See "The Fund's Investment Objective and Restrictions - Illiquid
Securities " in the SAI.

Securities Industry Related Investments. To the extent it is consistent with the
Fund's investment objective and certain limitations under the 1940 Act, the Fund
may invest its assets in securities issued by companies engaged in securities
related businesses, including such companies that are securities brokers,
dealers, underwriters or investment advisers. Such companies are considered part
of the financial services industry sector.

Pursuant to Section 12(d)(3) under the 1940 Act, the Fund may not acquire a
security or any interest in a securities related business, to the extent such
acquisition would exceed certain limitations. The Fund does not believe that
these limitations will impede the attainment of its investment objective.

Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and the shares of money market funds managed by
the Fund's investment manager which invest primarily in short-term debt
securities. Such temporary investments will only be made with cash held to
maintain liquidity or pending investment. In addition, for temporary defensive
purposes, in the event of, or when the investment manager anticipates, a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.

Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options, on securities and indices, which trade

<PAGE>

on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell futures and options on futures with respect to securities,
indices and currencies. Additionally, the Fund may sell futures and options to
"close out" futures and options it may have purchased and it may purchase
futures and options to "close out" futures and options it may have sold. The
Fund will not enter into any futures contract or related options (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial deposits and premiums on open contracts and options would exceed 5% of
the Fund's total assets (taken at current value). The Fund will not engage in
any stock options or stock index options if the option premiums paid regarding
its open option positions exceed 5% of the value of the Fund's total assets.

The Fund's option and futures investments involve certain risks. Such risks
include the risk that the effectiveness of an options and futures strategy
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. The Fund bears the risk that the prices of its portfolio securities
will not move in the same amount as the option or future it has purchased, or
that there may be a negative correlation which would result in a loss on both
such securities and the option or future.

The Fund's option and futures investments 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 may reduce the portion of the Fund's
dividends which is eligible for the corporate dividends-received deduction.
These transactions are also subject to special tax rules that may affect the
amount, timing and character of certain distributions to shareholders, more
information about which is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.

Over-the-counter ("OTC") options may not be closed out on an exchange and 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. There can be no assurance that a liquid secondary market will exist
for any particular option or futures contract at any specific time. Thus, it may
not be possible to close such an option or futures position. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.

The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and its investment
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the Fund will treat OTC options and "cover" assets as subject
to the Fund's limitation on illiquid securities. (See "Investment Objective and
Policies of the Fund - Illiquid Investments" in this Prospectus.)

<PAGE>

In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option. (See "The Fund's
Investment Objective and Restrictions - Transactions in Options, Futures and
Options on Financial Futures" in the SAI for a fuller discussion of the Fund's
investments in options and futures, including the risks associated with such
activity.)

Warrants and Rights. The Fund may invest up to 5% of its total assets in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price during or at the end of a specific period of time. The Fund will not
invest more than 2% of its total assets in warrants or rights which are not
listed on the New York or American stock exchanges.

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 and will be held pursuant to a written agreement.

The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked to market each day. Although reverse
repurchase agreements are borrowings under Section 2(a)(23) of the 1940 Act, the
Fund does not treat these arrangements as borrowings under investment
restriction 3 (set forth in the SAI) so long as the segregated account is
properly maintained.

Foreign Securities. The Fund may invest up to 10% of its net assets in foreign
securities, provided such investments are consistent with the Fund's investment
objective and policies. The Fund may purchase foreign securities which are
traded in the U.S. or purchase 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 or unsponsored. The Fund may also purchase
the securities of foreign issuers directly in foreign markets. Further
information about the

<PAGE>

Fund's investment in foreign securities is included in the SAI.

Investments in foreign securities where delivery takes place outside the United
States will involve risks that are different from investments in U.S.
securities. These risks may include future unfavorable political and economic
developments, possible withholding taxes, seizure of foreign deposits, currency
controls, higher transactional costs due to a lack of negotiated commissions, or
other governmental restrictions which might affect the amount and types of
foreign investments made or the payment of principal or interest on securities
the Fund holds. In addition, there may be less information available about these
securities and it may be more difficult to obtain or enforce a court judgment in
the event of a lawsuit. Fluctuations in currency convertibility or exchange
rates could result in investment losses for the Fund. Investment in foreign
securities may also subject the Fund to losses due to nationalization,
expropriation or differing accounting practices and treatments.

Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the United States and which
are publicly traded in the United States or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be 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.

General. The Fund will invest at least 65% of its total assets in equity
securities of companies which have a market capitalization of less than $1
billion at the time of the Fund's investment. In addition, the Fund seeks to
invest at least one-third of its assets in companies with a market
capitalization of $550 million or less; however, there is no assurance that it
will always be able to find suitable companies to include in this one-third
portion. The investment manager will monitor the availability of securities
suitable for investment by the Fund and recommend appropriate action to the
Board of Trustees if it appears that the goal of investing one-third of the
Fund's assets in companies with market capitalization of $550 million or less
may not be attainable under the Fund's current objective and policies. The Board
of Trustees will review the availability of suitable investments quarterly,
including the investment manager's assessment of the availability of suitable
investments. The investment manager will also present to the Board the
investment manager's views and recommendations regarding the Fund's ability to
meet this goal in the future. If the Board of Trustees should determine, based
upon one or more quarterly periods, that under the circumstances it is not
likely that sufficient suitable investments will be available to permit the Fund
to meet its goal of investing one-third of its assets in companies with market
capitalization of $550 million or less, it may determine to take appropriate
remedial action. Any such changes will be consistent with the requirements of
the 1940 Act and the rules adopted thereunder.

The investment policies of the Fund, except as otherwise specifically indicated
herein or in the

<PAGE>

SAI, are not fundamental policies of the Fund and may be changed without the
approval of a majority of the Fund's outstanding shares.

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

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

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 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. History
reflects both increases and decreases in the valuation of the market and in the
prevailing rate of interest, 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 Trust 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 33 U.S. registered investment
companies (111 separate series) with aggregate assets of over $73 billion.

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

<PAGE>

its capacity as transfer agent and dividend-paying agent. Investor Services is a
wholly-owned subsidiary of Resources.

The Expense Table at the front of this Prospectus includes the management fees
and total operating expenses (expressed as a percentage of net assets) which
were paid or would have otherwise been payable by the Fund, including fees to
Advisers and Investor Services, during the fiscal year ended April 30, 1994.

DISTRIBUTION PLAN

The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan"), whereby it 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.

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. 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

<PAGE>

months. 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.

DIVIDEND REINVESTMENT

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

DISTRIBUTIONS IN CASH

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

<PAGE>

The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. By distributing all of its net investment income and net realized
short-term and long-term capital gain and by 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 corporate shareholders, 92.01% of the income dividends paid by the Fund for
the fiscal year ended April 30, 1994 qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.

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 Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within 90 days of their purchase (for purposes of
determining gain or loss with respect to such shares) if the sales proceeds are
reinvested in the Fund or in another fund in the Franklin/Templeton Group and a
sales charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the tax basis of the
shares sold will be added to the tax basis of the shares acquired in the
reinvestment.

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

<PAGE>
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. The Fund currently does not permit investment by
market timing or allocation services ("Timing Accounts"), which generally
include accounts administered so as to redeem or purchase shares based upon
certain predetermined market indicators.

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.

PURCHASE PRICE OF FUND SHARES

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

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
-------------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*

- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 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 to dealers who initiate
and are responsible for purchases of $1 million or more: 1.00% on sales of $1
million but less $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25%
on sales of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.

<PAGE>

company and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more) See
"Special Net Asset Value Purchases" as described under "Purchases at Net Asset
Value" and as set forth in the SAI.

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 within
12 months of the calendar month following such investments. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."

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
dealer may be deemed to be an underwriter as that term is defined in the
Securities Act of 1933, as amended.

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

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,

<PAGE>

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

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

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

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.

See "Additional Information Regarding Purchases" in the SAI.

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by 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
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.

<PAGE>

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

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

<PAGE>

day period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.

Dividends and capital gains received in cash by the shareholder may also be used
to purchase shares of the Fund or another of the Franklin Templeton Funds at net
asset value within 120 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 by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual fund
investment company which charged the investor a contingent deferred sales charge
upon redemption, and which has investment objectives similar to those of the
Fund.

Shares of the Fund may be purchased at net asset value by registered
investment advisors and/or their affiliated broker-dealers, who have entered
into a supplemental agreement with Distributors, on behalf of their clients who
are participating in a comprehensive fee program (also known as a wrap fee
program).

Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Funds (including former participants of the Franklin Templeton Profit Sharing
401(k) plan) to the extent of such distribution. In order to exercise this
privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free 1-800/DIAL BEN
(1-800/342-5236).

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

DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES

Shares of the Fund may also be purchased at net asset value by certain
designated retirement plans, including profit sharing, pension, 401(k) and
simplified employee pension 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

<PAGE>

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 may be
afforded the same privilege if they meet the above requirements as well as the
uniform criteria for quali- fied 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 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.

GENERAL

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

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

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

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

<PAGE>

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

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

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

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

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

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

*The limit on compensation for determining SEP and qualified plan contributions
was reduced from $235,840 in 1993 to $150,000 for 1994 and 1995. The $150,000
limit will be adjusted for inflation, but only in $10,000 increments.

<PAGE>

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

SHARE CERTIFICATES

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

CONFIRMATIONS

AUTOMATIC INVESTMENT PLAN

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

<PAGE>

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.
Withdrawals which may be paid in the interim will be sent to the address of
record. Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance 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. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified 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's 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 another of the 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. Investors should review
the prospectuses 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. 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

<PAGE>

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

ADDITIONAL INFORMATION REGARDING EXCHANGES

A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased, and shares are subsequently redeemed within 12
months of the calendar month following such purchase, a contingent deferred
sales charge will be imposed. The 12-month period will be tolled (or stopped)
for the period such shares are exchanged into and held in a Franklin or
Templeton money market fund. See also "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."

When an investor requests the exchange of the total value of the Fund account,
declared but unpaid income and capital gain dividends 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

<PAGE>

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.

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

If a substantial portion of 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 objective 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.

TIMING ACCOUNTS

The Fund currently will not accept investments from Timing Accounts.

RETIREMENT ACCOUNTS

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

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

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

REDEMPTIONS BY MAIL

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

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

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

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

<PAGE>

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

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

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

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

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.

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.

<PAGE>

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 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 Franklin's Institutional Services Department by telephoning
1-800/321-8563.

REDEEMING SHARES THROUGH SECURITIES DEALERS

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

<PAGE>

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

The contingent deferred sales charge is waived for: exchanges; distributions to
participants in Trust Company qualified retirement plans due to death,
disability or attainment of age 591/2; tax-free returns of excess contributions
to employee benefit plans, including those due to termination or plan transfer;
distributions from employee benefit plans; redemptions through a Systematic
Withdrawal Plan set up 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); and redemptions
initiated by the Fund due to a shareholder's account falling below the minimum
specified account size.

REQUESTS FOR REDEMPTIONS FOR A SPECIFIED DOLLAR AMOUNT WILL RESULT IN ADDITIONAL
SHARES BEING REDEEMED TO COVER ANY APPLICABLE CONTINGENT DEFERRED SALES CHARGE
WHILE REQUESTS FOR REDEMPTION OF A SPECIFIC NUMBER OF SHARES WILL RESULT IN THE
APPLICABLE CONTINGENT DEFERRED SALES CHARGE BEING DEDUCTED FROM THE TOTAL DOLLAR
AMOUNT REDEEMED.

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 ACCOUNTS

OTHER

For any information required about a proposed liquidation, a shareholder may
call Franklin's Share-

<PAGE>

holder 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: (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, and (iv)
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 by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.

RESTRICTED ACCOUNTS

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

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

GENERAL

During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
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.

<PAGE>

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

The net asset value per share of the Fund is determined as of 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 sales charge of the Fund).

The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including, without limitation, the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
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. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All money
market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees has determined in good faith
constitutes fair value for purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the trustees
determine that it does not constitute fair value for such purposes. With the
approval of trustees, the Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions.

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

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

From a touch-tone phone, shareholders may obtain current price or performance
information specific to a fund in the Franklin Group of Funds(R) by call-

<PAGE>

ing the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
Information about the Fund may be accessed by entering Fund Code 98 followed by
the # sign, when requested to do so by the automated operator. The TeleFACTS
system is also available for processing exchanges. See "Exchange Privilege."

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

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

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

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

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 total return may be in any future period.

<PAGE>

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

REPORTS TO SHAREHOLDERS

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

ORGANIZATION

The Fund is a series of Franklin Strategic Series, a Delaware business trust
organized on January 25, 1991. The Trust is authorized to issue an unlimited
number of shares of beneficial interest, with a par value of $.01 per share in
various series. Each series, in effect, represents a separate mutual fund with
its own investment objective and policies. All shares have one vote and, when
issued, are fully paid, non-assessable, and redeemable. The Trust issues shares
in six other series: Franklin California Growth Fund, Franklin Global Health
Care Fund, Franklin Global Utilities Fund, Franklin Institutional MidCap Growth
Fund, Franklin MidCap Growth Fund and Franklin Strategic Income Fund. Additional
series may be added in the future by the Board of Trustees. All shares of the
Fund have equal voting, dividend and liquidation rights, but have no
subscription, preemptive or conversion rights.

VOTING RIGHTS

The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act.

REDEMPTIONS BY THE FUND

The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $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.

OTHER INFORMATION

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

<PAGE>

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

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

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, or which are anticipated to be made available in the near future,
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.

<PAGE>

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

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. Jamieson and Mr. Moore since inception and Mr.
McCarthy since March 1993.

Edward B. Jamieson
Senior Vice President of Advisers

Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with Advisers since 1987. He is a
member of several securities industry-related committees and associations.

Nicholas Moore
Portfolio Manager of Advisers

Mr. Moore holds a Bachelor of Science degree in business administration, with a
focus on accounting and finance, from the School of Business, Menlo College,
Menlo Park, California. He has been with Advisers since 1986.

Michael McCarthy
Portfolio Manager of Advisers

Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with Advisers since 1992.

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN SMALL CAP GROWTH FUND

FRANKLIN STRATEGIC SERIES
DATED SEPTEMBER 1, 1994

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

ADDITIONAL INFORMATION REGARDING PURCHASES

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

<PAGE>

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.

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

REINVESTMENT DATE

<PAGE>

FRANKLIN [FRANKLIN LOGO]
SMALL CAP
GROWTH FUND

FRANKLIN STRATEGIC SERIES

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

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

About the Fund (See also the Prospectus "About the Fund," "General
Information")............................................................. 2

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

Officers and Trustees...................................................... 11

Investment Advisory and Other Services (See also the Prospectus
"Management of the Fund")................................................. 13

The Fund's Policies Regarding Brokers Used on Portfolio Transactions....... 15

Additional Information Regarding Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund," "How to Sell Shares of the Fund,"
"Valuation of Fund Shares")................................................ 16

Additional Information Regarding Taxation.................................. 18

The Fund's Underwriter..................................................... 19

General Information........................................................ 21

Appendix................................................................... 24

Financial Statements....................................................... 26

Franklin Small Cap Growth Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund seeks long-term capital growth by investing primarily in equity securities
of companies which have a market capitalization of less than $1 billion at the
time of investment and by attempting to keep at least one-third of its assets
invested in common stocks of companies with market capitalization of $550
million or less.

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

<PAGE>
ABOUT THE FUND
- --------------------------------------------------------------------------------

The Franklin Small Cap Growth Fund is a diversified series of Franklin Strategic
Series, an open-end management investment company, commonly called a "mutual
fund." The Trust (until November 1991 named Franklin California 250 Growth Fund)
is a Delaware business trust organized on January 25, 1991.

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

As noted in the Prospectus, the Fund seeks long-term capital growth. The Fund
seeks to accomplish its objective by investing primarily in equity securities of
small capitalization growth companies.

SOME OF THE FUND'S OTHER INVESTMENT POLICIES

Lending of Portfolio Securities. As discussed in the Prospectus, the Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors. Any voting rights the securities may have may pass to
the borrower during the term of the loan. Loans are typically subject to
termination by the Fund in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Where matters are submitted to the
vote of the security holders of a portfolio company and such matters would
materially affect the Fund, the Fund will either terminate the loan or it will
have provided other means to permit it to vote such securities.

Short-Term Investments. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of which are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment and for defensive purposes in the event of, or in
anticipation of, a general decline in the market prices of stocks in which the
Fund invests.

Illiquid Securities. The Fund will not invest more than 10% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the instrument.
Notwithstanding this limitation, the Trust's Board of Trustees has authorized
the Fund to invest in certain restricted securities which are considered to be
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities; for example, 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, where such investment is
consistent with the Fund's investment objective. The Board of Trustees will
review any determination by the investment manager to treat a restricted
security as a liquid security on an ongoing basis, including the investment
manager'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 investment manager 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 in the Fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.

Securities Industry Related Investments. To the extent it is consistent with its
investment objective and certain limitations under the Investment Company Act of
1940 ("1940 Act"), the Fund may invest its assets in securities issued by
companies engaged in securities related businesses, including such companies
that are securities brokers, dealers, underwriters or investment advisers. Such
companies are considered to be part of the financial services industry.
Generally, under 12(d)(3) of the 1940 Act and Rule 12d3-1 thereunder, the Fund
may not acquire a security or any interest in a securities related business, to
the extent such acquisition would result in the Fund acquiring in excess of i)
5% of a class of an issuer's outstanding equity securities, ii) 10% of the
outstanding principal amount of an issuer's debt securities, or investing more
than iii) 5% of the value of the Fund's total assets in securities of the
issuer. In addition, any equity security of a securities related business must
be a marginable security under Federal Reserve Board regulations and any debt
security of a securities-related business must be investment grade as determined
by the Board of Trustees.

<PAGE>
Foreign Securities. As noted in the Prospectus, the Fund may invest up to 10% of
its net assets in foreign securities. When purchasing foreign securities, the
Fund will ordinarily purchase securities which are traded in the United States
or purchase sponsored or unsponsored 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.
A sponsored ADR is an ADR in which establishment of the issuing facility is
brought about by the participation of the issuer and the depositary institution
pursuant to a deposit agreement which sets out the rights and responsibilities
of the issuer, the depositary and the ADR holder. Under the terms of most
sponsored arrangements, depositaries agree to distribute notices of shareholder
meetings and voting instructions, thereby ensuring that ADR holders will be able
to exercise voting rights through the depositary with respect to the deposited
securities. An unsponsored ADR has no sponsorship by the issuing facility and
additionally, more than one depositary institution may be involved in the
issuance of the unsponsored ADR. It typically clears, however, through the
Depositary Trust Company and therefore, there should be no additional delays in
selling the security or in obtaining dividends. Although not required, the
depositary normally requests a letter of non-objection from the issuer. In
addition, the depositary is not required to distribute notices of shareholders'
meetings or financial information to the purchaser. The Fund may also purchase
the securities of foreign issuers directly in foreign markets so long as, in the
investment manager's judgment, an established public trading market exists (that
is, there are a sufficient number of shares traded regularly relative to the
number of shares to be purchased by the Fund).

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

Securities which are acquired by the Fund outside of the United States and which
are publicly traded in the United States or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be illiquid
assets if (a) the Fund reasonably believes it can readily dispose of the
securities for cash in the U.S. or foreign market or (b) current market
quotations are readily available. The Fund will not acquire the securities of
foreign issuers outside of the United States under circumstances where, at the
time of acquisition, the Fund has reason to believe that it could not resell the
securities in a public trading market. Investors should recognize that foreign
securities are often traded with less frequency and volume, and therefore may
have greater price volatility, than is the case with many U.S. securities.
Notwithstanding the fact that the Fund intends to acquire the securities of
foreign issuers only where there are public trading markets, investments by the
Fund in the securities of foreign issuers may tend to increase the risks with
respect to the liquidity of the Fund's portfolio and the Fund's ability to meet
a large number of shareholders' redemption requests should there be economic or
political turmoil in a country in which the Fund has its assets invested or
should relations between the United States and a foreign country deteriorate
markedly.

