TEMPLETON DEVELOPING MARKETS TRUST, 497, 1997-04-07

TEMPLETON DEVELOPING MARKETS TRUST
497, 1997-04-07

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TEMPLETON
DEVELOPING
MARKETS TRUST

ADVISOR CLASS

STATEMENT OF LOGO
ADDITIONAL INFORMATION 700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
JANUARY 1, 1997, AS SUPPLEMENTED APRIL 7, 1997
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<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
How Does the Fund Invest its Assets?.... 2
What Are the Fund's Potential Risks?.... 5
Investment Restrictions................. 8
Officers and Trustees................... 10
Investment Management and
Other Services........................ 15
How Does the Fund Buy Securities
for its Portfolio?.................... 16
How Do I Buy, Sell and Exchange
Shares?............................... 17
How Are Fund Shares Valued?............. 19
Additional Information on
Distributions and Taxes............... 19
The Fund's Underwriter.................. 24
How Does the Fund Measure
Performance?.......................... 24
Miscellaneous Information............... 27
Financial Statements.................... 28
Useful Terms and Definitions............ 28
Appendices.............................. 29
</TABLE>

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

Templeton Developing Markets Trust (the "Fund") is a diversified, open-end
management investment company. The Fund's investment objective is long-term
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in equity securities of issuers in countries having developing
markets. This SAI relates to the Advisor Class shares of the Fund.

Advisor Class shares are only available for purchase by certain persons,
including, among others, certain broker-dealers and qualified registered
investment advisors; participants in Franklin Templeton's 401(k) and Profit
Sharing Plans; Franklin Templeton Fund Allocator Series; and directors,
trustees, officers and full time employees (and their family members) of
Franklin Templeton Group and the Franklin Templeton Group of Funds.

The Fund's Prospectus relating to the Advisor Class, dated January 1, 1997, as
may be amended from time to time, contains the basic information you should know
before investing in the Fund. For a free copy, call 1-800/DIAL BEN or write the
Fund at the address shown.

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

MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:

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

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

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

TL711 SAIZ 01/97

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HOW DOES THE FUND INVEST ITS ASSETS?
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The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest its Assets?"

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

Debt Securities. The Fund may invest in debt securities which are rated at least
C by Moody's or C by S&P or unrated debt securities deemed to be of comparable
quality by TAML. As an operating policy, the Fund will invest no more than 5% of
its assets in debt securities rated lower than Baa by Moody's or BBB by S&P. The
market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's Net Asset Value.

Bonds which are rated C by Moody's are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Bonds rated C by S&P are obligations on
which no interest is being paid.

Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish the Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.

Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve its investment
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher rated securities.

Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the Fund may incur additional expenses to seek
recovery.

Structured Investments. Included among the issuers of debt securities in which
the Fund may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit

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with or purchase by an entity, such as a corporation or trust, of specified
instruments and the issuance by that entity of one or more classes of securities
("structured investments") backed by, or representing interests in, the
underlying instruments. The cash flows on the underlying instruments may be
apportioned among the newly issued structured investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flows
on the underlying instruments. Because structured investments of the type in
which the Fund anticipates investing typically involve no credit enhancement,
their credit risk will generally be equivalent to that of the underlying
instruments.

The Fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the Fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leveraged for purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing activities.

Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Fund's investment in these
structured investments may be limited by the restrictions contained in the 1940
Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. To the extent such investments are illiquid, they will be subject
to the Fund's restrictions on investments in illiquid securities.

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

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

At the time the Fund purchases a futures contract, an amount of cash, U.S.
government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the Fund's custodian. When writing a futures contract, the Fund will
maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).

Options on Securities or Indices. The Fund may write covered call and put
options and purchase call and put options on securities or stock indices that
are traded on U.S. and foreign exchanges and in the over-the-counter markets.

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

The Fund may write a call or put option only if the option is "covered." A call
option on a security written by the Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or

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exchange of other securities held in its portfolio. A call option on a security
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
(1) is equal to or less than the exercise price of the call written or (2) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or high grade U.S. government securities in a
segregated account with its custodian. A put option on a security written by the
Fund is "covered" if the Fund maintains cash or fixed income securities with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written.

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

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

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

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

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

Foreign Currency Hedging Transactions. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.

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The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. 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 the security. In addition, for example, when the Fund believes
that a foreign currency may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell an amount of the
former foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because in
connection with the Fund's forward foreign currency transactions an amount of
the Fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
cash equivalents or high quality debt securities available sufficient to cover
any commitments under these contracts or to limit any potential risk. In
addition, when the Fund sells a forward contract, it will cover its obligation
under the contract by segregating cash, cash equivalents or high quality debt
securities, or by owning securities denominated in the corresponding currency
and with a market value equal to or greater than the Fund's obligation. Assets
used as cover for forward contracts will be marked to market on a daily basis.
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 in the manner set forth above may be
restricted. Forward contracts may limit potential gain from a positive change in
the relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not engaged in such contracts.

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

The Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on TAML's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses.

WHAT ARE THE FUND'S POTENTIAL RISKS?
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Risk Factors. You should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published about companies in the U.S. Foreign companies are not
generally subject to uniform accounting or financial reporting standards, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. The Fund, therefore, may encounter difficulty in obtaining
market quotations for purposes of valuing its portfolio and calculating its Net
Asset Value. Foreign markets have substantially less volume than the NYSE and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers and listed companies than
in the U.S.