Portfolio Turnover. The Fund's portfolio turnover for the fiscal years ended
April 30, 1993 and 1994 was 63.15% and 89.60%, respectively.

TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES

Call and Put Options on Securities. 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 and Put 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 seg-

<PAGE>
regated 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. A put option
written by the Fund is covered if the Fund maintains cash and high grade debt
securities with a value equal to the exercise price in a segregated account with
its custodian, or holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written. 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, or purchased, in the case of a put
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. If a put option is exercised, the
writer must fulfill the obligation to purchase the underlying security at the
exercise price, which will usually exceed the then market value 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 canceled by the clearing corporation. A writer,
however, 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, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Effecting a closing transaction will also permit the cash or
proceeds from the concurrent 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.

The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price and the Fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.

Purchasing Call and Put 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 option 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 de-

<PAGE>

pend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.

The Fund intends to purchase put options on particular securities in order to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to purchase put options
will allow the Fund to protect the unrealized gain in an appreciated security in
its portfolio without actually selling the security. In addition, the Fund will
continue to receive interest or dividend income on the security. The Fund may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale will result in a net gain or loss
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid for the put option that is sold. Such
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to acquire.

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. OTC options,
however, 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. OTC options,
however, 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.

Options on Stock Indices. The Fund may also purchase call 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.

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
Commodities Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.

<PAGE>
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). 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.

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 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 the 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 in a segregated account with
its custodian, to the extent required by the rules of the Securities and
Exchange Commission ("SEC"), assets to cover its obligations with respect to
such contract which will consist of cash, cash equivalents or high quality debt
securities 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
contract.

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 it 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 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 stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account 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

<PAGE>

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.

RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS, FUTURES AND OPTIONS ON
FUTURES

The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indices, stock index futures, financial
futures and related options depends on the degree to which price movements in
the underlying debt 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 the index or such underlying
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 indices, stock index futures, financial futures and
related options will be subject to the investment manager's ability to predict
correctly movements in the direction of the securities markets generally or 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 option 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.

<PAGE>

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 investment adviser 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 investment adviser's 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 of business 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.

RISK FACTORS RELATING TO HIGH YIELDING, FIXED-INCOME SECURITIES

The Fund intends to invest less than 5% of its assets in lower-rated,
fixed-income securities and unrated securities of comparable quality (sometimes
referred to as "junk bonds" in the popular media). The market values of such
securities tend to reflect individual corporate developments to a greater extent
than do higher-rated securities, which react primarily to fluctuations in the
general level of interest rates. Such lower-rated securities also tend to be
more sensitive to economic conditions than higher-rated securities. These
lower-rated, fixed-income securities are considered by Standard & Poor's
Corporation ("S&P") and Moody's Investors Service ("Moody's"), 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 securities rated BBB or Baa by S&P and Moody's, ratings which
are considered investment grade, possess some speculative characteristics.

Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers 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
earnings to meet their payment obligations. The issuer's ability to service its
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. The default by an issuer of securities held by
the Fund will adversely affect the Fund by lowering its net asset value (as the
fair value of a security generally declines prior to and at default) and by
decreasing the amount of income available to the Fund from which dividends may
be paid. In addition, if an issuer defaults after the Fund has paid out
dividends based upon accrued income, reversal of such accrual may result in the
Fund having a return of capital to its shareholders. In addition, the

<PAGE>

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 its
obligations. Those adverse effects may continue even as the economy recovers.

High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the security 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 security with a lower yielding security, thus decreasing the net
investment income to the Fund and 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 Internal Revenue
Code of 1986, as amended (the "Code"), and 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.

The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent a secondary trading market for
high yielding, fixed-income securities does exist, it is generally not as liquid
as the secondary market for higher-rated securities. Reduced liquidity in the
secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as 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 value for these high yield issues 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. Many recently issued high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration. If the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.

The Fund may 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.

Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on the investment 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.

Adverse publicity regarding lower-rated bonds which appeared during 1989 and
1990 along with highly publicized defaults of some high yield issuers, and
concerns regarding an economic slowdown or recession which continued in 1992,
depressed the prices for such securities.

<PAGE>
Because of the Fund's policy of investing in lower-grade securities, a higher
degree of risk accompanies an investment in the Fund's shares than would be the
case in a more conservative income-type investment company. As with any other
investment, there is no assurance that the Fund's objective will be obtained.

INVESTMENT 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
Fund's shareholders. In order to change any of these restrictions, (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented at
that meeting or (ii) more than 50% of the outstanding voting securities of the
Fund, whichever is less, must vote to make the change. The Fund may not:

1. Purchase the securities of any one issuer (other than obligations of the
United States, its agencies or instrumentalities) if immediately thereafter, and
as a result of the purchase, the Fund would (a) have invested more than 5% of
the value of its total assets in the securities of the issuer, or (b) hold more
than 10% of any voting class of the securities of any one issuer;

2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are 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;

3. Borrow money (does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or emergency
(but not investment) purposes, in an amount up to 10% of the value of the Fund's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments;

4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry;

5. Underwrite securities of other issuers or invest more than 10% of its assets
in securities with legal or contractual restrictions on resale (although the
Fund may invest in such securities to the extent permitted under the federal
securities laws for example, transactions between the Fund and Qualified
Institutional Buyers subject to Rule 144A under the Securities Act of 1933) or
which are not readily marketable, or which have a record of less than three
years continuous operation, including the operations of any predecessor
companies, if more than 10% of the Fund's total assets would be invested in such
companies;

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

7. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;

8. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;

9. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);

10. 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, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets,
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
The Fund may invest in shares

<PAGE>

of one or more money market funds managed by Franklin Advisers, Inc. or its
affiliates; and

11. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but 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 Trust,
one or more of the officers or trustees of the Trust, 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.

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

<PAGE>

Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of
Park Avenue at Morris County General Host Corporation; director of certain of the investment
P.O. Box 1945 companies in the Templeton Group of Funds; and director, trustee or
Morristown, NJ 07962-1945 managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant Secretary/Treasurer and Director Berkeley
111 New Montgomery St., #402 Science Corporation (a venture capital company); and director,
San Francisco, CA 94105 trustee or managing general partner, as the case may be, of most of
the investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
*Charles B. Johnson Chairman President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. of the Board Franklin/Templeton Distributors, Inc.; Chairman of the Board and
San Mateo, CA 94404 and Trustee Director, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; director of
certain of the investment companies in the Templeton Group of Funds;
and officer and/or director, trustee or managing general partner, as
the case may be, of most other subsidiaries of Franklin Resources,
Inc. and of most of the investment companies in the Franklin Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
*Rupert H. Johnson, Jr. President Executive Vice President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. and Trustee Franklin/Templeton Distributors, Inc.; President and Director,
San Mateo, CA 94404 Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the investment companies in
the Templeton Group of Funds; and officer and/or director, trustee or
managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W.T. LaHaye Trustee General Partner, Peregrine Associates and Miller & LaHaye, which are
20833 Stevens Creek Blvd. General Partners of Peregrine Ventures and Peregrine Ventures II
Suite 102 (venture capital firms); Chairman of the Board and Director,
Cupertino, CA 95014 Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the case may be, of most of
the investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gordon S. Macklin Trustee Chairman, White River Corporation (information services); Director,
8212 Burning Tree Road Infovest Corporation, Medimmune, Inc., Fundamerican Enterprises
Bethesda, MD 20817 Holdings, Inc., Martin Marietta Corporation, and MCI Communications
Corporation; director of certain of the investment companies in the
Templeton Group of Funds; and director, trustee or managing general
partner, as the case may be, of most of the investment companies in
the Franklin Group of Funds; formerly, Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President, National
Association of Securities Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Charles E. Johnson Vice President President and Chief Executive Officer of Templeton Worldwide, Inc.;
777 Mariners Island Blvd. Senior Vice President, Franklin Resources, Inc. and
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.; President, Franklin
Institutional Services Corporation; director of certain of the
investment companies in the Templeton Group of Funds; 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 some of the investment companies in the Franklin Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales Manager, Franklin/Templeton
777 Mariners Island Blvd. Distributors, Inc.; and officer of many of the investment companies
San Mateo, CA 94404 in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President, Senior Vice President, Franklin Resources, Inc. and Franklin
777 Mariners Island Blvd. Treasurer, Chief Advisers, Inc.; Vice President, Franklin/Templeton Distributors,
San Mateo, CA 94404 Financial Officer Inc.; officer and/or director, as the case may be, of other
and Accounting subsidiaries of Franklin Resources, Inc.; and officer and/or managing
Officer general partner, as the case may be, of all the investment companies
in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources, Inc. and
777 Mariners Island Blvd. and Secretary Franklin/Templeton Distributors, Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc.; and officer of all the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). Trustees not affiliated with
the investment manager may be, but are not currently, paid fees or expenses
incurred in connection with attending meetings. As of June 8, 1994, the trustees
and officers, as a group, owned of record and beneficially approximately 1,057
shares, or less than 1% of the total outstanding shares of the Fund. Certain
officers or trustees who are shareholders of Franklin Resources, Inc. may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries. 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
- --------------------------------------------------------------------------------

The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources,

<PAGE>

Inc. ("Resources"), a publicly owned holding company whose shares are listed on
the New York Stock Exchange ("Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services. The Manager and other subsidiary companies of Resources currently
manage over $113 billion in assets for more than 3.5 million shareholders. The
preceding table indicates those officers and trustees who are also affiliated
persons of Distributors and Advisers.

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

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

The Manager has not imposed management fees and has assumed responsibility for
making payments, if necessary, to offset certain operating expenses otherwise
payable by the Fund. This action by the Manager to limit its management fees and
to assume responsibility for payment of the expenses related to the operations
of the Fund may be terminated by the Manager at any time. The management
agreement specifies that the management fee will be reduced to the extent
necessary to comply with the most stringent limits on the expenses which may be
borne by the Fund as prescribed by any state in which the Fund's shares are
offered for sale. The most stringent current limit requires the Manager to
reduce or eliminate its fee to the extent that aggregate operating expenses of
the Fund (excluding interest, taxes, brokerage commissions and extraordinary
expenses such as litigation costs) would otherwise exceed in any fiscal year
2.5% of the first $30 million of average net assets of the Fund, 2% of the next
$70 million of average net assets of the Fund and 1.5% of average net assets of
the Fund in excess of $100 million. Expense reductions have not been necessary
based on state requirements. For the period from February 14, 1992 (effective
date of registration) to April 30, 1992, and the fiscal years ended April 30,
1993 and 1994, the management fees the Fund was contractually obligated to pay
the Manager were $1,262, $19,419, and $82,978, respectively. The Manager,
however, did not impose any management fees and the Fund paid no management fees
for the period ended April 30, 1992, and for the fiscal years ended April 30,
1993 and 1994.

The management agreement is in effect until April 30, 1995. Thereafter, it 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 agreement or interested persons
of any such party (other than as trustees 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 the Manager on 60 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.

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

<PAGE>

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.

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

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

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

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

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

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders

<PAGE>

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

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

During the period from February 14, 1992 (effective date of registration) to
April 30, 1992, the Fund paid no brokerage commissions. During the fiscal years
ended April 30, 1993 and 1994, the Fund paid total brokerage commissions of
$8,638 and $53,806, respectively. As of April 30, 1994, the Fund did not own
securities of its regular broker-dealers.

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

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 funds into which the Fund 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.

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 (including a capital gain distribution) until new instructions are
received.

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.

<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- ---------------------------------------- ------
<S> <C>
Up to U.S. $100,000..................... 3%
U.S. $100,000 to U.S. $1,000,000........ 2%
Over U.S. $1,000,000.................... 1%
</TABLE>

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS

Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use

<PAGE>

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.

PURCHASES AT NET ASSET VALUE

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. 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

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

REINVESTMENT DATE

SPECIAL SERVICES

<PAGE>
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 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.

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

<PAGE>

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

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

The Fund's investment in options and futures contracts, including transactions
involving actual or deemed short sales, are subject to many complex and special
tax rules. For example, OTC 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 treatment
of certain other options and futures 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
contracts and certain foreign currency contracts 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 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 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.

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

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

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

Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

<PAGE>

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

Distributors allows a portion of the underwriting commission on the sale of Fund
shares to the securities dealer of record, if any, on an account (see the
Prospectus "How to Buy Shares of the Fund"). In connection with the offering of
the Fund's shares, aggregate underwriting commissions for the period from
February 14, 1992 (effective date of registration) to April 30, 1992 and the
fiscal years ended April 30, 1993 and 1994 were $4,498, $90,177, and $225,608,
respectively. After allowances to dealers, Distributors retained $511, $11,597,
and $30,222 during the period ended April 30, 1992, and the fiscal years ended
April 30, 1993 and 1994, respectively. 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 Manager or
Distributors or other parties on behalf of the Fund, the Manager 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. 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.

<PAGE>

Plan is effective through April 30, 1995, and renewable annually 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 the Manager 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.

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

PERFORMANCE

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

TOTAL RETURN

The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order, and 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. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum sales charge in effect currently.

The average annual compounded rate of return for a one-year period ending April
30, 1994, was 23.46%, and for the period from inception (February 14, 1992) to
April 30, 1994, was 11.55%.

These figures were calculated according to the SEC formula:

P(1+T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five-, and ten-year periods (or
fractional portion thereof). The total rate of return for a one-year period
ended April 30, 1994, was 23.46% and for the period from inception (February 14,
1992) to April 30, 1994, was 27.33%.

YIELD

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

<PAGE>

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 the Fund for the 30-day period ended on April 30, 1994 was 0.20%. This
figure was obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period

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

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

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

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
Statement of Additional Information with the substitution of net asset value for
the public offering price.

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.

COMPARISONS

b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of

<PAGE>

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) Wilshire Next 1750 Index - an index composed of the stocks in the Wilshire
2500 minus the largest 750 stocks.

f) Russell 2000 Small Stock Index - a broadly diversified index consisting of
approximately 2000 small capitalization common stocks.

g) Russell 2500 Index - an index consisting of the largest 2500 stocks based on
market capitalization.

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

i) 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.

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

k) 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.

l) 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.

m) 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 L.P.

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

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

p) 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.

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

<PAGE>

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 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $113 billion in
assets under management for more than 3.5 million shareholder accounts and
offers 103 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 of
36 mutual fund groups in service quality for 1993. One other fund group was also
ranked number one. Franklin has been ranked number one in service quality by
Dalbar for five of the past six years.

From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. As of
June 8, 1994, the principal shareholder of the Fund, beneficial or of record,
the shareholder's address and the amount of the share ownership was as follows:

<TABLE>
<CAPTION>
NUMBER
PERCENTAGE OF SHARES
---------- -----------
<S> <C> <C>
Franklin Resources, Inc. 5.21% 104,567.043
777 Mariners Island Blvd.
San Mateo, CA 94404
</TABLE>

OWNERSHIP AND AUTHORITY DISPUTES

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

DESCRIPTION OF CORPORATE BOND RATINGS

Moody's

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 by an 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, 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.

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

B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance

<PAGE>

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.

S&P

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

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

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.

COMMERCIAL PAPER RATINGS

Moody's

Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, 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.

FINANCIAL STATEMENTS
The Financial Statements are incorporated by reference herein to the Financial
Statements attached to the Franklin California Growth Fund Statement of
Additional Information.

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN STRATEGIC INCOME FUND

FRANKLIN STRATEGIC SERIES
DATED DECEMBER 30, 1994

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

1. EXPENSE TABLE

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

2. MANAGEMENT OF THE FUND

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

3. HOW TO BUY SHARES OF THE FUND

a) Add the following language as paragraph two:

b) Substitute the following for the sales charge table and the ensuing
paragraph:

<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $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.

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

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

Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 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 company and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of $10
million or more. See definitions under "Description of Special Net Asset Value
Purchases" and as set forth in the SAI.

c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:

PURCHASES AT NET ASSET VALUE

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

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

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.

<PAGE>
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 this Fund or any of
the Franklin Templeton Investments must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the bank
or trust company, with payment by federal funds received by the close of
business on the next business day following such order.

Refer to the SAI for further information.

4. EXCHANGE PRIVILEGE

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

5. HOW TO SELL SHARES OF THE FUND

Add the following subsection:

CONTINGENT DEFERRED SALES CHARGE

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

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

<PAGE>

FRANKLIN STRATEGIC
INCOME FUND

Franklin Strategic Series

PROSPECTUS DECEMBER 30, 1994

[FRANKLIN LOGO]

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 through a flexible policy of investing 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; various
types of fixed or adjustable rate mortgage securities; asset-backed securities;
and preferred stock, common stocks which pay dividends, and income producing
securities which are convertible into common stocks of such companies.

THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN BONDS ISSUED BY BOTH U.S. AND
FOREIGN ISSUERS, RATED BELOW INVESTMENT GRADE, COMMONLY KNOWN AS "JUNK BONDS"
WHICH ENTAIL GREATER RISK, INCLUDING PRICE VOLATILITY AND RISK OF DEFAULT, THAN
INVESTMENTS IN HIGHER RATED SECURITIES. SEE "RISK CONSIDERATIONS - HIGH YIELD
SECURITIES." AND "RISK CONSIDERATIONS - FOREIGN SECURITIES." INVESTORS SHOULD
CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND IN LIGHT
OF THE SECURITIES IN WHICH THE FUND INVESTS.

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

A Statement of Additional Information ("SAI") concerning the Fund, dated
December 30, 1994, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.

<PAGE>

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 .................................................... 3

Information About the Fund .............................................. 4

Investment Objectives and Policies of the Fund .......................... 4

Types of Securities the Fund May Purchase ............................... 5

Risk Considerations ..................................................... 14

Management of the Fund .................................................. 18

Distributions to Shareholders ........................................... 20

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............. 30

Exchange Privilege....................................................... 32

How to Sell Shares of the Fund........................................... 34

Telephone Transactions................................................... 37

Valuation of Fund Shares................................................. 38

How to Get Information Regarding an Investment in the Fund............... 39

Performance.............................................................. 40

General Information...................................................... 41

Account Registrations.................................................... 42

Important Notice Regarding Taxpayer IRS Certifications................... 43

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. The figures for "Annual Fund
Operating Expenses" are based on contractual amounts and, in the case of "Other
Expenses," on estimated amounts for the Fund's initial fiscal period.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....................... 4.25%

Maximum Sales Charge Imposed on Reinvested Dividends ...... NONE

Deferred Sales Charge...................................... NONE

Redemption Fees............................................ NONE

Exchange Fee (per transaction)............................. $5.00*
</TABLE>

<PAGE>

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

<TABLE>
<S> <C>
Management Fees.................................. 0.63%

12b-1 Fees....................................... 0.25%**

Other Expenses................................... 0.08%
-----
Total Fund Operating Expenses.................... 0.96%
=====
</TABLE>

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

EXAMPLE

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C>
$52 $72
</TABLE>

THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF 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. (See
"Management of the Fund" for a description of the Fund's expenses.) In addition,
federal regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.

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 October
31, 1994. These figures are unaudited.

<TABLE>
<CAPTION>
NET ASSETS NET REALIXED DISTRIBUTIONS
PERIOD VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM
OCT. 31 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 10.00 0.29 (0.033) 0.257 (0.067) --
</TABLE>

<TABLE>
<CAPTION> RATIO OF
NET ASSET NET ASSETS RATIO OF INVESTMENT
PERIOD VALUE AT END EXPENSES TO INCOME PORTFOLIO
ENDED TOTAL AT END TOTAL OF PERIOD AVERAGE NET TO AVERAGE TURNOVER
OCT. 31 DISTRIBUTION OF PERIOD RETURN* (IN 000'S) ASSETS*** NET ASSETS RATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 (0.067) 10.19 2.57 5,408 0.25** 7.12** 55.28
</TABLE>

*Total return measures the change in value of an investment over the period
indicated. It does not include the maximum initial sales charge.

**Annualized.

***During the period, Advisers reduced its management fee and reimbursed other
expenses incurred by the Fund. Had such action not been taken, the ratio of
operating expenses to average net assets would have been 1.08%**.

<PAGE>

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

Franklin Strategic Income Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company, commonly called a "mutual fund" and has registered as such under the
Investment Company Act of 1940 (the "1940 Act"). The Trust is a Delaware
business trust, organized on January 25, 1991. 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." See "Management of the
Fund."

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
based upon a variable percentage (ranging from 4.25% to less than 1.00% of the
offering price) depending upon the amount invested. (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 its objectives by using an active asset allocation
process and through a flexible policy of investing in: securities of foreign
governments, their agencies and instrumentalities; U.S. and foreign corporate
high yield fixed-income securities; securities of the U.S. government, its
agencies, authorities or instrumentalities; various types of fixed or adjustable
rate mortgage securities; asset-backed securities; and preferred stock, common
stocks which pay dividends and income producing securities which are convertible
into common stocks of such companies, 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 objectives of seeking a high level
of current income and capital appreciation and its ability to invest in lower
rated corporate U.S. and foreign bonds, a higher degree of risk accompanies an
investment in the Fund's shares than would be the case in a more conservative
income-type investment company. 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 investments which may be made in a
particular type of security and such determination is entirely within the
Managers' discretion.

The Fund may buy and sell ("write") financial futures contracts, stock and bond
index futures contracts and forward foreign currencies and futures contracts,
put and call options on securities, indices, foreign currencies and futures
contracts. The

<PAGE>

Fund may also buy defaulted debt securities, loan participations
and other related direct or indirect bank debt obligations ("Loan
Participations"), collateralized mortgage obligations, asset-backed securities;
loan its portfolio securities, borrow for temporary or emergency purposes or for
investment purposes; and enter into repurchase agreements, interest rate and
currency swaps. These investment techniques are described below and under the
heading "Investment Objectives and Policies" in the SAI.

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

Concentration. The Fund will not invest more than 25% of the value 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.

TYPES OF SECURITIES THE FUND MAY PURCHASE
- --------------------------------------------------------------------------------

High Yield Corporate Securities. The Fund may invest, without limitation, in
lower rated, fixed-income U.S. and foreign corporate high yield securities and
unrated securities of comparable quality, commonly called "junk bonds." 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"). 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, except for investments in defaulted securities as noted
below or, if unrated, are at least of comparable quality as determined by the
Managers. The Fund may also invest in securities which are unrated by any
NRSROs. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. (See the Appendix
to this Prospectus for a discussion of ratings.) Regardless of rating levels,
all debt securities considered for purchase (whether rated or unrated) will be
carefully analyzed by the Managers 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. The Fund may purchase foreign securities which are traded in the
U.S. or 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 also purchase the securities of foreign issuers directly
in foreign markets and may purchase securities of U.S. issuers which are
denominated in foreign currency. See "Risk Considerations - Foreign Securities."

Government Securities. There are three types of U.S. government securities.
Treasury bills and bonds, are obligations of, or guaranteed by, the U.S.
government and are supported by the full faith and

<PAGE>

credit of the U.S. Treasury. U.S. government agency securities 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. Other agency securities, such as those issued or guaranteed
by the Federal National Mortgage Association, are supported only by the credit
of the instrumentality. See also "Mortgage Securities."

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 such 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
other party'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 Securities. 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"); and in adjustable rate mortgage securities ("ARMs"),
collateralized mortgage obligations ("CMOs"), stripped mortgage-backed
securities ("SMBS"), any of which may be privately-issued. The Fund may also
invest in asset backed securities.

The Characteristics of the Mortgage Securities in Which the Fund Invests. A
mortgage security is an interest in a pool of mortgage loans. Most mortgage
securities are pass-through securities, which means that they provide investors
with payments consisting of both principal and interest as mortgages in the
underlying pool are paid off by the borrowers. The primary issuers or guarantors
of mortgage securities are GNMA, FNMA and FHLMC. These mortgage securities are
called pass-through certificates ("Certificates") because a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Fund). The Fund invests in both "modified"
and "straight" pass-through mortgage-backed securities. Principal and interest
are guaranteed for "modified pass-through" type certificates, rather than the
"straight pass-through" certificates for which such guarantee is not available.
CMOs and SMBS are not pass-through securities.

<PAGE>

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. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and the ultimate
collection of principal. Mortgage securities from FNMA and FHLMC are not backed
by the full faith and credit of the U.S. government. 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. 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.

Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of such securities nor do they extend to the value of the
Fund's shares. In general, the value of fixed-income securities varies inversely
with changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates. 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. An ARM, like a traditional mortgage
security, is an interest in a pool of mortgage loans. The ARMs in which the Fund
may invest may be issued or guaranteed by one of the federal agencies or by
private issuers. The interest rates on the mortgages underlying the ARM are
reset periodically. Since most ARMs in the Fund's portfolio will generally have
annual reset limits or "caps" of 100 to 200 basis points, fluctuation 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.

Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupons of the underlying mortgages, resulting in both higher current yields and
lower price fluctuations.

One difference between ARMs and fixed-rate mortgages is that for certain types
of ARM securities, the rate of amortization of principal, as well as interest
payments, can and does change in accordance with movements in a particular,
pre-specified, published interest rate index. For example, ARMs can have
negative amortization, which can extend the average life of the securities. 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.

<PAGE>

Resets. The interest rates paid on the ARMs in which the Fund will invest
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index, although instruments with longer resets
such as three years and five years are also permissible investments. 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.

Caps and Floors. The underlying mortgages which collateralize the ARMs in which
the Fund will 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.

Stripped Mortgage-Backed Securities. The Fund may also invest in SMBS, which are
derivative multiclass mortgage securities, to achieve a higher yield than may be
available from fixed-rate mortgage securities. The SMBS 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 have more
liquidity than privately issued SMBS. SMBS have greater market volatility than
other types of mortgage securities in which the Fund invests. Although SMBS are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, these securities were only recently
developed. As a result, established trading markets have not yet been fully
developed and, accordingly, these securities are generally illiquid.

SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving 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.

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 roll period, the
Fund forgoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated by the difference between the current sales price and the
lower forward 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 which matures on
or before the forward settlement date of the mortgage dollar roll transaction.
Mortgage dollar rolls that are not covered rolls will constitute a borrowing and
will be included in the calculation of the Fund's borrowings. Covered rolls,
however, are not treated as a borrowing or other senior security and will be
excluded from the calculation of the Fund's borrowings and other senior
securities. The Fund

<PAGE>

could suffer a loss if the contracting party failed to perform the future
forward 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.

Collateralized Mortgage Obligations ("CMOs"). 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. In effect, CMOs "pass through" the monthly
payments made by individual borrowers on their mortgage loans. 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,
mortgage poolers 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 Managers, the sponsor is creditworthy.
Prepayments of the mortgages included in the mortgage pool will impact the yield
of the CMO. In addition, prepayments usually increase when interest rates
decrease, thereby decreasing the life of the pool. Under those circumstances,
the reinvestment of prepayments will generally be at a rate lower than the rate
applicable to the original CMO.

In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specified coupon
rate or adjustable rate tranche and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO 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 semi-annual basis. The principal and interest on the underlying
mortgages may be allocated among several classes of a series of a CMO 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 is 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 include receivables on
home equity and credit card loans, automobile, mobile home and recreational
vehicle loans and leases. The assets are secured either in a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a "CMO" structure). The Fund may invest in these and other
types of asset-backed securities that may be developed in the future. In
general, the 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 these do not have the benefit of the same type of security
interests in the related collateral. Credit card receivables are generally
unsecured and a number of state and federal consumer credit laws give debtors

<PAGE>

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 technical requirements under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on the securities.

The Fund's Investments in Options, Futures Contracts and Forward Contracts. The
Fund's investment in options, futures contracts and forward contracts, which are
described below, may be limited by the requirements of the Code for
qualification as a regulated investment company and are 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, more information about which is included in the SAI.

Options on Securities, Indices and Futures Contracts. The Fund may invest
options, futures, and options on futures. 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 permits 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
permits 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 regarding its
open option positions exceed 5% of the value of the Fund's total assets.

Futures Contracts. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts and foreign

<PAGE>

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. See "Investment Objective and Policies - Futures
Contracts" in the SAI. The Fund may not commit more than 5% of its total assets
to initial margin deposits on futures contracts.

OTHER STRATEGIES

Interest Rate and Currency Swaps. Interest rate swaps involve the exchange by
the Fund with 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 Managers are incorrect
in their 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.

Defaulted Debt Securities and Loan Participations. Defaulted securities and Loan
Participations may be illiquid and, if so, will be part of the 10% limitation
policy listed under "Illiquid Investments." See also "Risk Considerations - High
Yield 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 Managers may acquire Loan Participations for the Fund when they believe
that, over the long term, appreciation will take place. An investment in such
securities, however, carries substantially the same risk as that for defaulted
debt securities and may cause the loss of the entire investment to the Fund.
Defaulted debt securities will be purchased if, in the opinion of the Managers,
the issuer may resume interest payments or other advantageous developments
appear likely, in the near term.

Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees of the Trust and subject to the following conditions, the Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors. 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 may invest up to 331/3% of its assets in such
loans, although it is the current intention to not exceed 10% of the value of
the Fundis total assets at the time of

<PAGE>

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

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.

Borrowing. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund, except that it may borrow for temporary or emergency
purposes, and to increase its holdings of portfolio securities, 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 Managers. 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
and will be held pursuant to written agreement.

Illiquid Investments. 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, and include 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 objective and
has authorized such securities to be considered to be liquid to the extent the
Managers determine 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 (see the discussion "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.

<PAGE>

Portfolio Turnover. The Fund expects that its portfolio turnover rate will
generally not exceed 100%, but this rate should not be construed as a limiting
factor. High portfolio turnover increases transactions costs which must be paid
by the Fund. High turnover may also result in the realization of net capital
gain, which is taxable when distributed to shareholders.

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 assets that may be invested at any time in the securities of any
one issuer. However, the Fund intends to comply with the diversification and
other requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to "regulated investment companies" 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
would be the case if it were more broadly 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. This
policy, together with any illiquid securities may not exceed 10% of the Fund's
net assets.

As long as percentage restrictions are observed by the Fund at the time of
purchase of any such security, changes in values 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. A list of these
additional restrictions and additional information concerning the
characteristics of the securities in the Fund's portfolio is included in the
SAI.

The Fund may also 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.

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.

<PAGE>

In addition to the factors which affect the value of individual securities, as
described in the preceding sections and under "Risk Considerations," a
shareholder may anticipate that the value of Fund shares will fluctuate with
movements in the broader equity and bond markets, as well. To the extent the
Fund's investments consist of debt securities, changes in interest rates will
affect the value of the Fund's portfolio and thus its share price. Increased
rates of interest which frequently accompany higher inflation and/or a growing
economy are likely to have a negative effect on the value of Fund shares. To the
extent the Fund's investments consist of common stocks, a decline in the market,
expressed for example by a drop in the Dow Jones Industrials or the Standard &
Poor's 500 average or any other broad based equity 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, relative 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 interest rates both in the U.S. and in individual
countries throughout the world, in foreign currency valuations and in the
valuation of the stock markets both in the U.S. and in foreign countries. These
may reoccur unpredictably in the future.

RISK CONSIDERATIONS
- --------------------------------------------------------------------------------

HIGH YIELD SECURITIES

Corporate debt securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The Managers will consider both credit risk and market risk
in making investment decisions as to corporate debt obligations for the Fund.

Bonds rated BB or below by S&P or Ba or below by Moody's (or comparable unrated
securities) are considered by S&P and Moody's, on balance, to be speculative and
questionable as to payment of principal and interest thereon. They will
generally involve more credit risk than securities in the higher rating
categories. The market values of such securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Such lower rated securities also tend to be more sensitive to economic
conditions than higher rated securities. Even securities rated BBB or Baa by S&P
and Moody's, ratings which are considered investment grade, possess some
speculative characteristics.

<PAGE>

adversely affected by specific corporate developments, or 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.

High yielding, fixed-income securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from a Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, when calls are exercised by the issuer during
periods of declining interest rates, the Fund must replace such called security
with a lower yielding security, decreasing the net investment income to the Fund
and thus the dividends to shareholders.

The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent a secondary trading market for
high yielding, fixed-income securities does exist, it is generally not as liquid
as the secondary market for higher rated securities. Reduced liquidity in the
secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as 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 value for these high yield issues 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 may acquire such 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 were
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities, as defined in
the Securities Act of 1933, which entails special responsibilities and
liabilities. The Fund may incur special costs in disposing of such securities;
however, the Fund will generally incur no costs when the issuer is responsible
for registering the securities.

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

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 high yield issuers, depressed the prices for
many such securities. The Fund may also incur additional expenses to the extent
it is required to seek recovery upon a default in the payment of

<PAGE>

principal or interest on its portfolio holding. The Fund will rely on the
Managers' judgment, analysis and experience in evaluating the creditworthiness
of an issuer. In this evaluation, the Managers 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.

Rather than relying principally on the ratings assigned by an NRSRO, however,
the Managers will perform their own internal investment analysis of debt
securities being considered for the Fund's portfolio. Such analysis may include,
among other things, consideration of relative values, based on such factors as:
anticipated cash flow; interest coverage; asset coverage; earning prospects; the
experience and managerial strength of the issuer; responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; and the issuer's changing financial condition and public
recognition thereof. Investments will be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in the Fund's portfolio is changed by the ratings
service, such change will be considered by the Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security.

The Fund may purchase debt obligations of issuers not currently paying interest
as well as issuers who are in default. The Fund may also retain an issue which
has defaulted because such issue may present an opportunity for subsequent price
recovery. In general, securities which default lose much of their value in the
time period prior to the actual default so that the Fund's net asset value would
be impacted prior to the default.

FOREIGN SECURITIES

General. Investments in the securities of companies organized outside the U.S.
or of companies whose securities are principally traded outside the U.S.
("foreign issuers") or investments in securities denominated or quoted in
foreign currency ("non-dollar securities") may offer potential benefits not
available from investments solely in securities of U.S. issuers or dollar
denominated securities. Such benefits may include the opportunity to invest in
foreign issuers that appear, in the opinion of the Managers, to offer better
opportunity 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.

Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing 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 of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations or cur-

<PAGE>

rency convertibility or exchange rates could result in investment losses for the
Fund. In addition, there may be less publicly available information about a
foreign company than about a U.S. domiciled company. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to U.S. companies. There is generally
less government regulation of securities exchanges, brokers and listed companies
abroad than in the U.S. Confiscatory taxation or diplomatic developments could
also affect investment in those countries.

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 to be 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.

Investments in Developing Markets. The Fund has the right to 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.

Political and economic structures of many of the developing countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of these countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks of foreign investment
generally including the risks of nationalization or expropriation of assets, may
be heightened. In addition, unanticipated political or social developments may
affect the values of the Fund's investments in those countries and the
availability to the Fund of additional investments in those countries.

The small size and inexperience of the securities markets in certain of these
countries and the limited volume of trading in securities in those countries may
also make the Fund's investments in such countries illiquid and more volatile
than investments in Japan or most Western European countries, and the Fund may
be required to establish special custody or other arrangements before making
certain investments in those countries. There may be little financial or
accounting infor-

<PAGE>

mation available with respect to issuers located in certain of such countries,
and it may be difficult as a result to assess the value or prospects of an
investment in such issuers. The laws of some foreign countries may limit the
ability of the Fund to invest in securities of certain issuers located in those
countries.

Risks of 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 the mortgage securities (i.e., the
Fund) receives monthly scheduled 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 securities. 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 such prepayments resulting from mortgage foreclosures,
may result in some loss of the holders' 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.

Risks in Investing in Options and Futures Contracts and Related Options. 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 any 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 a 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 Managers' ability to correctly
predict movements in the securities or foreign currency markets and no assurance
can be given that their judgment will be correct. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.

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

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 are direct or indirect wholly owned subsidiaries of
Franklin

<PAGE>

Resources, Inc. ("Resources"), a publicly owned holding company. Through its
subsidiaries, Resources manages over $112 billion in assets worldwide for over
3.4 million mutual fund shareholders, in addition to foundations and endowments,
employee benefit plans and individuals. The principal shareholders of Resources
are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann, who own
approximately 20%, 16% and 10%, respectively, of Resources' outstanding shares.

The Fund is responsible for its own operating expenses including, but not
limited to, Advisers' fee; taxes, if any; custodian, legal and auditing fees;
fees and expenses of trustees who are not members of, affiliated with, or
interested persons of the Managers; salaries of any personnel not affiliated
with the Managers; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of the Fund's net assets;
printing and other expenses which are not expressly assumed by Advisers.

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 average daily net
assets up to and including $100 million; 0.50 of 1% of the value of average
daily net assets over $100 million up to and including $250 million; and 0.45 of
1% of the value of average daily net assets over $250 million.

Advisers is obligated to pay TICI a 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 average daily net assets over $100 million up to and
including $250 million; and 0.225 of 1% of the value of 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.

During the start-up period of the Fund, Advisers may elect not to impose or to
limit management fees and may, in addition, assume responsibility for making
payments to offset certain operating expenses otherwise payable by the Fund. See
"Financial Highlights" for information on expenses of the Fund for the period
May 24, 1994 to October 31, 1994. 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.
Currently, the most restrictive of such provisions limits a fund's allowable
expenses, as a percentage of its average net assets for each fiscal year, to
2.5% of the first $30 million in assets, 2% of the next $70 million, and 1.5% of
assets in excess of $100 million.

The Managers, subject to the overall policies, control, direction and review of
the Board of Trustees (and to the instructions and supervision of Advisers in
the case of TICI), are responsible for recommending and providing advice with
respect to each Fund's investments, and for determining which securities will be
purchased, retained or sold as well as for the execution of portfolio
transactions. See "Investment Objectives and Policies of the Fund." The Managers
also provide certain administrative services and facilities which are necessary
to conduct the Fund's business.

<PAGE>

Among the responsibilities of the Managers under the management and subadvisory
agreements is the selection of brokers and dealers through whom transactions in
the Fund's portfolio securities will be effected. The Managers 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, the Managers will consider the furnishing
of quotations and of other market services, research, statistical and other data
for the Managers and 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 plan (the "Plan"), pursuant to Rule 12b-1 under the 1940
Act whereby it 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 of 1% 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 of 1% 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, Distributors, or
other parties on behalf of the Fund 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. Further information about the Plan is included in 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.

<PAGE>

more than one distribution derived from net short-term and net long-term capital
gain in any year or may adjust the timing of these distributions for operational
or other reasons.

DISTRIBUTION DATE

The Fund's dividend policy is established by the Trust's Board of Trustees,
without prior notice to or approval by shareholders. It is anticipated that the
Fund will start paying income dividends on the 3rd quarter of 1994, to be
declared 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 will be dependent upon the amount of net
income received by the Fund from its portfolio holdings, will not be guaranteed
and will be subject to the discretion of the Fund's Board of Trustees. Fund
shares will be 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, any distribution of income or
capital gain will result in a decrease in the value of the Fund's shares equal
to the amount of the distribution. While a dividend or capital gain distribution
received shortly after purchasing shares represents, in effect, a return of a
portion of the shareholder's investment, it may be taxable as dividend income or
capital gain.

DIVIDEND REINVESTMENT

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

DISTRIBUTIONS IN CASH

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

<PAGE>

Shareholders may change their dividend option by telephone, with the exception
of certain restricted accounts. Please refer to "Telephone Transactions" for
further information.

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

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

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

For corporate shareholders, 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.

Shareholders who are not U.S. persons for purposes of federal income taxation
should consult

<PAGE>

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

PURCHASE PRICE OF FUND SHARES

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
------------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $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 NONE
</TABLE>

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

**With respect to purchases of $1,000,000 or more made through selected
securities dealers or agents, Distributors or its affiliates may pay such
securities dealers or agents from their own resources a one-time fee of up to
0.25% of the amount invested.