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

In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.

Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to Fund shareholders.

Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.

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

Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (a)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (b) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (c) pervasiveness of corruption and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the Fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of

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international trade; (j) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and
(k) possible difficulty in identifying a purchaser of securities held by the
Fund due to the underdeveloped nature of the securities markets.

There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian issuers deemed suitable by TAML.
Further, this also could cause a delay in the sale of Russian securities by the
Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to
potential loss on the investment.

The Fund endeavors to buy and sell foreign currencies on as favorable a basis as
practicable. Some price spread on currency exchange (to cover service charges)
may be incurred, particularly when the Fund changes investments from one country
to another or when proceeds of the sale of shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Fund from transferring cash out of the country,
withhold portions of interest and dividends at the source, or impose other
taxes, with respect to the Fund's investments in securities of issuers of that
country. Although the management places the Fund's investments only in foreign
nations which it considers as having relatively stable and friendly governments,
there is the possibility of cessation of trading on national exchanges,
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in those nations.

The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places the Fund's investments.

The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.

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

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

Trading Policies. TAML and its affiliated companies serve as investment manager
to other investment companies and private clients. Accordingly, the respective
portfolios of certain of these funds and clients may contain many or some of the
same securities. When certain funds or clients are engaged simultaneously in the
purchase or sale of the same security, the trades may be aggregated for
execution and then allocated in a manner designed to be equitable to each party.
The larger size of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the transaction is
large enough, brokerage commissions may be negotiated below those otherwise
chargeable.

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

Personal Securities Transactions. Access persons of the Franklin Templeton
Group, as defined in SEC Rule 17(j) under the 1940 Act, who are employees of
Franklin Resources, Inc. or their subsidiaries, are permitted to engage in
personal securities transactions subject to the following general restrictions
and procedures: (1) The trade must receive advance clearance from a Compliance
Officer and must be completed within 24 hours after this clearance; (2) Copies
of all brokerage confirmations must be sent to the Compliance Officer and within
10 days after the end of each calendar quarter, a report of all securities
transactions must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and making investment
decisions must file annual reports of their securities holdings each January and
also inform the Compliance Officer (or other designated personnel) if they own a
security that is being considered for a fund or other client transaction or if
they are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.

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

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

The Fund MAY NOT:

1. Invest in real estate or mortgages on real estate (although the Fund may
invest in marketable securities secured by real estate or interests therein
or issued by companies or investment trusts which invest in real estate or
interests therein); invest in interests (other than debentures or equity
stock interests) in oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts

8
<PAGE> 9

(except futures contracts as described in the Fund's Prospectus); or invest
in other open-end investment companies except as permitted by the 1940
Act.(1)

2. Purchase or retain securities of any company in which trustees or officers
of the Fund or of TAML, individually own more than 1/2 of 1% of the
securities of such company or, in the aggregate, own more than 5% of the
securities of such company.

3. Purchase any security (other than obligations of the U.S. government, its
agencies and instrumentalities) if, as a result, as to 75% of the Fund's
total assets (i) more than 5% of the Fund's total assets would be invested
in securities of any single issuer, or (ii) the Fund would then own more
than 10% of the voting securities of any single issuer.(2)

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

5. Loan money, apart from the purchase of a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness,
although the Fund may enter into repurchase agreements and lend its
portfolio securities.

6. Borrow money, except that the Fund may borrow money from banks in an amount
not exceeding 33 1/3% of the value of the Fund's total assets (including the
amount borrowed), or pledge, mortgage or hypothecate its assets for any
purpose, except to secure borrowings and then only to an extent not greater
than 15% of the Fund's total assets. Arrangements with respect to margin for
futures contracts, forward contracts and related options are not deemed to
be a pledge of assets.

7. Invest more than 5% of the value of the Fund's total assets in securities of
issuers, including their predecessors, which have been in continuous
operation less than three years.

8. Invest more than 5% of the Fund's total assets in warrants, whether or not
listed on the NYSE or AMEX, including no more than 2% of its total assets
which may be invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to securities are not
included in this restriction.

9. Invest more than 25% of the Fund's total assets in a single industry.

10. Participate on a joint or a joint and several basis in any trading account
in securities. See "How Does the Fund Buy Securities for its Portfolio?" as
to transactions in the same securities for the Fund, other clients and/or
other mutual funds within the Franklin Templeton Group of Funds.

11. Invest more than 15% of the Fund's total assets in securities of foreign
issuers that are not listed on a recognized U.S. or foreign securities
exchange, including no more than 10% of its total assets in restricted
securities, securities that are not readily marketable, repurchase
agreements having more than seven days to maturity, and over-the-counter
options purchased by the Fund. Assets used as cover for over-the-counter
options written by the Fund are considered not readily marketable.

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

If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions. If the Fund receives from an issuer of securities held
by the Fund subscription rights to purchase securities of that issuer, and if
the Fund exercises such subscription rights at a time when the Fund's portfolio
holdings of securities of that issuer would otherwise exceed the limits set
forth in investment restrictions 3 or 9 above, it will not constitute a
violation if, prior to receipt of securities upon exercise of such rights, and
after announcement of such rights, the Fund has sold at least as many securities
of the same class and value as it would receive on exercise of such rights. The
Fund may borrow up to 5% of the value of its total assets to meet redemptions
and for other temporary purposes.