<PAGE>

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 many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Sales charge reductions
based upon purchases in more than one of the funds in the Franklin Group or
Templeton Group (the "Franklin/Templeton Group") may be effective only after
notification to Distributors that the investment qualifies for a discount.

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

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

<PAGE>

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

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

<PAGE>

ference in offering price will be applied to the purchase of additional shares
at the offering price applicable to a single purchase or the dollar amount of
the total purchases. If the total purchases, less redemptions, are less than the
amount specified under the Letter, the investor will remit to Distributors an
amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge which would have applied to the aggregate
purchases if the total of such purchases had been made at a single time. Upon
such remittance the reserved shares held for the investor's account will be
deposited to an account in the name of the investor or delivered to the investor
or to the investor's order. If within 20 days after written request such
difference in sales charge is not paid, the redemption of an appropriate number
of reserved shares to realize such difference will be made. In the event of a
total redemption of the account prior to fulfillment of the Letter of Intent,
the additional sales charge due will be deducted from the proceeds of the
redemption, and the balance will be forwarded to the investor. By completing the
Letter of Intent section of the Shareholder Application, an investor grants to
Distributors a security interest in the reserved shares and irrevocably appoints
Distributors as attorney-in-fact with full power of substitution to surrender
for redemption any or all shares for the purpose of paying any additional sales
charge due. Purchases under the Letter of Intent will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor or the investor's
securities dealer must inform Investor Services or Distributors that this Letter
is in effect each time a purchase is made.

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

GROUP PURCHASES

An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by 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, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.

<PAGE>

fering price per share determined on the day that both the check and payroll
deduction data are received in required form by the Fund.

PURCHASES AT NET ASSET VALUE

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

Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted by mail accompanied by a check, or by
telephone or other means of electronic data transfer directly from the bank or
trust company, with payment by federal funds received by the close of business
on the next business day following such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.

<PAGE>

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

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

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

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

<PAGE>

vested. Contact Franklin's Institutional Sales Department for additional
information.

GENERAL

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

FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and IRS requirements. Please note that separate applications other than
the one contained in this prospectus must be used to establish an FTTC
retirement account. To obtain a retirement plan brochure or application, call
toll free 1-800/DIAL BEN (1-800/342-5236).

The Franklin IRA is an individual retirement account in which the contributions,
annually limited to the lesser of $2,000 or 100% of an individual's earned
compensation, accumulate on a tax-deferred basis until withdrawn. Under the
current tax law, individuals who (or whose spouses) are covered by a company
retirement plan (termed "active par- ticipants") may be restricted in the amount
they may claim as an IRA deduction on their returns. The IRA deduction is
gradually reduced to the extent that a taxpayer's adjusted gross income exceeds
certain specified limits.

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

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

<PAGE>

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

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

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

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

SHARE CERTIFICATES

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

<PAGE>

the number of shares in "plan balance" for the account of the shareholder.

Shareholders who have questions about a confirmation statement or who believe
that any of the information on the statement is inaccurate should contact the
Shareholders Services Department at 1-800/632-2301.

AUTOMATIC INVESTMENT PLAN

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

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments 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 fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance 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.

<PAGE>

The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified 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's Institutional Services Department at 1-800/321-8563.

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

EXCHANGES BY MAIL

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

<PAGE>

EXCHANGES THROUGH SECURITIES DEALERS

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

GENERAL INFORMATION REGARDING EXCHANGES

Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least 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 ACCOUNTS

Franklin Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain

<PAGE>

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) make an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) make more than two exchanges out of the Fund per
calendar quarter, or (iii) exchange shares equal in value to at least $5 million
dollars, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.

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

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

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

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

REDEMPTIONS BY MAIL

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

<PAGE>

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

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

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

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

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

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

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

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.

<PAGE>

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 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 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 Franklin's Institutional Services Department by telephoning
1-800/321-8563.

SELLING SHARES THROUGH SECURITIES DEALERS

<PAGE>

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.

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 ACCOUNTS

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

OTHER

For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department; 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: (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, and (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders have the option of redeeming by telephone if they complete and file
an Agreement as described under "How to Sell Shares of the Fund - Redemptions by
Telephone."

VERIFICATION PROCEDURES

<PAGE>

Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions received
by telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.

RESTRICTED ACCOUNTS

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

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

GENERAL

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

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

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

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

The net asset value per share of the Fund is determined as of 1:00 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 sales charge of the Fund).

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

<PAGE>

most recent bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Portfolio
securities underlying actively traded call options are valued at their market
price as determined above. The current market value of any option held by the
Fund is its last sales price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices, if such valuation is believed to fairly
reflect the contract's market value. Other securities for which market
quotations are readily available are valued at the current market price, which
may be obtained from a pricing service, based on a variety of factors, including
recent trades, institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments related to specific
issues. Securities and other assets for which market prices are not readily
available are valued at fair value as determined following procedures approved
by the Board of Trustees. All money market instruments with a maturity of more
than 60 days are valued at current market, as discussed above. All money market
instruments with a maturity of 60 days or less are valued at their amortized
cost, which the Board of Trustees has determined in good faith constitutes fair
value for purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the trustees determine that it does not
constitute fair value for such purposes. With the approval of trustees, the Fund
may utilize a pricing service, bank or securities dealer to perform any of the
above described functions.

Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner, and values are translated
into U.S. dollars at the bid price of their respective currency denomination
against U.S. dollars last quoted by a major bank or, if no such quotation is
available, at the rate of exchange determined in accordance with policies
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, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
194 followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS system is also available for exchange transactions. See "Exchange
Privilege." 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 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>

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

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

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

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

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

<PAGE>

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.

Additional information on Fund performance will be included in the Fund's Annual
Report to Shareholders.

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

REPORTS

The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Trust and Semi-Annual Reports containing unaudited
financial statements will be automatically sent to shareholders. Additional
copies may be obtained, without charge, upon request to the Trust at the
telephone number or address set forth on the cover page of this prospectus.

ORGANIZATIONS

The Trust, a Delaware business trust, was organized on January 25, 1991. The
Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share, in various series. All shares have
one vote, and, when issued, are fully paid, non-assessable, and redeemable.
Currently, the Trust issues shares in seven series. The Board of Trustees may
from time to time issue other series, the assets and liabilities of which will
likewise be separate and distinct from any other series.

VOTING RIGHTS

Shares of the Fund have equal rights as to voting and vote separately (from
other Funds in the Trust) as to issues affecting the Fund, or the Trust, unless
otherwise permitted by the 1940 Act. Voting rights are not cumulative, so that
the holders of more than 50% of the shares voting in any election of trustees
can, if they choose to do so, elect all of the trustees. The Trust does not
intend to hold annual shareholders' meetings. The Trust may, however, hold a
special shareholders' meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by the trustees, in their discretion, or by
shareholders holding at least ten percent of the shares of the Trust entitled to
vote at the meeting. 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.

<PAGE>

CONVERSION TO MASTER/FEEDER FUND STRUCTURE

Currently, in seeking to accomplish its objective of maximizing total return,
the Fund invests directly in a portfolio of the securities described in
"Investment Objective and Policies." Certain funds administered by the Managers
participate as feeder funds in master/feeder fund structures. Under a
master/feeder structure one or more feeder funds, such as the Fund, invests its
assets in a master fund, which, in turn, invests its assets directly in the
securities. The Fund hereby 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 objective 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.

MISCELLANEOUS INFORMATION

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

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

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."

<PAGE>

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 dealer 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, or which are anticipated to be made available in the near future,
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
- --------------------------------------------------------------------------------

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.

<PAGE>

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

The following persons will be primarily responsible for the day-to-day
management of the Fund's portfolios: Mr. Molumphy and Ms. Perin.

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.

Serena Perin
Portfolio Manager
Templeton Investment Counsel, Inc.

Ms. Perin holds a Bachelor of Arts degree in business economics from Brown
University. She served as a research assistant to a member of Parliament in
London, England. Ms. Perin is a member of several securities industry committees
and associations. She joined Franklin in 1991 and TICI 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 by an 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.

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

Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there

<PAGE>

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.

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.

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.

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

<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF

FRANKLIN STRATEGIC INCOME FUND
DATED DECEMBER 30, 1994

a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":

Additional Information Regarding Purchases

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

REINVESTMENT DATE

c) FINANCIAL STATEMENTS

The Franklin Strategic Income Fund (the "Fund") hereby incorporates by
reference the Fund's unaudited Financial Statements for the six-month period
ended October 31, 1994 included in the Semi-Annual Report to shareholders
("Report") of Franklin Strategic Series (the "Trust"), dated October 31,
1994, into this Statement of Additional Information ("SAI") following the
discussion "Ownership and Authority Disputes" on page 26. this Report is
being furnished with the SAI to all prospective investors of the Fund.
Shareholders of the Fund may request an additional copy without charge from
the Trust at 777 Mariners Island Blvd. P.O. Box 777, San Mateo, CA
94403-7777, 1-800/DIAL BEN.

<PAGE>
FRANKLIN
STRATEGIC
INCOME FUND [FRANKLIN LOGO]

STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
MAY 24, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
CONTENTS PAGE

About the Trust (See also the Prospectus "Information 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 ..................................................... 12

Investment Advisory and Other Services (See also the Prospectus "Management
of the Fund") ............................................................ 15

The Fund's Policies Regarding Brokers Used on Portfolio Transactions ...... 16

Additional Information Regarding Fund Shares (See also the Prospectus "How
to Buy Shares of the Fund," "How to Sell Shares of the Fund," "Valuation
of Fund Shares") .......................................................... 17

Additional Information Regarding Taxation (See also the Prospectus
"Taxation of the Fund and Its Shareholders") .............................. 19

The Fund's Underwriter .................................................... 21

General Information ....................................................... 23

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:
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 May 24, 1994, as may be amended from time to
time, which provides the basic information a prospective investor should know
before investing in the Fund, may be obtained without charge from the Fund at
the address listed above or from the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors") at the address listed
above.

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

<PAGE>

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 newly
created, 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 lend its portfolio securities up to 331/3% of its net assets to
unaffiliated brokers, dealers and financial institutions as discussed in the
Prospectus. The lending of securities is a common practice in the securities
industry.

Any borrower of the Fund's securities must maintain cash collateral equal to at
least 102% of the market value of the securities loaned for the benefit of the
Fund and maintain this each business day. While such securities are on loan, the
borrower will pay the Fund any income or dividends accruing thereon and the Fund
may invest the cash collateral in portfolio securities thereby earning
additional income. Any gain or loss in the market price of the borrowed
securities during the term of the loan inures to the Fund and its shareholders.
Any voting rights the securities may have may pass to the borrower during the
term of the loan. Loans are typically subject to termination by the Fund in the
normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated.

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

<PAGE>

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. By investing in ADRs rather than directly in the stock of
foreign issuers, however, the Fund 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

<PAGE>
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

<PAGE>
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

<PAGE>
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), 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 underl-ying 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.

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.

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-

<PAGE>

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.

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

<PAGE>
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

<PAGE>

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.

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.

<PAGE>

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.

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 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

<PAGE>
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 restriction 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 objective and has
authorized such securities to be considered to be liquid to the extent the
Managers determine that there is a liquid institutional or other market for such
securities for example, 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 any determination by the Managers
to treat a restricted security as liquid on a monthly basis, 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.

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 Fund's shares. The Fund does 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 sub-

<PAGE>
stantially 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 order to change any of these restrictions, the lesser of (i) 67% or more of
voting securities present at a meeting of shareholders if the holders of more
than 50% of voting securities are represented at that meeting or (ii) more than
50% of outstanding voting securities must vote to make the change.

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 trad-ing accounts in securities, except that an order
to purchase or sell may be combined with orders from other persons to obtain
lower brokerage commissions.

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 (*).

Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott Corporation (an
1045 Sansome St. investment company); Director, Vacu-Dry Co. (a food
San Francisco, CA 94111 processing company) and Mother Lode Gold Mines
Consolidated; and director, trustee or managing gen-
eral partner, as the case may be, of most of the in-
vestment companies in the Franklin Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
Harris J. Ashton Trustee President, Chief Executive Officer and Chairman of
General Host Corporation the Board, General Host Corporation (nursery and
Metro Center, 1 Station Place craft centers); Director, RBC Holdings, Inc. (a bank
Stamford, CT 06904-2045 holding company), Bar-S Foods and Sunbelt Nurs-
ery Group, Inc.; director of certain of the investment
companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as
the case may be, of most of the investment compa-
nies in the Franklin Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
* Harmon E. Burns Trustee and Executive Vice President, Secretary and Director,
777 Mariners Island Blvd. Vice President Franklin Resources, Inc.; Executive Vice President
San Mateo, CA 94404 and Director, Franklin/Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.;
director of certain of the investment companies in
the Templeton Group of Funds; officer and/or direc-
tor, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director
or trustee of all the investment companies in the
Franklin Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin, Kipp &
Park Avenue at Morris County Szuch; Director of General Host Corporation; direc-
P.O. Box 1945 tor of certain of the investment companies in the
Morristown, NJ 07962-1945 Templeton Group of Funds; and director, trustee or
managing general partner, as the case may be, of
most of the investment companies in the Franklin
Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant Secretary/Treasurer and
111 New Montgomery St., #402 Director, Berkeley Science Corporation (a venture
San Francisco, CA 94105 capital company); and director , trustee or managing
general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
* Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc.
777 Mariners Island Blvd. Board and Trustee and Franklin/Templeton Distributors, Inc.; Chairman
San Mateo, CA 94404 of the Board and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.
and General Host Corporation; director of certain of
the investment companies in the Templeton Group
of Funds; and officer and/or director, trustee or man-
aging general partner, as the case may be, of most
other subsidiaries of Franklin Resources, Inc. and of
most of the investment companies in the Franklin
Group of Funds.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* Rupert H. Johnson, Jr. President Executive Vice President and Director, Franklin
777 Mariners Island Blvd. and Trustee Resources, Inc. and Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.;
director of certain of the investment companies in
the Templeton Group of Funds; and officer and/or
director, trustee or managing general partner, as
the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of most of the invest-
ment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and Miller &
20833 Stevens Creek Blvd. LaHaye, which are General Partners of Peregrine
Suite 102 Ventures and Peregrine Ventures II (venture capital
Cupertino, CA 95014 firms); Chairman of the Board and Director, Quar-
terdeck Office Systems, Inc.; Director, FischerImag-
ing Corporation; and director or trustee, as the case
may be, of most of the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin Trustee Chairman, White River Corporation (financial serv-
8212 Burning Tree Road ices); Director, Fundamerican Enterprises Holdings,
Bethesda, MD 20817 Inc., Martin Marietta Corporation, and MCI Communi-
cations Corporation; director of certain of the invest-
ment companies in the Templeton Group of Funds;
and director, trustee or managing general partner,
as the case may be, of most of the investment com-
panies in the Franklin Group of Funds; formerly,
Chairman, Hambrecht and Quist Group; Director,
H & Q Healthcare Investors; and President, Na-
tional Association of Securities Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------
Charles E. Johnson Vice President President and Chief Executive Officers of Templeton
777 Mariners Island Blvd. Worldwide, Inc.; Senior Vice President, Franklin
San Mateo CA 94404 Resources, Inc. and Franklin/Templeton Distributors,
Inc.; President, Franklin Institutional Services Cor-
poration; director of certain of the investment com-
panies in the Templeton Group of Funds; 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
some of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales Manager,
777 Mariners Island Blvd. Franklin/Templeton Distributors, Inc.; and officer of
San Mateo, CA 94404 many of the investment companies in the Franklin
Group of Funds.
- -------------------------------------------------------------------------------------------------------------------

<PAGE>

</TABLE>
<TABLE>
<CAPTION>

Positions and Offices
Name and Address with the Trust Principal Occupations During Past Five Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kenneth V. Domingues Vice President, Senior Vice President, Franklin Resources, Inc. and
777 Mariners Island Blvd. Treasurer, Franklin Advisers, Inc.; Vice President, Franklin/
San Mateo, CA 94404 Chief Financial Templeton Distributors, Inc.; officer and/or director, as
Officer and the case may be, of other subsidiaries of Franklin
Accounting Officer Resources, Inc.; and officer and/or managing gen-
eral partner, as the case may be, of all the invest-
ment companies in the Franklin Group of Funds.
- --------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources,
777 Mariners Island Blvd. and Secretary Inc. and Franklin/Templeton Distributors, Inc.; Vice
San Mateo, CA 94404 President, Franklin Advisers , Inc.; and officer of all
the investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------------
</Table

As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(R). The Trust does not now, but
may in the future, pay fees and reimburse trustees for expenses incurred in
connection with attending meetings of the Board, to trustees not affiliated with
the Managers. Certain officers or trustees who are shareholders of Resources may
be deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers. Charles E. Johnson is the son of Charles B. Johnson
and nephew of Rupert H. Johnson, Jr.

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 $112 billion in assets for over 3.4 million shareholders.

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. 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.

The management agreement with Advisers and the subadvisory agreement between
Advisers and TICI are in effect for initial two-year periods ending on May 23,
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 Investors 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 by the Fund on the basis
of a fixed fee per account.

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

Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors.

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 will seek to obtain prompt execution of orders at the most favorable net
price.

The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interests, the 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 securities dealers to execute the Fund's portfolio transactions.

Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes

<PAGE>

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.

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

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.

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.

</TABLE>
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- --------------------------------------------------------------------------------
<S> <C>
Up to U.S. $100,000 ................................................ 3%
U.S. $100,000 to U.S. $1,000,000 ................................... 2%
Over U.S. $1,000,000 ............................................... 1%
</TABLE>

PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS

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

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

PURCHASES AT NET ASSET VALUE

As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that

<PAGE>
there is minimal or no sales effort required with respect to these investors. If
certain investments at net asset value are made through a dealer who has
executed a dealer or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested, paid pro rata on a quarterly
basis on average quarterly balances for a period of one year.

REDEMPTIONS IN KIND

The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. 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
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.

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

REINVESTMENT DATE

SPECIAL SERVICES

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 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.

<PAGE>
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.

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.

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

<PAGE>
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.

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

<PAGE>
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 taxation 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 be also subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any tax paid
by the Fund as a result of its ownership of shares in 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 gross 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."

Legislation introduced in the U.S. House of Representatives would unify, and, in
some cases, modify the anti-deferral rules contained in various provisions of
the Code, including the provisions dealing with PFICs, related to the taxation
of U.S. shareholders of foreign corporations. In the case of passive foreign
company, as defined in the proposed legislation ("PFC"), having "marketable
stock," the proposed legislation would require U.S. shareholders, such as the
Fund, owning less than 25% of a PFC that is not U.S.-controlled to mark to
market PFC stock annually, unless the shareholders elected to include in income
currently their proportionate shares of the PFC's income and gain. Otherwise,
U.S. shareholders would be treated substantially the same as under current law.
Special rules applicable to mutual funds would classify as "marketable stock"
all stock in PFCs held by a fund; however, a fund would not be liable for tax on
income from PFCs that is distributed to its shareholders. It is unclear if or
when the proposed legislation will become law and if enacted what form it will
take. On April 1, 1992, the U.S. Internal Revenue Service ("IRS") released
proposed regulations regarding a mark to market election for regulated
investment companies that would have effects similar to the proposed
legislation. These regulations would be effective for taxable years ending after
promulgation of the regulations as final regulations. The IRS subsequently
issued a notice indicating that final regulations will provide that regulated
investment companies may elect the mark to market election for tax years ending
after March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of a fund is unclear.

THE FUND'S UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to an underwriting agreement in effect until April 30, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.

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 out-

<PAGE>
standing 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.

Distributors allows the entire underwriting commission on the sale of Fund
shares to the securities dealer of record, if any, on an account.

DISTRIBUTION PLAN

The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act 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 preparation and distribution of sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
Distributors.

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.

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 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 effective for an
initial one-year period ending on May 23, 1995 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

<PAGE>
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.

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

PERFORMANCE

Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized perform-ance 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 that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum sales charge is deducted from the initial
$1,000 purchase order, and all income dividends and capital gains are reinvested
at net asset value on the reinvestment dates during the period. 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% maximum sales charge reflected in each quotation is a one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge the longer an
investor retains the investment in the Fund.

These figures will be calculated according to the SEC formula:

P(1 + T)n = ERV

where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

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

<PAGE>
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.

This figure will be obtained using the following SEC formula:

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

where:

a = dividends and interest earned during the period

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

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

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

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.

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. Franklin Resources, Inc. 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 to
each other. Such comparisons may include, but are not limited to, the following
examples:

b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of

<PAGE>
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 - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.

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.

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 L.P.

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 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.

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
costs 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 costs 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.

<PAGE>
The Fund is a member of the Franklin/Templeton Group, one of the largest mutual
fund organizations in the U.S. and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $112 billion in
assets under management for more than 3.4 million shareholder accounts and
offers 101 U.S.-based mutual funds. The Fund may identify itself by its Quotron
or CUSIP number.

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

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

<PAGE>
FRANKLIN
STRATEGIC
SERIES

SEMI-ANNUAL REPORT
OCTOBER 31, 1994

[LOGO]

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 82.6%
AUTOMOBILE 1.3%
3,000 Ford Motor Co. ......................................... $ 88,500
----------
CONSUMER SERVICES 3.6%
2,000 Disney (Walt) Co. ...................................... 78,750
3,000 McClatchy Newspapers, Inc., Series A ................... 69,750
2,000 aUnited Television, Inc. ................................ 103,500
----------
252,000
----------
ELECTRONIC TECHNOLOGY 16.2%
3,500 3Com Corp. ............................................. 140,875
600 aApplied Digital Access, Inc. ........................... 14,850
1,500 aAscend Communications, Inc. ............................ 48,750
2,000 aAspect Telecommunications Corp. ........................ 69,000
3,000 aCisco Systems, Inc. .................................... 90,375
1,500 aComputer Sciences Corp. ................................ 69,750
5,612 ECI Telecommunications, Ltd. ........................... 108,733
3,000 Logicon, Inc. .......................................... 92,250
1,700 aMattson Technology, Inc. ............................... 35,700
900 Northrop Grumman Corp. ................................. 39,487
3,000 aPairgain Technologies, Inc. ............................ 46,500
3,000 Rockwell International Corp. ........................... 104,625
1,000 aSilicon Graphics, Inc. ................................. 30,375
5,000 aSun Microsystems, Inc. ................................. 163,750
18,000 aTrinzic Corp. .......................................... 81,000
----------
1,136,020
----------
ENERGY MINERALS 2.6%
2,000 Chevron Corp. .......................................... 90,000
2,200 Ultramar Corp. ......................................... 56,650
800 aWestern Atlas, Inc. .................................... 36,800
----------
183,450
----------
FINANCE 2.9%
4,000 Mercury General Corp.................................... 120,000
5,000 ValliCorp Holdings, Inc. ............................... 78,750
----------
198,750
----------
HEALTH SERVICES 3.1%

1,800 aAbbey Healthcare Group, Inc. ........................... 40,050
4,000 aGranCare, Inc. ......................................... 62,000
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH SERVICES (CONT.)
1,000 aHomedco Group, Inc. ................................. $ 36,125
1,000 aPacifiCare Health Systems, Class A................... 74,500
-----------
212,675
-----------
HEALTH TECHNOLOGY 4.9%
2,000 aAmgen, Inc. ......................................... 111,500
1,500 aChiron Corp. ........................................ 101,063
1,500 aGenentech, Inc. ..................................... 76,125
6,700 aPenederm, Inc. ...................................... 55,275
-----------
343,963
-----------
OTHER
198 a,bLynx Therapeutics, Inc. ............................. --
-----------
PRODUCER/MANUFACTURING 2.8%
4,000 Lear Seating Corp. .................................. 80,000
4,000 Superior Industries International, Inc. ............. 118,000
-----------
198,000
-----------
REAL ESTATE 3.1%
1,800 Health Care Property Investors, Inc. ................ 52,875
6,000 Kaufman & Broad Home Corp. .......................... 78,000
3,000 LTC Properties, Inc. ................................ 38,625
1,400 Nationwide Health Property, Inc. .................... 49,175
-----------
218,675
-----------
RETAIL TRADE 8.4%
12,000 aBroadway Stores, Inc. ............................... 135,000
2,500 Dreyer's Grand Ice Cream, Inc. ...................... 63,750
3,000 aFresh Choice, Inc. .................................. 55,500
10,000 aGood Guys, Inc. ..................................... 116,250
4,343 aPrice/Costco, Inc. .................................. 68,402
4,200 aStrouds, Inc. ....................................... 53,025
5,000 aVons Companies, Inc. ................................ 97,500
-----------
589,427
-----------
SEMICONDUCTORS/TECHNOLOGY 10.8%
4,000 aAltera Corp. ........................................ 157,750
4,500 aExar Corp........................................... 94,500
1,500 Intel Corp. ......................................... 93,188
800 Linear Technology Corp. ............................. 38,400
5,000 aMegatest Corp. ...................................... 75,000
5,000 aMicro Linear Corp. .................................. 42,500
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
----------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (CONT.)
SEMICONDUCTORS/TECHNOLOGY (CONT.)
4,000 aSolectron Corp. ..................................... $ 111,500
2,500 aXilinx, Inc. ........................................ 145,313
----------
758,151
----------
TECHNOLOGY SERVICES 11.2%
5,600 Autodesk, Inc. ...................................... 193,200
800 aBroderbund Software, Inc. ........................... 51,200
3,500 aFTP Software, Inc. .................................. 88,375
4,000 aInformix Corp. ...................................... 110,000
20,000 aStructural Dynamics Research Corp. .................. 97,500
1,500 aSybase, Inc. ........................................ 78,562
400 aSynopsys, Inc. ...................................... 18,450
8,000 Wyle Laboratories ................................... 148,000
----------
785,287
----------
TRANSPORTATION 8.8%
4,700 Air Express International Corp. ..................... 131,600
4,000 aAllied Holdings, Inc. ............................... 53,000
400 Covenant Transportation, Inc., Class A .............. 7,600
5,600 Expeditors International of Washington, Inc. ........ 116,200
4,000 aFritz Companies, Inc. ............................... 156,000
8,000 aMesa Airlines, Inc. ................................. 65,000
5,000 aSouthern Pacific Rail Corp. ......................... 86,875
----------
616,275
----------
UTILITIES 2.9%
2,000 aAirTouch Communications, Inc. ....................... 59,750
5,000 San Diego Gas & Electric Co. ........................ 100,000
2,600 Southern California Water ........................... 40,625
----------
200,375
----------
TOTAL COMMON STOCKS (COST $5,032,243) ......... 5,781,548
----------
PREFERRED STOCKS
OTHER
288 a,bLynx Therapeutics, Inc., pfd., Series A (COST $288).. 288
----------
TOTAL COMMON AND PREFERRED STOCKS
(COST $5,032,531) ........................... 5,781,836
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA GROWTH FUND (NOTE 1)
----------------------------------------------------------------------------
<S> <C> <C>
d,eRECEIVABLES FROM REPURCHASE AGREEMENTS 18.9%
$1,355,323 Joint Repurchase Agreement, 4.824%, 11/01/94
(Maturity Value $1,324,365) (COST $1,324,188)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%,
11/15/94 - 07/15/99.............................. $1,324,188
----------
TOTAL INVESTMENTS
(COST $6,356,719) 101.5% ............... 7,106,024
LIABILITIES IN EXCESS OF OTHER ASSETS,
NET (1.5)% ............................. (104,587)
----------
NET ASSETS 100.0% ........................ $7,001,437
==========
At October 31, 1994, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $6,356,719 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ................................... $ 913,726
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................. (164,421)
----------
Net unrealized appreciation ....................... $ 749,305
==========
</TABLE>

aNon-income producing.
bSee Note 7 regarding restricted securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS 1.9%
FINANCIAL SERVICES
1,000 First National Bank, 11.50% pfd. (COST $100,000) .... $ 102,500
----------
CONVERTIBLE PREFERRED STOCKS 2.9%
ENERGY .9%
2,025 Snyder Oil Corp., $1.50 cvt. exch. pfd. ............. 46,828
----------
INFORMATION/TECHNOLOGY 1.0%
800 aNational Semiconductor Corp., $3.25 cvt. pfd. ....... 55,200
----------
METALS 1.0%
1,000 Amax Gold, Inc., $3.75 cvt. pfd., Series B .......... 53,000
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(COST $159,800).......................... 155,028
----------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
- -------
<S> <C> <C>
CORPORATE BONDS 24.0%
CABLE TELEVISION 4.8%
$ 150,000 gBell Cablemedia, Plc., senior disc. notes, zero coupon
to 07/15/99, (original accretion rate 11.95%), 11.95%
thereafter, 07/15/04 .............................. 84,750
150,000 gDiamond Cable Communication Co., senior disc. notes,
zero coupon to 09/30/99, (original accretion rate
13.25%), 13.25% thereafter, 09/30/04 .............. 79,313
100,000 Rogers Cablesystems, Inc., guaranteed notes, 9.625%,
08/01/02 .......................................... 96,500
----------
260,563
----------
CONSUMER GOODS 3.4%
100,000 Playtex Family Products Corp., senior sub. deb.,
9.00%, 12/15/03 ................................... 86,250
100,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03...... 95,000
----------
181,250
----------
CONTAINERS & PACKAGING 3.7%
100,000 Owens Illinois, Inc., senior sub. deb., 10.50%,
06/15/02 .......................................... 101,000
100,000 Stone Container, senior notes, 11.50%, 10/01/04 ..... 101,000
----------
202,000
----------
ENERGY 1.7%
100,000 Gulf Canada Resources, Ltd., senior sub. deb., 9.25%,
01/15/04 .......................................... 92,750
----------
FOOD/BEVERAGES 1.9%
100,000 c,fPF Acquisition (Curtis-Burns Foods, Inc.), senior
sub. deb., 12.25%, 02/01/05 ....................... 101,500
----------
GAMING & HOTELS 3.6%
100,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 .... 99,000
100,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09.. 95,000
----------
194,000
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------
<S> <C> <C>
a,bCORPORATE BONDS (CONT.)
HEALTH CARE 1.9%
$ 100,000 Ornda Healthcorp., Inc., senior sub. notes, 11.375%,
08/15/04 .......................................... $ 103,250
----------
METALS & MINING 1.3%
100,000 gACME Metals, Inc., guaranteed senior secured disc.
notes, zero coupon to 08/01/97, (original accretion
rate 13.50%), 13.50% thereafter, 08/01/03.......... 69,000
----------
TEXTILE 1.7%
100,000 WestPoint Stevens, Inc., senior notes, 8.75%,
12/15/01 ........................................... 92,250
----------
TOTAL CORPORATE BONDS (COST $1,257,892).... 1,296,563
----------
CONVERTIBLE BONDS 4.7%
HEALTH CARE .8%
50,000 Pacific Physician Services, cvt. sub. deb., 5.50%,
12/15/03 .......................................... 41,500
----------
HOME BUILDING .6%
50,000 U.S. Home Corp., cvt. sub. notes, 4.875%, 11/01/05... 33,124
----------
REAL ESTATE INVESTMENT TRUST .8%
50,000 Liberty Property Trust, cvt. sub. deb., 8.00%,
07/01/01 .......................................... 47,688
----------
TELECOMMUNICATION .5%
25,000 cAspect Telecommunication, cvt. sub. deb., 5.00%,
10/15/03 .......................................... 25,594
----------
TRANSPORTATION 1.1%
60,000 Air Express International, cvt. sub. deb., 6.00%,
01/15/03 .......................................... 59,250
----------
UTILITIES .9%
50,000 AES Corp., cvt. deb., 6.50%, 03/15/02 ............... 49,563
----------
TOTAL CONVERTIBLE BONDS (COST $254,420).... 256,719
----------
FOREIGN CORPORATE BONDS 11.5%
100,000 cEssar Guajarat, Ltd., floating rate deb., 8.025%,
07/15/99 .......................................... 100,125
400,000 hNew Zealand Electricity Corp., deb. notes, 10.00%,
06/15/96 .......................................... 249,671
225,000 f,hQueensland Treasury Corp., 8.875%, 11/08/96.......... 166,584
100,000 Tjiwi Kimia International, 13.25%, 08/01/01 ......... 103,500
----------
TOTAL FOREIGN CORPORATE BONDS
(COST $616,353).......................... 619,880
----------
hFOREIGN GOVERNMENT AGENCIES 13.7%
250,000 Canadian Government, 10.25%, 12/01/98................ 196,575
200,000 Canadian Government, 10.50%, 10/01/04................ 161,103
250,000 Republic of Argentina, floating rate notes, 5.125%,
09/01/02 .......................................... 173,250
130,000 United Kingdom Treasury, 7.00%, 08/06/97............. 207,532
----------
TOTAL FOREIGN GOVERNMENT AGENCIES
(COST $733,567).......................... 738,460
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
a,bU.S. GOVERNMENT 4.6%
$ 250,000 U.S. Treasury Notes, 6.75%, 05/31/97
(COST $248,359).................................... $ 248,359
----------
U.S. GOVERNMENT AGENCIES/MORTGAGES 5.1%
50,081 FHLMC, 7.50%, 04/01/24 .............................. 47,061
49,888 FNMA, 7.50%, 10/01/07 ............................... 48,532
50,051 GNMA, SF, 7.50%, 09/15/23 ........................... 46,501
100,000 GNMA, SF, 6.50%, 03/15/24 ........................... 86,375
50,399 GNMA, SF, 8.00%, 06/15/24............................ 48,351
----------
TOTAL U.S. GOVERNMENT AGENCIES/MORTGAGES
(COST $336,806) ......................... 276,820
----------
TOTAL LONG TERM INVESTMENTS
(COST $3,707,197) ....................... 3,694,329
----------
SHORT TERM INVESTMENTS
hFOREIGN CORPORATE AGENCIES 3.6%
5,000,000 Thailand Military Bank Notes, 6.875%, 06/01/95
(COST $197,570) ................................... 197,709
----------
hFOREIGN GOVERNMENT BONDS 3.0%
gMexican Federal Treasury Certificates (CETES),
350,000 11.475%, 03/16/95 ................................... 96,544
240,000 15.24%, 04/27/95 .................................... 65,157

TOTAL FOREIGN GOVERNMENT BONDS
(COST $162,899) ......................... 161,701
----------
TOTAL INVESTMENTS BEFORE REPURCHASE
AGREEMENTS (COST $4,067,666) ............ 4,053,739
----------
dRECEIVABLES FROM REPURCHASE AGREEMENTS 25.0%
715,000 Bank of America, 4.76%, 11/01/94 (Maturity Value
$700,093)
Collateral: U.S. Treasury Notes, 3.875%, 02/28/95.. 700,000
667,800 eJoint Repurchase Agreement, 4.824%, 11/01/94
(Maturity Value $652,518)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%,
11/15/94 - 07/31/99 ............................. 652,431
----------
TOTAL RECEIVABLES FROM REPURCHASE
AGREEMENTS (COST $1,352,431) ............ 1,352,431
----------
TOTAL INVESTMENTS (COST $5,420,097)
100.0% ................................ 5,406,170

OTHER ASSETS AND LIABILITIES, NET........ 1,640
----------
NET ASSETS 100.0% ..................... $5,407,810
==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
FRANKLIN STRATEGIC INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------
<S> <C>
At October 31, 1994, the net unrealized depreciation
based on the cost of investments for income tax
purposes of $5,420,097 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ..................................... $ 37,763
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................... (51,690)
---------
Net unrealized depreciation ......................... $ (13,927)
=========
</TABLE>

PORTFOLIO ABBREVIATIONS:
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
SF - Single Family

aNon-income producing.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.
fSee Note 1(e) regarding securities purchased on a when-issued basis.
gZero coupon/Step-up bonds. The current effective yield may vary. The original
accretion rate by security will remain constant.
hFace amount stated in foreign currency, value in U.S. dollars.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

US 100,000 AES Corp. .............................. $ 1,975,000
US 57,200 American Electric Power Co., Inc. ...... 1,830,400
US 49,500 Central & South West Corp. ............. 1,113,750
HK 302,400 China Light & Power Co., Ltd. .......... 1,573,145
US 175,000 CINergy Corp. .......................... 4,046,875
US 99,700 Dominion Resources, Inc. ............... 3,701,363
US 21,100 DPL, Inc. .............................. 429,913
US 60,950 Duke Power Co. ......................... 2,415,144
US 55,900 Empresa Nacional de Electricidad, ADR .. 2,564,413
US 129,000 Enron Corp. ............................ 4,176,375
US 110,000 Entergy Corp. .......................... 2,571,250
US 39,000 FPL Group, Inc. ........................ 1,291,875
US 49,600 General Public Utilities Corp. ......... 1,277,200
US 29,700 Hawaiian Electric Industries, Inc. ..... 965,250
HK 1,461,600 Hong Kong & China Gas Co., Ltd. ........ 2,770,940
HK 121,800 aHong Kong & China Gas Co., Ltd.,
warrants.............................. 44,133
HK 1,180,000 Hong Kong Electric Holdings, Ltd. ...... 3,710,644
US 62,000 aHuaneng Power International, Inc., ADR.. 1,147,000
ES 285,000 Iberdrola, SA .......................... 1,879,271
US 60,300 NIPSCO Industries, Inc. ................ 1,680,863
US 109,000 National Fuel Gas Co. .................. 3,242,750
US 40,400 Pacific Gas & Electric Co. ............. 909,000
US 176,700 PacifiCorp ............................. 3,114,338
US 141,000 Panhandle Eastern Corp. ................ 3,313,500
US 117,500 Pinnacle West Capital Corp. ............ 2,188,438
US 50,000 Public Service Co. of Colorado ......... 1,362,500
US 45,800 SCEcorp ................................ 635,475
US 208,000 Southern Co. ........................... 4,108,000
US 41,200 Southern Indiana Gas & Electric Co. .... 1,102,100
US 183,900 TECO Energy, Inc. ...................... 3,563,063
US 115,700 Texas Utilities Co. .................... 3,774,713
US 180,000 cTransportadora Gas Sur, ADR ............ 2,114,258
DD 12,700 Veba, Ag ............................... 4,255,285
US 131,518 Williams Cos., Inc. .................... 3,814,022
-----------
78,662,246
-----------

TELECOMMUNICATIONS 5.4%
US 20,150 aAirTouch Communications, Inc. .......... 601,981
US 59,300 AT&T Corp. ............................. 3,261,500
CA 88,900 a,cCall-Net Enterprises, Inc., Class B .... 509,390
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
TELECOMMUNICATIONS (CONT.)
CA 235,700 aCall-Net Enterprises, Inc., Class B .... $ 1,350,542
US 19,700 aComcast UK Cable Partners, Ltd. ........ 394,000
US 25,900 aInternational Cabletel, Inc. ........... 802,900
------------
6,920,313
------------

TELEPHONES 19.1%
US 47,300 British Telecommunications, Plc., ADR .. 3,044,938
US 16,700 Compania de Telefonos de Chile, ADR .... 1,571,888
US 55,300 GTE Corp. .............................. 1,700,475
US 20,150 Pacific Telesis Group, Inc. ............ 637,243
IT 550,000 STET-Societa Finanziaria Telefonica .... 1,662,441
US 64,750 cTelecom de Argentina, GDS .............. 3,937,518
US 70,800 Telecommunications Corp. of New Zealand,
Ltd., ADR ............................ 3,938,250
US 85,000 aTele Danmark, A/S, ADS ................. 2,443,750
US 10,200 Telefonica de Argentina, ADR ........... 633,674
US 55,950 Telefonica de Espana, ADR .............. 2,265,974
US 45,700 Telefonos de Mexico, ADR ............... 2,519,212
------------
24,355,363
------------
TOTAL COMMON STOCKS & WARRANTS
(COST $112,791,976)........... 109,937,922
------------