(1)As a non-fundamental policy, the Fund will not invest more than 10% of its
assets in real estate investment trusts. In addition, the Fund has undertaken
with a state securities commission that (1) the Fund will invest in other
open-end investment companies only (a) for short term investment of cash
balances in money market funds, or (b) for investment in securities in the
portfolios of such other open-end investment companies, direct investment in
which is unavailable to the Fund; and (2) the Fund will not pay an investment
management fee with respect to any portion of its portfolio comprising shares of
other open-end investment companies.
(2)The Fund has undertaken with a state securities commission that, with respect
to 100% of its assets, the Fund will not purchase more than 10% of a company's
outstanding voting securities. As a non-fundamental policy, the Fund will not
invest in any company for the purpose of exercising control or management.

9
<PAGE> 10

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

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

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
HARRIS J. ASHTON Trustee Chairman of the Board, president and chief
Metro Center executive officer of General Host Corporation
1 Station Place (nursery and craft centers); and a director of
Stamford, Connecticut RBC Holdings (U.S.A.) Inc. (a bank holding
Age 64 company) and Bar-S Foods; and director or
trustee of 55 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
*NICHOLAS F. BRADY Trustee Chairman of Templeton Emerging Markets Invest-
The Bullitt House ment Trust PLC; chairman of Templeton Latin
102 East Dover Street America Investment Trust PLC; chairman of Darby
Easton, Maryland Overseas Investments, Ltd. (an investment firm)
Age 66 (1994-present); chairman and director of
Templeton Central and Eastern European Fund;
director of the Amerada Hess Corporation,
Christiana Companies, and the H.J. Heinz
Company; formerly, Secretary of the United
States Department of the Treasury (1988-1993)
and chairman of the board of Dillon, Read & Co.
Inc. (investment banking) prior to 1988; and
director or trustee of 23 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
FRANK J. CROTHERS Trustee President and chief executive officer of
P.O. Box N-3238 Atlantic Equipment & Power Ltd.; vice chairman
Nassau, Bahamas of Caribbean Utilities Co., Ltd.; president of
Age 52 Provo Power Corporation; a director of various
other business and non-profit organizations;
and director or trustee of 4 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO Trustee Member of the law firm of Pitney, Hardin, Kipp
200 Campus Drive & Szuch; director of General Host Corporation
Florham Park, New Jersey (nursery and craft centers); and director or
Age 64 trustee of 57 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH Trustee President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of Gulf
Suite 1300 West Banks, Inc. (bank holding company)
St. Petersburg, Florida (1995-present); formerly, director of
Age 75 Mercantile Bank (1991-1995), vice chairman of
Templeton, Galbraith & Hansberger Ltd.
(1986-1992), and chairman of Templeton Funds
Management, Inc. (1974-1991); and director or
trustee of 22 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

10
<PAGE> 11

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ANDREW H. HINES, JR. Trustee Consultant for the Triangle Consulting Group;
150 2nd Avenue N. chairman and director of Precise Power
St. Petersburg, Florida Corporation; executive-in-residence of Eckerd
Age 73 College (1991-present); director of Checkers
Drive-In Restaurants, Inc.; formerly, chairman
of the board and chief executive officer of
Florida Progress Corporation (1982-1990) and
director of various of its subsidiaries; and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY Trustee Director (1993-present) of Amerada Hess
3239 38th Street, N.W. Corporation and Hercules Incorporated; director
Washington, D.C. of Beverly Enterprises, Inc. (1995-present) and
Age 44 H.J. Heinz Company (1994-present); chairman
(1995-present) and trustee (1993-present) of
National Child Research Center; formerly,
assistant to the President of the United States
and Secretary of the Cabinet (1990-1993),
general counsel to the United States Treasury
Department (1989-1990), and counselor to the
Secretary and Assistant Secretary for Public
Affairs and Public Liaison-United States
Treasury Department (1988-1989); and director
or trustee of 15 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
*CHARLES B. JOHNSON Chairman of the President, chief executive officer, and
777 Mariners Island Blvd. Board and Vice director of Franklin Resources, Inc.; chairman
San Mateo, California President of the board and director of Franklin Advisers,
Age 63 Inc. and Franklin Templeton Distributors, Inc.;
director of General Host Corporation (nursery
and craft centers), Franklin Templeton Investor
Services, Inc.; and officer and/or director,
trustee or managing general partner, as the
case may be, of most other subsidiaries of
Franklin Resources, Inc.; and 56 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
*CHARLES E. JOHNSON Trustee and Vice Senior vice president and director of Franklin
500 East Broward Blvd. President Resources, Inc.; senior vice president of
Fort Lauderdale, Florida Franklin Templeton Distributors, Inc.;
Age 40 president and chief executive officer of
Templeton Worldwide, Inc.; president and
director of Franklin Institutional Services
Corporation; chairman of the board of Templeton
Investment Counsel, Inc.; and officer and/or
director, as the case may be, of other sub-
sidiaries of Franklin Resources, Inc. and
officer and/or director or trustee of 39 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

11
<PAGE> 12

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
BETTY P. KRAHMER Trustee Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst, U.S.
Wilmington, Delaware government; and director or trustee of 23 of
Age 67 the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
GORDON S. MACKLIN Trustee Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., MCI
Age 68 Communications Corporation, Fusion Systems
Corporation, Infovest Corporation, MedImmune,
Inc., Source One Mortgage Services Corporation,
and Shoppers Express, Inc. (on-line shopping
service); formerly, chairman of Hambrecht and
Quist Group, director of H&Q Healthcare
Investors and Lockheed Martin Corporation, and
president of the National Association of
Securities Dealers, Inc.; and director or
trustee of 52 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
CONSTANTINE DEAN Trustee Physician, Lyford Cay Hospital (July
TSERETOPOULOS 1987-present); formerly, cardiology fellow,
Lyford Cay Hospital University of Maryland (July 1985-July 1987)
P.O. Box N-7776 and internal medicine intern, Greater Baltimore
Nassau, Bahamas Medical Center (July 1982-July 1985); and
Age 42 director or trustee of 4 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
FRED R. MILLSAPS Trustee Manager of personal investments (1978-present);
2665 N.E. 37th Drive director of various business and non-profit
Fort Lauderdale, Florida organizations; formerly, chairman and chief
Age 67 executive officer of Landmark Banking
Corporation (1969-1978), financial vice
president of Florida Power and Light
(1965-1969) and vice president of The Federal
Reserve Bank of Atlanta (1958-1965); and
director or trustee of 24 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
J. MARK MOBIUS President Portfolio manager of various Templeton advisory
Two Exchange Square affiliates; managing director of Templeton
Hong Kong Asset Management Ltd.; formerly, president of
Age 60 International Investment Trust Company Limited
(investment manager of Taiwan R.O.C.
Fund)(1983-1986) and director of Vickers da
Costa, Hong Kong (1980-1983); and officer of 8
of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. Vice President Executive vice president and director of
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin Templeton
San Mateo, California Distributors, Inc.; president and director of
Age 56 Franklin Advisers, Inc.; director of Franklin
Templeton Investor Services, Inc.; and officer
and/or director, trustee or managing general
partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and 60
of the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

12
<PAGE> 13

<TABLE>
<CAPTION>
Positions and
Offices
Name, Address and Age with the Fund Principal Occupation During the Past Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
HARMON E. BURNS Vice President Executive vice president, secretary and
777 Mariners Island Blvd. director of Franklin Resources, Inc.; executive
San Mateo, California vice president and director of Franklin
Age 51 Templeton Distributors, Inc.; executive vice
president of Franklin Advisers, Inc.; and
officer and/or director, as the case may be, of
other subsidiaries of Franklin Resources, Inc.
and officer and/or director or trustee of 60 of
the investment companies in the Franklin
Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
DEBORAH R. GATZEK Vice President Senior vice president and general counsel of
777 Mariners Island Blvd. Franklin Resources, Inc.; senior vice president
San Mateo, California of Franklin Templeton Distributors, Inc.; vice
Age 47 president of Franklin Advisers, Inc. and
officer of 60 of the investment companies in
the Franklin Templeton Group of Funds.
- ---------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO Vice President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of
Nassau, Bahamas global equity research for Templeton Worldwide,
Age 36 Inc.; formerly, investment administrator with
Roy West Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN Vice President Senior vice president, treasurer and chief
777 Mariners Island Blvd. financial officer of Franklin Resources, Inc.;
San Mateo, California director and executive vice president of
Age 36 Templeton Investment Counsel, Inc.; a member of
the International Society of Financial Analysts
and the American Institute of Certified Public
Accountants; formerly, accountant with Arthur
Andersen & Company (1982-1983); and officer
and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee of 60 of the
investment companies in the Franklin Templeton
Group of Funds.
- ---------------------------------------------------------------------------------------------------
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Global Investors, Inc. and Templeton Worldwide,
Fort Lauderdale, Florida Inc.; assistant vice president of Franklin
Age 56 Templeton Distributors, Inc.; formerly, vice
president and controller of the Keystone Group,
Inc.; and officer of 27 of the investment
companies in the Franklin Templeton Group of
Funds.
- ---------------------------------------------------------------------------------------------------
</TABLE>

13
<PAGE> 14

*Nicholas F. Brady, Charles E. Johnson and Charles B. Johnson are "interested
persons" of the Fund under the 1940 Act, which limits the percentage of
interested persons that can comprise a fund's board. Charles B. Johnson is an
interested person due to his ownership interest in Resources, and Charles E.
Johnson is an interested person due to his employment affiliation with
Resources. Mr. Brady's status as an interested person results from his business
affiliations with Resources and Templeton Global Advisors Limited. Mr. Brady and
Resources are both limited partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in February 1994, and is
Chairman and shareholder of the corporate general partner of Darby Overseas. In
addition, Darby Overseas and Templeton Global Advisors Limited are limited
partners of Darby Emerging Markets Fund, L.P. The remaining Board members of the
Fund are not interested persons (the "independent members of the Board").