PREFERRED STOCKS .5%
TELEPHONES
US 18,000 cPhilippine Long Distance Co., 5.75% cvt.
pfd., Series II (COST $553,000) ...... 596,250
------------
TOTAL COMMON STOCKS & WARRANTS
AND PREFERRED STOCKS
(COST $113,344,976)........... 110,534,172
------------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
-----------
<S> <C> <C>
d,eRECEIVABLES FROM REPURCHASE AGREEMENTS 12.0%
US $15,608,760 Joint Repurchase Agreement, 4.824%,
11/01/94 (Maturity Value $15,256,091)
(COST $15,254,047)
Collateral: U.S. Treasury Notes, 4.00% -
11.625%, 11/15/94 - 07/31/99 ....... 15,254,047
------------
TOTAL INVESTMENTS (COST
$128,599,023) 98.8%........ 125,788,219
OTHER ASSETS AND LIABILITIES,
NET 1.2%................... 1,494,377
------------
NET ASSETS 100.0% ........... $127,282,596
============
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
FRANKLIN GLOBAL UTILITIES FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C>
At October 31, 1994, the net unrealized
depreciation based on the cost of
investments for income tax purposes of
$128,601,826 was as follows:
Aggregate gross unrealized
appreciation for all investments in
which there was an excess of value
over tax cost ...................... $ 6,840,967
Aggregate gross unrealized
depreciation for all investments in
which there was an excess of tax
cost over value .................... (9,654,574)
------------
Net unrealized depreciation .......... $ (2,813,607)
============
</TABLE>

COUNTRY LEGEND:
CA - Canada
DD - Germany
ES - Spain
HK - Hong Kong
IT - Italy
US - United States of America

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 89.7%
AUTO PARTS 2.2%
20,000 Donnelly Corp. ....................................... $ 350,000
17,900 Excel Industries, Inc. ............................... 268,500
8,300 aLear Seating Corp. ................................... 166,000
----------
784,500
----------
BROADCASTING 1.3%
10,000 aAll American Communications, Inc. .................... 65,000
20,300 aComcast UK Cable Partners, Ltd. ...................... 406,000
----------
471,000
----------

CEMENT PRODUCERS .5%
10,000 aLone Star Industries ................................. 193,750
----------

COMPONENT SUPPLIERS 2.6%
22,100 aAtchison Casting Corp. ............................... 370,175
24,000 Roper Industries, Inc. ............................... 576,000
----------
946,175
----------
COMPUTER SOFTWARE 10.0%
13,000 Autodesk, Inc. ....................................... 448,500
23,400 aFTP Software, Inc. ................................... 590,850
18,000 aInformix Corp. ....................................... 495,000
9,500 aIntergrated Systems, Inc. ............................ 140,125
5,000 aOracle Systems Corp. ................................. 230,000
15,000 aPairgain Technologies, Inc. .......................... 232,500
100,000 aStructural Dynamics Research Corp. ................... 487,500
9,200 aSybase, Inc. ......................................... 481,850
107,500 aTrinzic Corp. ........................................ 483,750
----------
3,590,075
----------
CONSUMER SERVICES .3%
3,300 The Loewen Group, Inc. ............................... 81,675
----------
ELECTRONICS/ELECTRICAL EQUIPMENT 7.6%
20,000 aAltera Corp. ......................................... 788,750
25,000 aIntegrated Device Technology, Inc. ................... 709,375
10,000 Logicon, Inc. ........................................ 307,500
30,000 aMegatest Corp. ....................................... 450,000
10,000 aMicrochip Technology, Inc. ........................... 468,750
----------
2,724,375
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES .9%
8,200 Leucadia National Corp. ............................. $ 318,775
-----------
GAMING .6%
17,700 Showboat, Inc. ...................................... 212,400
-----------
HOMEBUILDERS .5%
29,200 aNVR, Inc. ........................................... 167,900
-----------
HOSPITAL MANAGEMENT/SERVICES 8.3%
50,500 aAdvocat, Inc. ....................................... 530,250
10,000 Columbia/HCA Healthcare Corp. ....................... 416,250
24,000 aGranCare, Inc. ...................................... 372,000
8,700 aHomedco Group, Inc. ................................. 314,288
15,000 aHumana, Inc. ........................................ 365,625
27,500 aPyxis Corp. ......................................... 529,375
8,750 United Healthcare Corp. ............................. 461,563
-----------
2,989,351
-----------
INSURANCE 4.1%
20,000 ACE, Ltd. ........................................... 455,000
60,800 aACMAT Corp., Class A ................................ 562,400
15,000 Mercury General Corp. ............................... 450,000
-----------
1,467,400
-----------
IRON/STEEL PRODUCTS 4.3%
25,000 aGeneva Steel Co., Class A ........................... 440,625
16,792 cHylsamex, ADR ....................................... 369,248
42,000 aNational Steel Corp., Class B ....................... 745,500
-----------
1,555,373
-----------
MACHINE - DIVERSIFIED .8%
8,000 aDuracraft Corp. ..................................... 298,000
-----------
NETWORKING 5.7%
25,000 aCisco Systems, Inc. ................................. 753,125
13,900 aNewbridge Networks Corp. ............................ 385,725
15,000 aSilicon Graphics, Inc. .............................. 455,625
11,000 a3Com Corp. .......................................... 442,750
-----------
2,037,225
-----------
OIL & GAS 3.1%
30,000 aBarrett Resources Corp. ............................. 596,250
20,000 Parker & Parsley Petroleum Co. ...................... 500,000
-----------
1,096,250
-----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PHARMACEUTICALS 7.2%
40,000 aKV Pharmaceutical Co., Class B ....................... $ 295,000
50,000 aMatrix Pharmaceutical, Inc. .......................... 718,750
50,100 aNoven Pharmaceuticals, Inc. .......................... 764,025
98,000 aPenederm, Inc. ....................................... 808,500
----------
2,586,275
----------
REAL ESTATE 2.8%
28,500 Equity Inns, Inc. .................................... 299,250
14,700 Mid-America Apartment Communities, Inc. .............. 365,663
13,800 Storage USA, Inc. .................................... 346,725
----------
1,011,638
----------
RESTAURANTS .5%
17,500 aBack Bay Restaurant Group, Inc. ...................... 157,500
----------
RETAIL 3.8%
50,000 aBroadway Stores, Inc. ................................ 562,500
10,000 aErnst Home Center, Inc. .............................. 127,500
10,100 aGood Guys, Inc. ...................................... 117,413
20,800 aStrouds, Inc. ........................................ 262,600
9,000 aUrban Outfitters, Inc. ............................... 272,250
----------
1,342,263
----------
SEMICONDUCTORS EQUIPMENT/SERVICES 7.2%
10,000 aLSI Logic Corp. ...................................... 425,000
8,300 aMattson Technology, Inc. ............................. 174,300
32,500 aMicro Linear Corp. ................................... 276,250
25,000 aNational Semiconductor Corp. ......................... 440,625
10,000 Tower Semiconductor, Ltd. ............................ 140,000
31,000 Wyle Laboratories .................................... 573,500
9,500 aXilinx, Inc. ......................................... 552,188
----------
2,581,863
----------
TELECOMMUNICATIONS 9.5%
3,000 aApplied Digital Access, Inc. ......................... 74,250
7,000 Ascend Communications, Inc. .......................... 227,500
10,000 aAspect Telecommunications Corp. ...................... 345,000
11,100 a,cCall-Net Enterprises, Inc., Class B .................. 63,602
20,000 aCall-Net Enterprises, Inc., Class B .................. 114,598
4,500 Cascade Communications Corp. ......................... 250,875
33,000 aColonial Data Technologies Corp. ..................... 305,250
23,000 aComnet Cellular, Inc. ................................ 649,750
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
29,900 ECI Telecommunications, Ltd. ........................ $ 579,313
1,000 Grupo Iusacell, SA, Series D ........................ 299,250
7,800 aInternational Cabletel .............................. 241,800
5,000 aTellabs, Inc. ...................................... 243,750
-----------
3,394,938
-----------
TEXTILES/APPAREL 1.8%
18,000 aCone Mills Corp. .................................... 213,750
10,000 aTommy Hilfiger Corp. ................................ 441,250
-----------
655,000
-----------
TRANSPORTATION 3.1%
20,000 Air Express International Corp. ..................... 560,000
47,500 aAtlantic Coast Airlines, Inc. ....................... 160,312
9,000 aChicago & North Western Holdings Corp. .............. 183,374
2,100 Covenant Transportation, Inc., Class A .............. 39,900
21,500 aMesa Airlines, Inc. ................................ 174,687
-----------
1,118,273
-----------
TRUCKING & LEASING 1.0%
25,000 aUS Xpress Enterprises, Inc., Class A ................ 368,750
-----------
TOTAL COMMON STOCKS (COST $29,678,490) ...... 32,150,724
-----------
PREFERRED STOCKS 2.1%
ELECTRONICS/ELECTRICAL EQUIPMENT
10,000 aNokia Corp., pfd., ADR (COST $598,725)............... 751,250
-----------
TOTAL COMMON STOCKS AND PREFERRED STOCKS
(COST $30,277,215)......................... 32,901,974
-----------

</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
- ----------
<S> <C> <C>
d,eRECEIVABLES FROM REPURCHASE AGREEMENTS 10.3%

$3,789,833 Joint Repurchase Agreement, 4.824%, 11/01/94
(Maturity Value $3,703,791) (COST $3,703,295)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%,
11/15/94 - 07/31/99.............................. 3,703,295
-----------
TOTAL INVESTMENTS
(COST $33,980,510) 102.1%................. 36,605,269
LIABILITIES IN EXCESS OF OTHER ASSETS,
NET (2.1)%................................ (762,532)
-----------
NET ASSETS 100.0% .......................... $35,842,737
===========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN SMALL CAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (CONT.)
At October 31, 1994, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $33,990,678 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ................................... $ 4,091,801
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................. (1,477,210)
-----------
Net unrealized appreciation ....................... $ 2,614,591
===========
</TABLE>

aNon-income producing.
cSee Note 8 regarding Rule 144A securities.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS 87.9%
BIOTECHNOLOGY 6.1%
US 1,500 aBiogen, Inc. ............................. $ 73,500
GB 10,000 aBritish Bio-Technology Group ............. 94,844
GB 3,750 aBritish Bio-Technology Group, warrants ... 7,849
US 2,000 aChiron Corp. ............................. 134,750
US 4,000 aGenzyme Corp. ............................ 131,000
US 20,000 aUnivax Biologics, Inc. ................... 120,000
----------
561,943
----------
HEALTH MAINTENANCE ORGANIZATIONS 10.6%
US 2,000 aPacifiCare Health Systems, Inc.,
Class B ................................ 146,000
US 6,000 aPhysician Corporation of America ......... 144,750
US 8,000 aSierra Health Services, Inc. ............. 260,000
US 4,000 United Healthcare Corp. .................. 211,000
US 4,500 U.S. HealthCare, Inc. .................... 212,625
----------
974,375
----------
HOMECARE/ALTERNATE SITE 3.0%
US 5,000 aHomedco Group, Inc. ...................... 180,625
US 10,000 aProfessional Sports Care Management,
Inc. ................................... 92,500
----------
273,125
----------
HOSPITALS 9.8%
US 6,300 Columbia/HCA Healthcare Corp. ............ 262,238
US 6,000 aHealthtrust, Inc. - The Hospital Co. ..... 210,000
US 7,000 aHumana, Inc. ............................. 170,625
US 10,000 aNational Medical Enterprises ............. 145,000
US 5,000 aQuorum Health Group, Inc. ................ 113,750
----------
901,613
----------
MEDICAL TECHNOLOGY & SUPPLIES 14.2%
US 40,000 aAbaxis, Inc. ............................. 200,000
US 35,000 aAngeion Corp. ............................ 96,250
US 35,000 aAngeion Corp., warrants .................. 9,844
US 6,000 Bard (C.R.), Inc. ........................ 147,000
US 1,000 aCordis Corp. ............................. 57,625
US 5,000 aDatascope Corp. .......................... 87,500
US 10,666 aHealthdyne Technologies, Inc. ............ 114,659
US 3,000 aHeart Technology, Inc. ................... 71,625
US 3,000 Medtronic, Inc. .......................... 156,375
US 2,500 aSciMed Life Systems, Inc. ................ 119,375
US 3,000 Stryker Corp. ............................ 102,750
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
MEDICAL TECHNOLOGY & SUPPLIES (CONT.)
US 914 aThermolase Corp. ......................... $ 7,312
US 9,000 aThermotrex Corp. ......................... 137,250
----------
1,307,565
----------
NURSING HOMES/SUBACUTE 4.3%
US 7,500 aAdvocat, Inc. ............................ 78,750
US 7,000 aGranCare, Inc. ........................... 108,500
US 9,000 aMariner Health Group, Inc. ............... 203,625
----------
390,875
----------
PHARMACEUTICAL DISTRIBUTORS 1.0%
US 3,000 Grupo Casa Autrey, SA de C.V., ADR ....... 91,500
----------
PHARMACEUTICALS 12.2%
SE 10,000 aAstra AB, Series B ....................... 267,129
CH 200 Ciba-Geigy, AG ........................... 116,588
US 10,000 Laboratorio Chile SA, ADR ................ 183,750
US 2,000 Pfizer, Inc. ............................. 148,250
CH 200 Sandoz, AG-R ............................. 99,705
FR 3,000 Sanofi SA ................................ 145,557
US 2,200 Schering-Plough Corp. .................... 156,750
----------
1,117,729
----------
SPECIALTY PHARMACEUTICALS 22.0%
US 7,000 Allergan, Inc. ........................... 184,625
CH 100 aAres Serono, Inc., Series B .............. 54,153
US 10,000 aCirca Pharmaceuticals, Inc. .............. 148,750
US 2,000 aElan Corp., Plc., ADR .................... 73,750
US 10,000 aGensia, Inc. ............................. 47,500
US 20,000 aKV Pharmaceutical Co., Class B ........... 147,500
US 20,000 aMatrix Pharmaceutical, Inc. .............. 287,500
US 35,000 aNoven Pharmaceuticals, Inc. .............. 533,750
US 55,000 aPenederm, Inc. ........................... 453,750
US 2,000 aScherer (R.P.) Corp. ..................... 89,250
----------
2,020,528
----------
SOFTWARE/INFORMATION SYSTEMS 4.7%
US 4,000 aCerner Corp. ............................. 163,000
US 14,000 aPyxis Corp. .............................. 269,500
----------
432,500
----------
TOTAL COMMON STOCKS & WARRANTS
(COST $7,040,958)............... 8,071,753
----------
</TABLE>

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

<PAGE>
\FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL HEALTH CARE FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
a,eRECEIVABLES FROM REPURCHASE AGREEMENTS 13.3%
US $1,251,068 Joint Repurchase Agreement, 4.824%,
11/01/94 (Maturity Value $1,222,480)
(COST $1,222,316)
Collateral: U.S. Treasury Notes,
4.00% - 11.625%, 11/15/94 -
07/15/99 ............................. $1,222,316
----------
TOTAL INVESTMENTS
(COST $8,263,274) 101.2%....... 9,294,069
LIABILITIES IN EXCESS OF OTHER
ASSETS, NET (1.2)% ............ (116,175)
----------
NET ASSETS 100.0% ............... $9,177,894
==========
At October 31, 1994, the net unrealized
appreciation based on the cost of
investments for income tax purposes of
$8,265,986 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there was
an excess of value over tax cost ....... $1,248,921
Aggregate gross unrealized depreciation
for all investments in which there was
an excess of tax cost over value ....... (220,838)
----------
Net unrealized appreciation............... $1,028,083
==========
</TABLE>

COUNTRY LEGEND:
CH - Switzerland
FR - France
GB - United Kingdom
SE - Sweden
US - United States of America

*Securities traded in currency of country indicated.
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS98.8%
ADVERTISING .4%
400 Omnicom Group, Inc. ...................................... $ 21,300
----------
AEROSPACE/DEFENSE .2%
500 aColtec Indutries, Inc. ................................... 9,063
----------
CHEMICAL & MATERIALS 3.6%
700 aApplied Materials, Inc. .................................. 36,400
400 ARCO Chemical Co. ........................................ 19,550
200 Cabot Corp. .............................................. 5,700
1,700 Ethyl Corp. .............................................. 19,338
500 aGeorgia Gulf Corp. ....................................... 19,375
200 aIMC Global, Inc. ......................................... 8,500
900 International Specialty Products, Inc. ................... 6,638
400 Lubrizol Corp. ........................................... 12,900
1,700 Precision Castparts Corp. ................................ 38,888
100 aSterling Chemicals, Inc. ................................. 1,213
400 The Geon Co. ............................................. 12,000
200 Wellman, Inc. ............................................ 6,575
----------
187,077
----------
COMMERCIAL SERVICES 2.1%
1,600 Banta Corp. .............................................. 49,600
200 CPI Corp. ................................................ 4,350
1,000 Manpower, Inc. ........................................... 29,125
100 PHH Corp. ................................................ 3,750
600 The Olsten Corp. ......................................... 21,525
----------
108,350
----------
COMMUNICATIONS EQUIPMENT 4.0%
1,000 a3Com Corp. ............................................... 40,250
200 aADC Telecommunications, Inc. ............................. 9,425
1,400 aALC Communications Corp. ................................. 53,025
1,800 Cabletron Systems, Inc. .................................. 90,450
300 aTellabs, Inc. ............................................ 14,625
----------
207,775
----------
COMPUTER HARDWARE 3.1%
2,000 aEMC Corp. ................................................ 43,000
400 aExabyte Corp. ............................................ 8,800
1,300 aSeagate Technology, Inc. ................................. 32,988
200 aSequent Computer Systems, Inc. ........................... 3,800
</TABLE>