The table above shows the officers and Board members who are affiliated with
Distributors and TAML. Nonaffiliated members of the Board and Mr. Brady are
currently paid an annual retainer and/or fees for attendance at Board and
Committee meetings, the amount of which is based on the level of assets in the
Fund. Accordingly, the Fund currently pays the independent members of the Board
and Mr. Brady an annual retainer of $6,000 and a fee of $500 per meeting of the
Board and its portion of a flat fee of $2,000 for each Audit Committee meeting
and/or Nominating and Compensation Committee meeting attended. As shown above,
some of the nonaffiliated Board members also serve as directors, trustees or
managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members and Mr. Brady by the Fund and by other funds in the Franklin
Templeton Group of Funds.

14
<PAGE> 15

<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE FUND* GROUP OF FUNDS** WHICH EACH SERVES***
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton...................... $ 8,000 $339,592 55
Nicholas F. Brady..................... 8,000 119,275 23
Frank J. Crothers..................... 8,863 29,550 4
S. Joseph Fortunato................... 8,000 356,412 57
John Wm. Galbraith.................... 6,000 102,475 22
Andrew H. Hines, Jr................... 8,000 130,525 24
Betty P. Krahmer...................... 6,000 119,275 23
Gordon S. Macklin..................... 8,000 331,542 52
Fred R. Millsaps...................... 8,711 130,525 24
Constantine Dean Tseretopoulos........ 8,863 29,550 4
</TABLE>

* For the fiscal year ended December 31, 1996.
** For the calendar year ended December 31, 1996.
*** We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 171 U.S. based
funds or series.

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

As of December 1, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 36,513, or less than 1% of the Fund's
total outstanding shares.

Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.

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

Investment Manager and Services Provided. TAML provides investment research and
portfolio management services, including the selection of securities for the
Fund to buy, hold or sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. TAML renders its services to the Fund from
outside the U.S. and its activities are subject to the review and supervision of
the Board to whom TAML renders periodic reports of the Fund's investment
activities. TAML is covered by fidelity insurance on its officers, directors and
employees for the protection of the Fund.

TAML and its affiliates act as investment manager to numerous other investment
companies or funds and accounts. TAML may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by TAML on behalf of the Fund. Similarly, with respect
to the Fund, TAML is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that TAML and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. TAML is not obligated to refrain from investing in
securities held by the Fund or other funds that it manages. Of course, any
transactions for the accounts of TAML and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."

Investment Management Fees. Under its investment management agreement the Fund
pays TAML a monthly fee equal to an annual rate of 1.25% of its average daily
net assets. Each class pays its proportionate share of the management fee. For
the fiscal years ended December 31, 1995, 1994 and 1993, the investment
management fees totaled $26,314,151, $23,325,167 and $6,765,008, respectively.

Investment Management Agreement. The investment management agreement for the
Fund may continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the

15
<PAGE> 16

holders of a majority of the Fund's outstanding voting securities, and in either
event by a majority vote of the Board members who are not parties to the
investment management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. The investment management agreement may be terminated without penalty
at any time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by TAML on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.

Administrative Services. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Fund. These include preparing and maintaining books, records, and tax
and financial reports, and monitoring compliance with regulatory requirements.
FT Services is a wholly owned subsidiary of Resources.

Under the administration agreement, the Fund pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the average daily net
assets of the Fund up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. Since FT Services' fee covers services often provided by investment
advisers to other funds, the Fund's combined expenses for advisory and
administrative services together may be higher than those of some other
investment companies. Each class of shares pays its proportionate share of the
administration fee.

For the fiscal years ended December 31, 1995, 1994 and 1993, the Fund's
administrative services fees totaled $2,153,848, $1,974,513 and $760,331,
respectively.

Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.

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

Auditors. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, are the
Fund's independent auditors. During the fiscal year ended December 31, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended December 31, 1995, and review of the Fund's filings with
the SEC and the IRS. Advisor Class shares of the Fund were not offered to the
public before January 1, 1997.

HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
- ---------------------------------------------------------

The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by TAML in accordance with criteria set forth in the
investment management agreement and any directions that the Board may give.

When placing a portfolio transaction, TAML seeks to obtain prompt execution of
orders at the most favorable net price. When portfolio transactions are done on
a securities exchange, the amount of commission paid by the Fund is negotiated
between TAML and the broker executing the transaction. 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 the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. TAML
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of TAML, 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.

In placing orders to effect transactions for the Fund, TAML may pay to
particular brokers commissions that are higher than another broker might charge,
if TAML determines in good faith that the amount of commission paid is
reasonable in relation to the value of the brokerage and research services to be
received, viewed in terms of the particular transaction or TAML's overall
responsibilities with respect to client accounts for which TAML exercises
investment discretion. Services received by TAML may

16
<PAGE> 17

include, among other things, information relating to particular companies,
markets or countries, local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information and other
information which provide lawful and appropriate assistance to TAML in carrying
out its investment advisory responsibilities. The services received may not
always be of direct benefit to the Fund, but must be of value to TAML in
carrying out its overall responsibilities to its clients.

It is not possible to place a dollar value on the special executions or on the
research services received by TAML from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits TAML 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, TAML and its affiliates may use this research and data in
their investment advisory capacities with other clients. If the Fund's officers
are satisfied that the best execution is obtained, the sale of Fund shares
(which shall be deemed to include also shares of other funds which have either
the same investment adviser or an investment adviser affiliated with TAML) may
also be considered a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.

Because Distributors is a member of the NASD, it may sometimes receive 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 investment
management fee payable to TAML will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.

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

During the fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid
brokerage commissions totaling $4,305,521, $4,035,106 and $3,109,324,
respectively.

As of December 31, 1995, the Fund did not own securities of its regular
broker-dealers.

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

ADDITIONAL INFORMATION ON BUYING SHARES

The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.

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

Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.

ADDITIONAL INFORMATION ON EXCHANGING SHARES

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

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

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<PAGE> 18

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

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

ADDITIONAL INFORMATION ON SELLING SHARES

Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th business day of the month in
which a payment is scheduled.

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

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

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

Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.

GENERAL INFORMATION

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

If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.

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

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

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

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<PAGE> 19

Certain shareholder servicing agents may be authorized to accept your
transaction request.

HOW ARE FUND SHARES VALUED?
- ---------------------------------------------------------

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

For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by TAML.

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

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

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

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

DISTRIBUTIONS

You may receive two types of distributions from the Fund:

1. Income dividends. The Fund receives income generally 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 capital loss carryforward or post October
loss deferral) may generally be made twice each year. One distribution may be
made in December to reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31 of that year. Any net short-term and net
long-term capital gains realized by the Fund during the remainder of the fiscal
year may be distributed following the end of the fiscal year.

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<PAGE> 20

TAXES

As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code.

To qualify as a regulated investment company, the Fund generally must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures contracts and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; (b) derive less than 30% of its gross income from the
sale or other disposition of certain assets (namely, (i) stock or securities,
(ii) options, futures, and forward contracts (other than those on foreign
currencies), and (iii) foreign currencies (including options, futures, and
forward contracts on such currencies) not directly related to the Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks and securities)) held less than three months (the "30%
Limitation"); (c) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies) or of any two or more issuers that the Fund controls and
that are determined to be engaged in the same business or some similar or
related business; and (d) distribute at least 90% of its investment company
taxable income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses, but does not
include net long-term capital gains in excess of net short-term capital losses)
each tax-
able year.

As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (net long-term capital gains in excess of net short-term capital losses),
if any, that it distributes to shareholders. The Fund intends to distribute to
its shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the tax, the Fund must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (adjusted for certain ordinary losses) for the twelve-month
period ending on October 31 of the calendar year, and (3) any ordinary income
and capital gains for previous years that was not distributed during those
years. A distribution will be treated as having been received on December 31 of
the current calendar year if it is declared by the Fund in October, November or
December with a record date in such a month and paid by the Fund during January
of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.

The Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that 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.

Some of the debt securities that may be acquired by the Fund may be treated as
debt securities that are originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund in a given year, original issue
discount on a taxable debt security earned in that given year generally is
treated for federal income tax purposes as interest and, therefore, such income
would be subject to the distribution requirements of the Code. Thus, the Fund
may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash or leverage itself by borrowing cash, so that it
may satisfy the distribution requirement.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original

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<PAGE> 21

issue discount on such debt securities, if any. This additional discount
represents market discount for federal income tax purposes. The gain realized on
the disposition of any taxable debt security having market discount will be
treated as ordinary income to the extent it does not exceed the accrued market
discount on such debt security. Generally, market discount accrues on a daily
basis for each day the debt security is held by the Fund at a constant rate over
the time remaining to the debt security's maturity or, at the election of the
Fund, at a constant yield to maturity which takes into account the semiannual
compounding of interest.

Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
calendar year distribution requirements. See "What Are the Fund's Potential
Risks?" section of the SAI.

The Fund may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If the Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.

The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC in a given year. If this election were made, the special
rules, discussed above, relating to the taxation of excess distributions, would
not apply. In addition, another election may be available that would involve
marking to market the Fund's PFIC shares at the end of each taxable year (and on
certain other dates prescribed in the Code), with the result that unrealized
gains are treated as though they were realized. If this election were made, tax
at the Fund level under the PFIC rules would generally be eliminated, but the
Fund could, in limited circumstances, incur nondeductible interest charges. The
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.

Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC shares, as well as subject the Fund itself to tax
on certain income from PFIC shares, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC shares.

Dividends paid out of the Fund's investment company taxable income will be
taxable to a shareholder as ordinary income. Because a portion of the Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. However, the alternative minimum tax applicable to corporations may
reduce the benefit of the dividends received deduction. Distributions of net
capital gains, if any, designated by the Fund as capital gain dividends, are
taxable as long-term capital gains, regardless of how long the shareholder has
held the Fund's shares, and are not eligible for the dividends-received
deduction. Generally, dividends and distributions are taxable to shareholders,
whether received in cash or reinvested in shares of the Fund. Any distributions
that are not from the Fund's investment company tax-
able income or net capital gain may be characterized as a return of capital to
shareholders or, in some cases, capital gain. Shareholders receiving
distributions in the form of newly issued shares generally will have a cost
basis in each share received equal to the Net Asset Value of a share of the Fund
on the distribution date. Shareholders will be notified annually as to the U.S.
federal tax status of distributions, and shareholders receiving distributions in
the form of newly-issued shares will receive a report as to the Net Asset Value
of the shares received.