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

<PAGE>
FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
COMPUTER HARDWARE (CONT.)
1,500 aSilicon Graphics, Inc. ................................... $ 45,563
700 aStratus Computer, Inc. ................................... 26,075
----------
160,226
----------
COMPUTER SOFTWARE 2.7%
300 Adobe Systems, Inc. ...................................... 10,800
300 Cadence Design Systems, Inc. ............................. 6,000
2,600 General Motors Corp., Class E ............................ 95,225
900 HBO & Co. ................................................ 29,250
----------
141,275
----------
CONSUMER PRODUCTS/SERVICES 1.4%
1,300 Dexter Corp. ............................................. 26,813
1,400 Hanna (M.A.) Co. ......................................... 35,875
100 Tambrands, Inc. .......................................... 4,100
100 Xtra Corp. ............................................... 5,100
----------
71,888
----------
CONTAINERS & PACKAGING .6%
1,600 Riverwood International Corp. ............................ 27,800
100 Chesapeake Corp. ......................................... 3,100
----------
30,900
----------
ELECTRONIC COMPONENTS/ TECHNOLOGY 10.7%
1,300 aAmphenol Corp. ........................................... 28,438
1,800 aArrow Electronics, Inc. .................................. 67,950
1,500 aCirrus Logic, Inc. ....................................... 43,125
1,800 Comdisco, Inc. ........................................... 36,000
1,500 Intelligent Electronics, Inc. ............................ 23,250
500 aKLA Instruments Corp. .................................... 26,375
400 Linear Technology Corp. .................................. 19,200
1,800 aLitton Industries, Inc. .................................. 66,150
800 aLSI Logic Corp. .......................................... 34,000
1,700 Micron Technology, Inc. .................................. 67,363
1,800 aSymbol Technologies, Inc. ................................ 60,750
1,300 aTeradyne, Inc. ........................................... 42,738
900 Varian Associates, Inc. .................................. 33,300
200 Vishay Intertechnology, Inc. ............................. 9,825
----------
558,464
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE 9.7%
1,100 AT&T Capital Corp. ....................................... $ 25,575
3,100 Bank of New York Co., Inc. ............................... 98,425
1,200 BayBanks, Inc. ........................................... 69,300
3,000 Bear Stearns Companies, Inc. ............................. 48,750
600 Comerica, Inc. ........................................... 16,575
200 Crestar Financial Corp. .................................. 8,250
2,300 Edwards (AG), Inc. ....................................... 42,550
900 First Bank System, Inc. .................................. 33,525
400 Green Tree Financial Corp. ............................... 10,950
500 Integra Financial Corp. .................................. 21,688
200 Mercantile Bancorp. ...................................... 6,950
1,200 Midlantic Corp., Inc. .................................... 33,600
600 Morgan Stanley Group, Inc. ............................... 39,225
400 Standard Federal Bank .................................... 10,600
200 Washington Mutual Savings Bank ........................... 3,575
1,300 West One Bancorp ......................................... 35,750
-----------
505,288
-----------
FOODS/BEVERAGE 3.1%
500 Coca-Cola Enterprises, Inc. .............................. 9,750
1,400 Dean Foods Co. ........................................... 40,425
2,000 IBP, Inc. ................................................ 68,250
4,300 Michael Foods, Inc. ...................................... 42,463
-----------
160,888
-----------
HEALTHCARE PRODUCTS 2.5%
2,900 aAcuson Corp. ............................................. 53,288
300 aCordis Corp. ............................................. 17,288
2,100 Mylan Laboratories Corp. ................................. 58,800
-----------
129,376
-----------
HEALTHCARE SERVICES 6.2%
1,000 aAmerican Medical Holdings, Inc. .......................... 23,750
70 Columbia/HCA Healthcare Corp. ............................ 2,914
700 aFHP International Corp. .................................. 20,300
300 aHealth Care and Retirement Corp. ......................... 8,063
400 aHealth Management Associates, Inc. ....................... 10,400
1,900 aHealth Systems International, Inc., Class A .............. 51,063
1,700 aHEALTHSOUTH Rehabilitation Corp. ......................... 64,600
600 aMid-Atlantic Medical Services, Inc. ...................... 13,875
800 aNational Health Laboratories Holdings .................... 11,500
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTHCARE SERVICES (CONT.)
5,300 aNovaCare, Inc. ........................................... $ 53,000
600 aPacifiCare Health Systems, Inc., Class A ................. 44,700
100 aPhyCor, Inc. ............................................. 3,425
400 U.S. Healthcare, Inc. .................................... 18,900
----------
326,490
----------
HOMEBUILDING .6%
2,200 Lennar Corp. ............................................. 33,275
----------
INSURANCE 5.9%
2,600 AFLAC, Inc. .............................................. 88,725
200 aAmerican Re Corp. ........................................ 5,875
400 Aon Corp. ................................................ 12,450
700 Conseco, Inc. ............................................ 26,600
300 Equitable of Iowa Cos. ................................... 10,613
300 Hartford Steam Boiler Inspection & Insurance Co. ......... 12,788
1,500 aHumana, Inc. ............................................. 36,563
1,100 MGIC Investment Corp. .................................... 34,513
1,400 NWNL Cos., Inc. .......................................... 40,250
200 TIG Holdings, Inc. ....................................... 3,850
600 Transatlantic Holdings, Inc. ............................. 30,525
700 Western National Corp. ................................... 7,963
----------
310,715
----------
LEISURE 1.1%
1,000 Callaway Golf Co. ........................................ 38,250
600 Harley-Davidson, Inc. .................................... 16,800
----------
55,050
----------
MANUFACTURING - DIVERSIFIED .9%
200 Carlisle Co., Inc. ....................................... 6,525
500 Danaher Corp. ............................................ 24,563
400 Pentair, Inc. ............................................ 16,800
----------
47,888
----------
MANUFACTURING - SPECIALIZED INDUSTRIAL 2.6%
500 aColeman Co., Inc. ........................................ 17,313
933 Lancaster Colony Corp. ................................... 32,422
1,400 Modine Manufacturing Co. ................................. 40,950
400 aReliance Electric Co., Class A ........................... 11,900
700 Sundstrand Corp. ......................................... 31,850
----------
134,435
----------
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING 3.5%
1,500 aAlumax, Inc. ............................................. $ 44,625
3,000 Brush Wellman, Inc. ...................................... 50,250
700 Carpenter Technology Corp. ............................... 39,550
800 aLTV Corp. ................................................ 15,300
2,000 aMagma Copper Co. ......................................... 35,750
----------
185,475
----------
OFFICE SUPPLIES 2.2%
2,500 aOffice Depot ............................................. 61,875
1,900 Wallace Computer Services, Inc. .......................... 52,725
----------
114,600
----------
OIL & GAS 4.8%
500 Apache Corp. ............................................. 14,063
1,600 Equitable Resources, Inc. ................................ 48,800
200 FINA, Inc., Class A ...................................... 14,650
1,700 Mitchell Energy & Development, Class A ................... 30,175
1,600 Murphy Oil Corp. ......................................... 76,200
3,900 Ranger Oil, Ltd. ......................................... 25,350
1,200 Ultramar Corp. ........................................... 30,900
500 Western Gas Resources, Inc. .............................. 9,750
----------
249,888
----------
PAPER & FOREST PRODUCTS 1.1%
800 Bowater, Inc. ............................................ 21,600
500 Consolidated Papers, Inc. ................................ 22,438
400 Rayonier, Inc. ........................................... 11,800
----------
55,838
----------
RESTAURANTS .4%
2,400 aNPC International Inc., Class A .......................... 16,200
400 aOutback Steakhouse, Inc. ................................. 12,350
----------
28,550
----------
RETAIL 7.5%
700 aAnnTaylor Stores, Inc. ................................... 29,050
800 aBest Buy Co., Inc. ....................................... 30,200
300 aBurlington Coat Factory Co. .............................. 3,900
2,300 Dollar General Corp. ..................................... 66,700
300 Edison Brothers Stores ................................... 7,125
1,000 aFederated Department Stores, Inc. ........................ 20,750
600 aMichael Stores, Inc. ..................................... 24,338
1,700 aRevco D.S., Inc. ......................................... 38,038
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

TELECOMMUNICATIONS 3.0%
1,700 Century Telephone Enterprises ............................ 51,000
2,700 Cincinnati Bell, Inc. .................................... 49,613
2,300 Rochester Telephone Corp. ................................ 56,350
----------
156,963
----------

TEXTILES 1.2%
800 Angelica Corp. ........................................... 21,200
2,600 aWarnaco Group, Inc., Class A ............................. 49,075
----------
70,275
----------

TRANSPORTATION 2.6%
2,300 Airborne Freight Corp. ................................... 43,988
1,800 American President Cos. .................................. 43,650
800 Arnold Industries, Inc. .................................. 18,650
700 Illinois Central Corp. ................................... 22,488
300 aNorthwest Airlines Corp., Class A ........................ 6,300
----------
135,076
----------

UTILITIES 11.1%
600 Atlantic Energy, Inc. .................................... 10,125
1,600 Central Maine Power Co. .................................. 18,400
3,300 Delmarva Power & Light Co. ............................... 62,288
2,000 General Public Utilities Corp. ........................... 51,500
200 IES Industries, Inc. ..................................... 5,125
2,800 Iowa-Illinois Gas & Electric Co. ......................... 57,400
2,600 NIPSCO Industries, Inc. .................................. 72,475
1,500 Northeast Utilities ...................................... 34,688
3,500 Portland General Corp. ................................... 60,813
3,300 Pinnacle West Capital Corp. .............................. 61,463
4,600 aPublic Service Co. of Mexico ............................. 56,925
1,500 Rochester Gas & Electric Corp. ........................... 31,313
1,300 Scana Corp. .............................................. 56,063
----------
578,578
----------
TOTAL COMMON STOCKS (COST $5,051,314) ............ 5,164,330
----------

</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
(UNAUDITED) (CONT.)

<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND (NOTE 1)
- -------------------------------------------------------------------------------
<S> <C> <C>
d,eRECEIVABLES FROM REPURCHASE AGREEMENTS .4%
$21,133 Joint Repurchase Agreement, 4.824%, 11/01/94
(Maturity Value $20,825) (COST $20,822)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%,
11/15/94 - 07/15/99 ................................. $ 20,822
----------
TOTAL INVESTMENTS (COST $5,072,136) 99.2% .... 5,185,152
OTHER ASSETS AND LIABILITIES, NET .8% ........ 39,973
----------
NET ASSETS 100.0% ............................ $5,225,125
==========
At October 31, 1994, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $5,073,184 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost ..................................... $ 374,764
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax
cost over value ................................... (262,796)
----------
Net unrealized appreciation ......................... $ 111,968
==========
</TABLE>

aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral.
eSee Note 1(h) regarding Joint Repurchase Agreement.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS

STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1994 (UNAUDITED)

<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
Assets: GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- ----------- -------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investments in securities:
At identified cost.................. $5,032,531 $4,067,666 $113,344,976 $30,277,215 $7,040,958 $5,051,314
========== ========== ============ =========== ========== ==========

At value............................ 5,781,836 4,053,739 110,534,172 32,901,974 8,071,753 5,164,330
Receivables from repurchase
agreements, at value and cost....... 1,324,188 1,352,4311 5,254,047 3,703,295 1,222,316 20,822
Cash.................................. 9,200 17,676 3,667 22,665 106,006 14,905
Foreign currencies (Cost $77,885)..... -- -- -- -- 77,695 --
Receivables:
Dividends and interest.............. 1,653 86,549 340,194 8,146 2,225 8,547
Investment securities sold.......... 211,679 423,207 1,415,853 838,375 7,650 241,084
Capital shares sold................. 1,191 -- 125,547 120,009 95,817 --
Prepaid expenses...................... 16,783 6,207 67,543 56,056 10,876 --
Unamortized organization costs
(Note 2)............................ 13,306 -- 8,452 8,604 8,014 --
---------- ---------- ------------ ----------- ---------- ----------
Total assets.................. 7,359,836 5,939,809 127,749,475 37,659,124 9,602,352 5,449,688
---------- ---------- ------------ ----------- ---------- ----------

Liabilities:
Payables:
Investment securities purchased:
Regular delivery.................. 317,568 255,460 147,542 1,761,842 392,448 224,563
When-issued basis (Note 1)........ -- 267,122 -- -- -- --
Capital shares repurchased.......... -- -- 188,853 20,289 57 --
Shareholder servicing costs......... 1,377 -- 4,135 1,053 3,318 --
Distribution fees................... 8,903 6,060 88,881 18,187 16,463 --
Accrued expenses and other
liabilities....................... 30,551 3,357 37,468 15,016 12,172 --
---------- ---------- ------------ ----------- ---------- ----------
Total liabilities............. 358,399 531,999 466,879 1,816,387 424,458 224,563
---------- ---------- ------------ ----------- ---------- ----------
Net assets, at value.................... $7,001,437 $5,407,810 $127,282,596 $35,842,737 $9,177,894 $5,225,125
========== ========== ============ =========== ========== ==========

Net assets consist of:
Undistributed net investment income... $ 26,486 $ 117,832 $ 1,199,229 $ 27,140 $ 20,460 $ 28,039
Unrealized appreciation (depreciation)
on investments and translation of
assets and liabilities denominated
in foreign currencies............... 749,305 (13,553) (2,810,803) 2,624,759 1,030,038 113,016
Net realized gain (loss) from
investments......................... 305,875 (5,890) 344,610 1,232,100 377,037 (48,365)
Net realized gain (loss)from foreign
currency transactions............... -- (674) 7,085 -- 916 --
Capital shares........................ 5,476 5,306 103,215 26,273 7,750 5,136
Additional paid-in capital............ 5,914,295 5,304,789 128,439,260 31,932,465 7,741,693 5,127,299
---------- ---------- ------------ ----------- ---------- ----------
Net assets, at value.................... $7,001,437 $5,407,810 $127,282,596 $35,842,737 $9,177,894 $5,225,125
========== ========== ============ =========== ========== ==========

Shares outstanding...................... 547,607 530,569 10,321,541 2,627,319 775,028 513,618
========== ========== ============ =========== ========== ==========

Net asset value per share............... $12.79 $10.19 $12.33 $13.64 $11.84 $10.17
========== ========== ============ =========== ========== ==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1994 (UNAUDITED)

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- ----------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends............................. $ 24,968 $ 4,531 $2,368,480 $ 59,535 $ 15,060 $ 55,726
Interest.............................. 18,491 153,422 320,684 66,035 19,247 3,578
-------- -------- ---------- ---------- ---------- --------
Total income.................. 43,459 157,953 2,689,164 125,570 34,307 59,304
-------- -------- ---------- ---------- ---------- --------
Expenses:
Management fees, net (Note 6)......... -- -- 376,876 15,233 -- --
Distribution fees (Note 6)............ 5,133 6,066 157,167 28,164 7,419 --
Shareholder servicing costs (Note 6).. 1,377 -- 42,777 13,407 3,318 3
Reports to shareholders............... 6,882 336 41,684 11,556 3,156 408
Custodian fees........................ 234 477 25,099 1,596 609 330
Professional fees..................... 3,780 2,667 15,265 5,100 1,863 2,025
Registration fees..................... 900 -- 21,934 3,255 888 2,082
Amortization of organization costs
(Note 2)............................ 3,327 -- 1,584 1,878 1,620 --
Other................................. 2,121 168 1,949 1,119 312 255
Payments from Manager (Note 6)........ (16,782) (4,386) -- -- (10,876) (5,103)
-------- -------- ---------- ---------- ---------- --------
Total expenses................ 6,972 5,328 684,335 81,308 8,309 --
-------- -------- ---------- ---------- ---------- --------
Net investment income......... 36,487 152,625 2,004,829 44,262 25,998 59,304
-------- -------- ---------- ---------- ---------- --------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on:
Investments......................... 306,434 (5,890) 355,048 1,233,622 382,924 (48,098)
Foreign currency transactions....... -- (674) 7,085 -- 916 --
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in foreign
currencies.......................... 367,568 (13,553) 235,456 2,472,725 627,363 134,979
-------- -------- ---------- ---------- ---------- --------
Net realized and unrealized gain (loss)
on investments........................ 674,002 (20,117) 597,589 3,706,347 1,011,203 86,881
-------- -------- ---------- ---------- ---------- --------
Net increase in net assets resulting
from operations....................... $710,489 $132,508 $2,602,418 $3,750,609 $1,037,201 $146,185
======== ======== ========== ========== ========== ========
</TABLE>

*For the period May 24, 1994 (effective date) to October 31, 1994.

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1994 (UNAUDITED)
AND FOR THE YEAR ENDED APRIL 30, 1994

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN STRATEGIC FRANKLIN GLOBAL
GROWTH FUND INCOME FUND UTILITIES FUND
------------------------ ------------------ -----------------------------
SIX MONTHS YEAR 05/24/94 SIX MONTHS YEAR
ENDED ENDED (EFFECTIVE DATE) ENDED ENDED
10/31/94 04/30/94 TO 10/31/94 10/31/94 04/30/94
---------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Increase in net assets:
Operations:
Net investment income.......................... $ 36,487 $ 47,698 $ 152,625 $ 2,004,829 $ 1,873,880
Net realized gain (loss) from investments and
foreign currency transactions................ 306,434 533,611 (6,564) 362,133 3,574,739
Net unrealized appreciation (depreciation)
on investments and translation of assets
and liabilities denominated in foreign
currencies................................... 367,568 276,756 (13,553) 235,456 (4,000,978)
---------- ---------- ---------- ------------ ------------
Net increase in net assets resulting
from operations...................... 710,489 858,065 132,508 2,602,418 1,447,641
Distributions to shareholders from:
Undistributed net investment income............ (22,522) (48,522) (34,793) (1,744,653) (1,053,413)
Net realized capital gains..................... (243,646) (195,872) -- (3,335,908) (249,283)
Increase in net assets from capital share
transactions (Note 4)........................ 1,911,409 620,455 5,310,095 5,572,660 109,816,315
---------- ---------- ---------- ------------ ------------
Net increase in net assets............. 2,355,730 1,234,126 5,407,810 3,094,517 109,961,260
Net assets:
Beginning of period............................ 4,645,707 3,411,581 -- 124,188,079 14,226,819
---------- ---------- ---------- ------------ ------------
End of period.................................. $7,001,437 $4,645,707 $5,407,810 $127,282,596 $124,188,079
========== ========== ========== ============ ============
Undistributed net investment income included in
net assets:
Beginning of period............................ $ 12,521 $ 13,345 $ -- $ 939,053 $ 118,586
========== ========== ========== ============ ============
End of period.................................. $ 26,486 $ 12,521 $ 117,832 $ 1,199,229 $ 939,053
========== ========== ========== ============ ============
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

FINANCIAL STATEMENTS (CONT.)

STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1994 (UNAUDITED)
AND FOR THE YEAR ENDED APRIL 30, 1994

<TABLE>
<CAPTION>
FRANKLIN SMALL CAP FRANKLIN GLOBAL FRANKLIN INSTITUTIONAL
GROWTH FUND HEALTH CARE FUND MIDCAP GROWTH FUND
------------------------ ----------------------- -----------------------------
SIX MONTHS YEAR SIX MONTHS YEAR SIX MONTHS 06/17/93
ENDED ENDED ENDED ENDED ENDED (EFFECTIVE DATE)
10/31/94 04/30/94 10/31/94 04/30/94 10/31/94 04/30/94
----------- ----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Increase in net assets:
Operations:

Net investment income............... $ 44,262 $ 32,254 $ 25,998 $ 31,543 $ 59,304 $ 75,987
Net realized gain (loss) from
investments and foreign
currency transactions............. 1,233,622 1,627,612 383,840 361,025 (48,098) 24,817
Net unrealized appreciation
(depreciation) on investments
and translation of assets
and liabilities denominated
in foreign currencies............. 2,472,725 156,594 627,363 438,510 134,979 (21,963)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net
assets resulting from
operations................ 3,750,609 1,816,460 1,037,201 831,078 146,185 78,841
Distributions to shareholders from:
Undistributed net investment
income............................ (24,802) (35,477) (12,378) (33,141) (67,751) (39,501)
Net realized capital gains.......... (1,186,478) (427,302) (87,823) (137,028) (7,584) (17,500)
Increase in net assets from capital
share transactions (Note 4)......... 9,388,317 16,535,237 2,445,798 1,711,689 75,335 5,057,100
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets.. 11,927,646 17,888,918 3,382,798 2,372,598 146,185 5,078,940
Net assets:
Beginning of period................. 23,915,091 6,026,173 5,795,096 3,422,498 5,078,940 --
----------- ----------- ---------- ---------- ---------- ----------
End of period....................... $35,842,737 $23,915,091 $9,177,894 $5,795,096 $5,225,125 $5,078,940
=========== =========== ========== ========== ========== ==========
Undistributed net investment income
included in net assets:
Beginning of period................. $ 7,680 $ 10,903 $ 6,840 $ 8,438 $ 36,486 $ --
=========== =========== ========== ========== ========== ==========
End of period....................... $ 27,140 $ 7,680 $ 20,460 $ 6,840 $ 28,039 $ 36,486
=========== =========== ========== ========== ========== ==========
</TABLE>

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

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

Franklin Strategic Series (the Series) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Series currently has two separate diversified funds consisting of
Franklin Small Cap Growth Fund (the Small Cap Fund) and Franklin Institutional
MidCap Growth Fund (the Institutional MidCap Growth Fund); and four separate
non-diversified funds: Franklin California Growth Fund (the California Growth
Fund), Franklin Strategic Income Fund (the Strategic Income Fund), Franklin
Global Health Care Fund (the Global Health Fund) and Franklin Global Utilities
Fund (the Global Utilities Fund). Prior to June 21, 1994, the Institutional
MidCap Growth Fund was known as the FISCO MidCap Growth Fund. Each of the Funds
issues a separate series of shares and maintains a totally separate investment
portfolio.

A. SECURITIES VALUATIONS: Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from pricing services, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Other securities for which market quotations are not available,
if any, are valued in accordance with procedures established by the Board of
Trustees. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.

Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner, and these values are
translated into U.S. Dollars at current market quotations of their respective
currency against U.S Dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
procedures established by the Board of Trustees.

The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees -- see Note 7.

D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount is amortized as
required by the Internal Revenue Code.

Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)

E. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS: The Series
may trade securities on a when-issued or delayed delivery basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Series will
generally purchase these securities with the intention of acquiring such
securities, they may sell such securities before the settlement date. These
securities are identified on the accompanying statement of investments in
securities and net assets. The Series have set aside sufficient investment
securities as collateral for these purchase commitments.

G. FOREIGN CURRENCY TRANSLATION: The accounting records of the Series are
maintained in U.S. Dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. Dollars at the rate of exchange of such
currencies against U.S. Dollars on the date of the valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are
recognized when reported by the custodian bank.

The Series does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.

Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency
gains or losses realized between the trade date and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Series books, and the
U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at semi-fiscal year end,
resulting from changes in exchange rates.

H. REPURCHASE AGREEMENTS: The Series may enter into a Joint Repurchase
Agreement whereby its uninvested cash balance is deposited into a joint cash
account to be used to invest in one or more repurchase agreements with
government securities dealers recognized by the Federal Reserve Board and/or
member banks of the Federal Reserve System. The value and face amount of the
Joint Repurchase Agreement has been allocated to the Funds based on their
pro-rata interest at October 31, 1994.

In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At October 31, 1994, all outstanding repurchase agreements held
by the Funds have been entered on that date.

I. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION: Effective
October 31, 1994, the Series adopted AICPA Statement of Position (SOP) 93-4:
Foreign Currency Accounting and Financial Statement Presentation for Investment
Companies. The adoption of SOP 93-4 had no effect on net assets for the six
months ended October 31, 1994, but affected the classification of foreign
currency transactions from assets and liabilities other than investments on the
income statements.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

2. UNAMORTIZED ORGANIZATION COSTS

The organization costs of the Series are amortized on a straight-line basis
over a period of five years from the effective date of registration under the
Securities Act of 1933. In the event that Franklin Resources, Inc. (which was
the sole shareholder prior to the effective date of registration) redeems its
shares within the five-year period, the pro rata share of the then-unamortized
deferred organization costs will be deducted from the redemption price paid to
Franklin Resources, Inc. New investors purchasing shares of the Series
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income. The Series' Manager
advanced all of the organization costs of the Series, which amounted to
$33,267, $15,648, $18,775 and $16,816 for the California Growth Fund, the
Global Utilities Fund, the Small Cap Fund, and the Global Health Fund,
respectively. In an effort to reduce the Series' expenses, the manager has
reimbursed the current period's amortization of $3,327, $1,878 and $1,620 for
the California Growth Fund, the Small Cap Fund, and the Global Health Fund,
respectively.

3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS

At April 30, 1994, for tax purposes, the Funds have accumulated undistributed
net realized capital gains as follows:

<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Accumulated net realized gains.................. $243,087 $3,328,273 $1,184,956 $87,472 $7,317
========= ========== ========== ======= ======
</TABLE>

For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower or unrealized depreciation is higher) than for financial
reporting purposes at October 31, 1994 by $2,803 in the Global Utilities Fund,
$10,168 in the Small Cap Growth Fund, $5,381 in the Global Health Fund, and
$1,048 in the Institutional MidCap Growth Fund.

4. TRUST SHARES

At October 31, 1994, there were an unlimited number of $.01 par value shares
authorized. Transactions in the Series' shares for the six months ended October
31, 1994 and for the year ended April 30, 1994 were as follows:

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN STRATEGIC FRANKLIN GLOBAL
GROWTH FUND INCOME FUND* UTILITIES FUND
--------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ---------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Six months ended October 31, 1994 -
Shares sold.......................................... 44,323 $ 532,994 521,034 $5,213,869 874,804 $10,677,117
Shares issued in reinvestment of distributions....... 22,740 254,237 3,366 34,131 361,803 4,233,130
Shares redeemed...................................... (10,714) (129,159) (3,746) (38,284) (769,122) (9,343,032)
Changes from exercise of exchange privilege:
Shares sold........................................ 120,887 1,436,347 9,915 100,379 805,388 9,837,297
Shares redeemed.................................... (15,171) (183,010) -- -- (810,384) (9,831,852)
------- ---------- ------- ---------- ------- -----------
Net increase......................................... 162,065 $1,911,409 530,569 $5,310,095 462,489 $ 5,572,660
======= ========== ======= ========== ======= ===========
</TABLE>

*For the period May 24, 1994 (effective date) to October 31, 1994.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

4. TRUST SHARES (CONT.)

<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN STRATEGIC FRANKLIN GLOBAL
GROWTH FUND INCOME FUND* UTILITIES FUND
-------------------- -------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended April 30, 1994 -
Shares sold......................................... 50,123 $ 596,456 -- -- 4,597,333 $ 58,206,365
Shares issued in reinvestment of distributions...... 20,366 232,835 -- -- 83,094 1,057,033
Shares redeemed..................................... (32,139) (374,204) -- -- (531,949) (6,782,713)
Changes from exercise of exchange privilege:
Shares sold....................................... 54,080 648,657 -- -- 5,765,127 73,837,870
Shares redeemed................................... (40,915) (483,289) -- -- (1,307,264) (16,502,240)
------- --------- -------- ------- --------- ------------
Net increase........................................ 51,515 $ 620,455 8,606,341 $109,816,315
======= ========= ======== ======= ========= ============
</TABLE>

*For the period May 24, 1994 (effective date) to October 31, 1994.

<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN SMALL CAP FRANKLIN GLOBAL INSTITUTIONAL MIDCAP
GROWTH FUND HEALTH CARE FUND GROWTH FUND*
------------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Six months ended October 31, 1994 -
Shares sold...................................... 342,731 $(14,270,494 116,797 $(1,302,457 -- $ --
Shares issued in reinvestment of distributions... 85,211 983,335 9,328 93,753 8,014 75,335
Shares redeemed.................................. (111,347) (1,369,348) (31,752) (340,864) -- --
Changes from exercise of exchange privilege:
Shares sold.................................... 1,340,502 16,712,615 263,967 2,941,269 -- --
Shares redeemed................................ (904,884) (11,208,779) (139,026) (1,550,817) -- --
--------- ------------ ------- ----------- ------- ----------
Net increase..................................... 752,213 $ 9,388,317 219,314 $ 2,445,798 8,014 $ 75,335
========= ============ ======= =========== ======= ==========
Year ended April 30, 1994 -
Shares sold...................................... 527,823 $ 6,523,254 174,501 $ 1,732,415 500,010 $5,000,099
Shares issued in reinvestment of distributions... 33,180 410,352 16,250 160,950 5,594 57,001
Shares redeemed.................................. (111,639) (1,417,140) (66,382) (692,594) -- --
Changes from exercise of exchange privilege:
Shares sold.................................... 1,634,135 21,097,953 329,826 3,285,773 -- --
Shares redeemed................................ (798,157) (10,079,182) (283,890) (2,774,855) -- --
--------- ------------ ------- ----------- ------- ----------
Net increase..................................... 1,285,342 $ 16,535,237 170,305 $ 1,711,689 505,604 $5,057,100
========= ============ ======= =========== ======= ==========
</TABLE>

*For the period August 17, 1993 (effective date) to April 30, 1994.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

5. PURCHASES AND SALES OF SECURITIES

Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the six months ended October 31, 1994 were as
follows:

<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND INCOME FUND UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Purchases............................. $2,968,195 $7,045,400 $15,539,097 $23,402,711 $4,479,884 $4,364,879
========== ========== =========== =========== ========== ==========
Sales................................. $2,006,516 $2,987,102 $11,422,370 $14,352,307 $2,981,449 $4,081,199
========== ========== =========== =========== ========== ==========
</TABLE>

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

Franklin Advisers, Inc., under the terms of an agreement, provides investment
advice, administrative services, office space and facilities to each Fund,
except for the Institutional MidCap Growth Fund, and receives fees computed
monthly based on the net assets of each Fund, at an annual rate of .625 of 1%
of the average daily net assets up to and including $100 million; .50 of 1% of
the average daily net assets over $100 million, up to and including $250
million; .45 of 1% of the average daily net assets over $250 million, up to and
including $10 billion; .44 of 1% of the average daily net assets over $10
billion, up to and including $12.5 billion; .42 of 1% of the average daily net
assets over $12.5 billion, up to and including $15 billion; and .40 of 1% of
the average daily net assets over $15 billion. Franklin Institutional Services
Corporation (FISCO) serves as the investment adviser for the Institutional
MidCap Growth Fund, and receives fees computed monthly at the annual rate of
.65% of the Fund's average daily net assets.

The terms of the agreements provide that annual aggregate expenses of the
Series' be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Series' shares are registered. The Series' expenses did not exceed
these limitations; however, for the six months ended October 31, 1994, Franklin
Advisers, Inc. and FISCO agreed in advance to waive the management fees, as
indicated below, in an effort to minimize the Series' expenses. Additionally,
Franklin Advisers, Inc. made payments of $16,782, $4,386, $10,876 and $5,103
for other expenses as shown in the Statement of Operations for the California
Growth Fund, the Strategic Income Fund, the Global Health Fund and the
Institutional MidCap Growth Fund, respectively.

FRANKLIN ADVISERS, INC. FISCO
--------------------------------------------------------------------------- -------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN INSTITUTIONAL
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH MIDCAP
GROWTH FUND INCOME FUND* UTILITIES FUND GROWTH FUND CARE FUND GROWTH FUND
----------- ----------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management fees earned............. $17,471 $13,400 $376,876 $87,092 $21,275 $16,534
Less reduction of fees............. 17,471 13,400 -- 71,859 21,275 16,534
------- ------- -------- ------- -------- --------
Management fees paid............... $ -- $ -- $376,876 $15,233 $ -- $ --
======= ======= ======== ======= ======== ========
</TABLE>

Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Series pays costs on a per shareholder account basis.
Shareholder servicing costs of $60,882 were incurred for the six months ended
October 31, 1994, of which $60,033 was for services provided by
Franklin/Templeton Investor Services, Inc. In an effort to minimize such costs,
Franklin/Templeton Investor Services, Inc. agreed in advance to waive
shareholder servicing costs of $1,743 in the California Growth Fund, $45 in the
Strategic Income Fund, $3,774 in the Global Health Fund, and $3 in the
Institutional MidCap Growth Fund.

*For the period May 24, 1994 (effective date) to October 31, 1994.

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)

Under the terms of a Distribution Agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Funds, except for the Institutional MidCap
Growth Fund, will reimburse Franklin/Templeton Distributors, Inc. in an amount
up to .25% per annum of the Series' average daily net assets for costs incurred
in the promotion, offering and marketing of the Funds' shares. Costs incurred
by the Series under the agreement aggregated $203,949 for the six months ended
October 31, 1994.

In its capacity as underwriter for the shares of the Funds, except for the
Institutional MidCap Growth Fund, Franklin/Templeton Distributors, Inc.
received commissions on sales of the Funds' shares. Commissions received by
Franklin/Templeton Distributors, Inc., and the amounts which were subsequently
paid to other dealers for the six months ended October 31, 1994 were as
follows:

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
CALIFORNIA STRATEGIC GLOBAL SMALL CAP GLOBAL HEALTH
GROWTH FUND INCOME FUND* UTILITIES FUND GROWTH FUND CARE FUND
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total commissions received..... $20,833 $8,221 $448,662 $146,325 $56,650
======= ====== ======== ======== =======
Paid to other dealers.......... $18,418 $8,221 $396,414 $129,481 $50,087
======= ====== ======== ======== =======
</TABLE>

*For the period May 24, 1994 (effective date) to October 31, 1994.

Commissions are deducted from the gross proceeds received from the sale of the
shares of the Funds, and as such are not expenses of the Funds.

At October 31, 1994, Franklin Resources owned 42% of the California Growth
Fund, 95% of the Strategic Income Fund, 1% of the Global Utilities Fund, 4% of
the Small Cap Fund, 14% of the Global Health Fund, and 100% of the
Institutional MidCap Growth Fund.

7. RESTRICTED SECURITIES

A restricted security is a security which has not been registered with the
Securities & Exchange Commission pursuant to the Securities Act of 1933. The
Series may purchase restricted securities through a private offering which
cannot be sold without prior registration under the Securities Act of 1933,
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Series values these
securities as disclosed in Note 1. At October 31, 1994, the California Growth
Fund held restricted securities with a value aggregating $288, representing
less than one percent of the Fund's net assets. Such securities are:

<TABLE>
<CAPTION>
ACQUISITION
SHARES SECURITY DATE COST VALUE
- ------ -------- ----------- ------ -----
<S> <C> <C> <C> <C>
198 Lynx Therapeutics, Inc.................... 10/19/92 $ 40 $ --
288 Lynx Therapeutics, Inc., pfd., Series A... 10/19/92 $288 $288
</TABLE>

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

8. RULE 144A SECURITIES

Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resale of restricted
securities to qualified institutional investors. The Series values these
securities as disclosed in Note 1. At October 31, 1994, Rule 144A securities
were held as follows:

<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
STRATEGIC GLOBAL SMALL CAP
INCOME FUND UTILITIES FUND GROWTH FUND
----------- -------------- -----------
<S> <C> <C> <C>
Value.......................... $227,219 $7,157,416 $432,850
======== ========== ========
Ratio of value to net assets... 4.20% 5.62% 1.21%
======== ========== ========
</TABLE>

See the accompanying Statement of Investments in Securities and Net Assets for
specific information on such securities.

9. FINANCIAL HIGHLIGHTS

Selected data for each share of beneficial interest outstanding throughout the
periods, by Fund, are as follows:

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------------------------------------
NET
REALIZED & NET
NET ASSET NET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET
YEAR VALUE AT INVEST- GAIN (LOSS) TOTAL FROM FROM NET FROM VALUE
ENDED BEGINNING MENT ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END TOTAL
APRIL 30 OF PERIOD INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD RETURN*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND
199(1) $10.04 $0.07 $(0.168) $(0.098) $(0.072) -- -- $ 9.87 (1.77)%**
1993 9.87 0.12 0.340 0.460 (0.120) -- -- 10.21 4.72
1994 10.21 0.14 2.425 2.565 (0.145) (0.580) (0.725) 12.05 25.55
1994(6) 12.05 0.07 1.320 1.390 (0.055) (0.595) (0.650) 12.79 12.31

FRANKLIN STRATEGIC INCOME FUND
1994(5) 10.00 0.29 (0.033) 0.257 (0.067) -- (0.067) 10.19 2.57

FRANKLIN GLOBAL UTILITIES FUND
1993(2) 10.00 0.22 1.270 1.490 (0.130) -- -- 11.36 18.08**
1994 11.36 0.30 1.280 1.580 (0.299) (0.042) (0.341) 12.60 14.04
1994(6) 12.60 0.19 0.044 0.234 (0.173) (0.331) (0.504) 12.33 2.07

FRANKLIN SMALL CAP GROWTH FUND
1992(3) 10.00 0.04 (0.460) (0.420) -- -- -- 9.58 (19.96)**
1993 9.58 0.07 0.657 0.727 (0.087) -- -- 10.22 7.66
1994 10.22 0.03 2.944 2.974 (0.043) (0.401) (0.444) 12.75 29.26
1994(6) 12.75 0.02 1.456 1.476 (0.012) (0.574) (0.586) 13.64 12.41

FRANKLIN GLOBAL HEALTH CARE FUND
1992(3) 10.00 0.02 (1.180) (1.160) -- -- -- 8.84 (55.14)**
1993 8.84 0.09 0.037 0.127 (0.087) -- -- 8.88 1.41
1994 8.88 0.07 1.856 1.926 (0.078) (0.298) (0.376) 10.43 21.93
1994(6) 10.43 0.04 1.540 1.580 (0.021) (0.149) (0.170) 11.84 15.44
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------
RATION OF NET
NET RATIO OF INVESTMENT
ASSETS EXPENSES INCOME TO
YEAR AT END TO AVERAGE AVERAGE PORTFOLIO
ENDED OF PERIOD NET NET ASSETS TURNOVER
APRIL 30 (IN 000'S) ASSETS*** (SEE NOTE 6) RATE
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN CALIFORNIA GROWTH FUND
1992(1) $ 3,091 --% 1.27%** 13.73%
1993 3,412 -- 1.23 38.28
1994 4,646 0.09 1.16 135.12
1994(6) 7,001 0.25** 1.31** 41.20

FRANKLIN STRATEGIC INCOME FUND
1994(5) 5,408 0.25** 7.12** 85.28

FRANKLIN GLOBAL UTILITIES FUND
1993(2) 14,227 -- 3.89** --
1994 124,188 0.84 2.95 16.28
1994(6) 127,283 1.09** 3.19** 10.37

FRANKLIN SMALL CAP GROWTH FUND
1992(3) 1,268 -- 2.45** 2.41
1993 6,026 -- 0.84 63.15
1994 23,915 0.30 0.24 89.60
1994(6) 35,843 0.58** 0.32** 56.04

FRANKLIN GLOBAL HEALTH CARE FUND
1992(3) 1,368 -- 1.68** 41.01
1993 3,422 -- 1.13 62.74
1994 5,795 0.10 0.68 110.82
1994(6) 9,178 0.24** 0.76** 48.19
</TABLE>

<PAGE>

FRANKLIN STRATEGIC SERIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)

9. FINANCIAL HIGHLIGHTS (CONT.)

<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
NET
REALIZED & NET
NET ASSET NET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET
YEAR VALUE AT INVEST- GAIN (LOSS) TOTAL FROM FROM NET FROM VALUE
ENDED BEGINNING MENT ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END TOTAL
APRIL 30 OF PERIOD INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD RETURN*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994(4) $10.00 $0.15 $ 0.014 $ 0.164 $(0.079) $(0.035) $(0.114) $10.05 1.62%
1994(6) 10.05 0.12 0.149 0.269 (0.134) (0.015) (0.149) 10.17 2.80
</TABLE>

<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------
NET RATIO OF INVESTMENT
ASSETS EXPENSES INCOME TO
YEAR AT END TO AVERAGE AVERAGE PORTFOLIO
ENDED OF PERIOD NET NET ASSETS TURNOVER
APRIL 30 (IN 000'S) ASSETS*** (SEE NOTE 6) RATE
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994(4) $ 5,079 --% 2.21%** 70.53%
1994(6) 5.225 -- 2.35 ** 83.06
</TABLE>

(1) For the period October 18, 1991 (effective date) to April 30, 1992.
(2) For the period July 2, 1992 (effective date) to April 30, 1993.
(3) For the period February 14, 1992 (effective date) to April 30, 1992.
(4) For the period August 17, 1993 (effective date) to April 30, 1994.
(5) For the period May 24,1994 (effective date) to October 31, 1994.
(6) For the six months ended October 31, 1994.

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

**Annualized

***During the period indicated, Franklin Advisers, Inc. and FISCO agreed to
waive in advance a portion of their management fees and made payments of other
expenses incurred by the Funds in the Series. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:

<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
FRANKLIN CALIFORNIA GROWTH FUND
1992(1).................................. 1.61%**
1993..................................... 1.99
1994..................................... 1.89
1994(6).................................. 1.48**
FRANKLIN STRATEGIC INCOME FUND
1994(5).................................. 1.08%**
FRANKLIN GLOBAL UTILITIES FUND
1993(2).................................. 1.51%**
1994..................................... 1.28
FRANKLIN SMALL CAP GROWTH FUND
1992(3).................................. 1.74%**
1993..................................... 1.95
1994..................................... 1.58
1994(6).................................. 1.10**
FRANKLIN GLOBAL HEALTH CARE FUND
1992(3).................................. 1.62%**
1993..................................... 2.16
1994..................................... 1.74
1994(6).................................. 1.19**
FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
1994(4).................................. 0.91%**
1994(6).................................. 0.86**
</TABLE>