21
<PAGE> 22

Distributions by the Fund reduce the Net Asset Value of the Fund shares. Should
a distribution reduce the Net Asset Value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by the Fund. The price of shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.

If the Fund retains net capital gains for reinvestment, the Fund may elect to
treat such amounts as having been distributed to shareholders. As a result, the
shareholders would be subject to tax on undistributed net capital gains, would
be able to claim their proportionate share of the federal income taxes paid by
the Fund on such gains as a credit against their own federal income tax
liabilities, and would be entitled to an increase in their basis in their Fund
shares.

Certain options, futures contracts and forward contracts in which the Fund may
invest are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by the Fund at the end of each taxable
year (and, in some cases, for purposes of the 4% excise tax, on October 31 of
each year) are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized.

Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to shareholders.

The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.

Requirements relating to the Fund's tax status as a regulated investment company
may limit the extent to which the Fund will be able to engage in transactions in
options, futures contracts and forward contracts.

Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain financial contracts, forward contracts and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "section 988" gains or loses, may increase, decrease or
eliminate the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income. If section 988 losses exceed
other net investment income during a taxable year, the Fund generally would not
be able to make ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as return of capital to
shareholders for federal income tax purposes, rather than as an ordinary
dividend, reducing each shareholder's basis in his Fund shares, or as a capital
gain.

Upon the sale, exchange or other taxable disposition of shares of the Fund, a
shareholder may real-

22
<PAGE> 23

ize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including replacement through the reinvestment of
dividends and capital gain distributions in the Fund) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of Fund
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of capital gain
dividends received by the shareholder with respect to such shares.

Under certain circumstances, the sales charge incurred in acquiring shares of
the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. For example, this rule applies if (1) the
shareholder incurs a sales charge in acquiring stock of a regulated investment
company, (2) shares of the Fund are exchanged for shares of another Templeton or
Franklin Fund within 90 days after the date they were purchased, and (3) the new
shares are acquired without a sales charge or at a reduced sales charge under a
"reinvestment right" received upon the initial purchase of shares of stock. In
that case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the sales charge incurred in acquiring such
shares exchanged all or a portion of the amount of sales charge incurred in
acquiring the shares. This exclusion applies to the extent that the otherwise
applicable sales charge with respect to the newly acquired shares is reduced as
a result of having incurred the sales charge initially. Instead, the portion of
the sales charge affected by this rule will be treated as an amount paid for the
new shares.

Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries. If
more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass-through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, a
shareholder will be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by the
Fund, and will be entitled either to deduct (as an itemized deduction) his pro
rata share of foreign taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit (see below). Each shareholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year.

Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his or her foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its shareholders. With respect to
the Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by the Fund. Because of changes made by the Tax
Reform Act of 1986, shareholders may be unable to claim a credit for the full
amount of their proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative minimum taxable
income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign taxes it pays will reduce investment company taxable income and the
distributions by the Fund will be treated as U.S. source income.

The Fund may be required to withhold U.S. federal income tax at the rate of 31%
("backup withholding") of all taxable distributions and gross redemption
proceeds payable to shareholders (1) who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, (2)
where the Fund or shareholder has been notified by the IRS that they are subject
to backup withholding or (3) when required to do so, the shareholder fails to
certify that he is not subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withhold-

23
<PAGE> 24

ing. Backup withholding is not an additional tax. Any amounts withheld may be
credited against the shareholder's U.S. federal income tax liability.

The tax consequences to a foreign shareholder of an investment in the Fund may
differ from those described herein. Foreign shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in the Fund.

The foregoing discussion relates only to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state, local and foreign taxes, and their treatment under
state and local income tax laws may differ from U.S. federal income tax
treatment. Shareholders should consult their tax advisers with respect to
particular questions of U.S. federal, state and local taxation. Shareholders who
are not U.S. persons should consult their tax advisers regarding U.S. and
foreign tax consequences of ownership of shares of the Fund, including the
likelihood that distributions to them would be subject to withholding of U.S.
federal income tax at a rate of 30% (or at a lower rate under a tax treaty).

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

Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.

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

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

Distributors will not receive compensation from the Fund for acting as
underwriter with respect to the Advisor Class shares.

HOW DOES THE FUND MEASURE PERFORMANCE?
- ---------------------------------------------------------

Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for the Advisor Class shares follows.
For any period prior to January 1, 1997, the standardized performance quotations
for the Advisor Class will be calculated by substituting the performance of
Class I for the relevant time period, and excluding the effect of the maximum
sales charge and including the effect of the Rule 12b-1 fees applicable to Class
I. 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.

24
<PAGE> 25

TOTAL RETURN

Average Annual Total Return. Average annual total return is determined by
finding the average annual 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 income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees.

The average annual total return for the Advisor Class for the one-year period
ended December 31, 1995 and since inception (October 17, 1991) would have been
0.36% and 9.23%, respectively.

These figures were calculated according to the SEC formula:

P(1+T)(n) = ERV

where:

<TABLE>
<S> <C> <C>
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)
</TABLE>

Cumulative Total Return. The Fund may also quote its cumulative total return, in
addition to its average annual total return. These quotations are computed the
same way, except the cumulative total return will be based on the Fund's actual
return for a specified period rather than on its average return over the period.
The cumulative total return for the Advisor Class for the one-year period ended
December 31, 1995 and since inception (October 17, 1991) would have been 0.36%
and 45.00%, respectively.

VOLATILITY

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

OTHER PERFORMANCE QUOTATIONS

For any period prior to January 1, 1997, sales literature about the Advisor
Class may quote a current distribution rate, yield, cumulative total return,
average total return and other measures of performance as described elsewhere in
this SAI by substituting the performance of Class I for the relevant time period
and excluding the effect of the maximum sales charge, if applicable, and Rule
12b-1 fees applicable to Class I.

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.

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 advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.

COMPARISONS AND OTHER INFORMATION

To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages.

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

Advertisements or information may also compare the performance of the Advisor
Class to the return on CDs or other investments. You should be aware, however,
that an investment in the Fund involves the risk of fluctuation of principal
value, a risk generally not present in an investment in a CD issued

25
<PAGE> 26

by a bank. For example, as the general level of interest rates rise, the value
of the Fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
Fund's shares can be expected to increase. Cds are frequently insured by an
agency of the U.S. government. An investment in the Fund is not insured by any
federal, state or private entity.

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

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

Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.

From time to time, the Fund and TAML may also refer to the following
information:

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

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

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

(4) The geographic and industry distribution of the Fund's portfolio and the
Fund's top ten holdings.

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

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

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

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

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

(10) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.

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

(12) The number of shareholders in the Fund or the aggregate number of
shareholders of the Franklin Templeton Group of Funds or the dollar amount
of fund and private account assets under management.

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

26
<PAGE> 27

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

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

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

- "Always maintain a long-term perspective."

- "Invest for maximum total real return."

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

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

- "Buy low."

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

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

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

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

- "Aggressively monitor your investments."

- "Don't panic."

- "Learn from your mistakes."

- "Outperforming the market is a difficult task."

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

- "There's no free lunch."

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

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

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

The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $151
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public. The Fund may identify itself
by its NASDAQ symbol or CUSIP number.

The DALBAR Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.

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

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

27
<PAGE> 28

As of December 27, 1996, the principal holders of the Fund, beneficial or of
record, were as follows:

<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- --------------------------------------------------
<S> <C> <C>
CLASS I
Merrill Lynch, Pierce,
Fenner & Smith, Inc. 15,981,943 7%
4800 Deer Lake Drive East
3rd Floor Jacksonville,
FL 32246

CLASS II
Merrill Lynch, Pierce,
Fenner & Smith, Inc. 2,184,441 14%
4800 Deer Lake Drive East
3rd Floor Jacksonville,
FL 32246
</TABLE>

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

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

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

Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.

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

The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended December 31, 1995, including the
auditors' report, and the unaudited financial statements contained in the
Semi-Annual Report to Shareholders of the Fund, for the six months ended June
30, 1996, are incorporated herein by reference. These audited and unaudited
financial statements do not include information for the Advisor Class as those
shares were not publicly offered prior to the date of this SAI.

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

1933 Act - Securities Act of 1933, as amended.

1940 Act - Investment Company Act of 1940, as amended.

AMEX - American Stock Exchange, Inc.

Board - The Board of Trustees of the Fund.

CD - Certificate of deposit.

CFTC - Commodity Futures Trading Commission.

Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes

28
<PAGE> 29

have proportionate interests in the Fund's portfolio. Class I and Class II
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Advisor Class shares are purchased without a sales charge and do not have
a Rule 12b-1 plan.

Code - Internal Revenue Code of 1986, as amended.

Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."

Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.

Franklin Templeton Funds - The Franklin Funds and the Templeton Funds.

Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.

Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds.

FT Services - Franklin Templeton Services, Inc., the Fund's administrator.

Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing agent and transfer agent.

IRS - Internal Revenue Service.

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

Mutual Series - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly Mutual Series Fund Inc. Each series of Mutual Series began
offering three classes of shares on November 1, 1996, Class I, Class II and
Class Z. All shares sold before that time are designated Class Z.

NASD - National Association of Securities Dealers, Inc.

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

NYSE - New York Stock Exchange, Inc.

Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge, if applicable. The
maximum front-end sales charge is 5.75% for Class I and 1% for Class II. The
Advisor Class has no front-end sales charge.

Prospectus - The prospectus for the Advisor Class of the Fund dated January 1,
1997, as may be amended from time to time.

Resources - Franklin Resources, Inc.

SAI - Statement of Additional Information.

S&P - Standard & Poor's Corporation.

SEC - U.S. Securities and Exchange Commission.

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

TAML - Templeton Asset Management Ltd. - Hong Kong Branch, the Fund's investment
manager, is located at Two Exchange Square, Hong Kong.

Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., the Templeton Variable
Annuity Fund, and the Templeton Variable Products Series Fund.

U.S. - United States.

We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.

APPENDICES
DESCRIPTION OF RATINGS
- ---------------------------------------------------------

CORPORATE BOND RATINGS

Moody's

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

Aa - Bonds rated Aa are judged to be 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, 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.

A - Bonds rated A possess many favorable investment attributes and are
considered upper medium

29
<PAGE> 30

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

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

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

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

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

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

Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.

S&P

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

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

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

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

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

C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC-rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.

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

COMMERCIAL PAPER RATINGS

Moody's

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

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

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

30
<PAGE> 31

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.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.

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